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(Exact Name of
Registrant as Specified in its Charter)
Delaware
26-2940963
(State or other
jurisdiction of incorporation or organization)
(I.R.S. Employer
Identification No.)
10900 Wilshire Blvd. Suite
650, Los Angeles, California
(Address of
Principal Executive Offices)
90024
(Zip
Code)
Registrant's
telephone number, including area code: (310) 388-6706
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
X No
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes X No
Indicate by check
mark whether the registrant is a large accelerated filer,
accelerated filer, non-accelerated filer, smaller reporting company
or emerging growth company. See definition of “large
accelerated filer, accelerated filer, smaller reporting company and
emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer ___
Accelerated filer
X
Non-accelerated
filer ___
Smaller reporting
company X
(Do not check if
smaller reporting company)
Emerging growth
company ___
If an emerging
growth company, indicate by checkmark if the registrant has elected
not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ___ No
X
As of May 8, 2019 there were 55,521,783 shares of the
registrant’s common stock issued and
outstanding.
Securities registered pursuant to Section 12(b) of the
Act:
The
accompanying financial statements of ChromaDex Corporation and its
wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research,
LLC, ChromaDex Analytics, Inc. and ChromaDex Asia Limited
(collectively referred to herein as “ChromaDex” or the
“Company” or, in the first person as “we”,
“us” and “our”) include all adjustments,
consisting of normal recurring adjustments and accruals, that, in
the opinion of the management of the Company, are necessary for a
fair presentation of the Company’s financial position as of
March 31, 2019 and results of operations and cash flows for the
three months ended March 31, 2019 and March 31, 2018. These
unaudited interim financial statements should be read in
conjunction with the Company’s audited financial statements
and the notes thereto for the year ended December 31, 2018
appearing in the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission (the
“Commission”) on March 7, 2019. Operating results for
the three months ended March 31, 2019 are not necessarily
indicative of the results to be achieved for the full year ending
on December 31, 2019. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
The
balance sheet at December 31, 2018 has been derived from the
audited financial statements at that date, but does not include all
of the information and footnotes required by GAAP for complete
financial statements.
Note
2. Nature
of Business and Liquidity
Nature of business: ChromaDex is a science-based
integrated nutraceutical company devoted to improving the way
people age. ChromaDex scientists partner with leading universities
and research institutions worldwide to discover, develop and create
products to deliver the full potential of nicotinamide adenine
dinucleotide and its impact on human health. Its flagship
ingredient, NIAGEN® nicotinamide riboside, sold
directly to consumers as TRU NIAGEN®, is backed with
clinical and scientific research, as well as extensive intellectual
property protection.
Liquidity: The Company's net cash outflow from operating
activities was approximately $3.0 million for the three-month
period ended March 31, 2019. As of March 31, 2019, cash and cash
equivalents totaled approximately $19.3 million.
The
Company anticipates that its current cash, cash equivalents and
cash to be generated from operations will be sufficient to meet its
projected operating plans through at least the next twelve months
from the issuance date of this report. The Company may, however,
seek additional capital within the next twelve months, both to meet
its projected operating plans within the next twelve months and/or
to fund its longer term strategic objectives.
Note
3. Significant
Accounting Policies
Basis of presentation: The financial statements and
accompanying notes have been prepared on a consolidated basis and
reflect the consolidated financial position of the Company and its
wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated from these financial
statements. In January 2019, the Company began its operations under
its wholly owned subsidiary ChromaDex Asia Limited and began
consolidating its operations into its financial statements.
ChromaDex Asia Limited is based in Hong Kong and the Company plans
to expand its operations in Asia through this subsidiary. The
Company’s fiscal year ends on December 31.
Recently adopted accounting standards: Effective the first
day of our fiscal year 2019, the Company adopted Accounting
Standards Update No. 2016-02, Leases (Topic 842). ASU 2016-02
requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the
statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its
right to use the underlying asset for the lease term. The Company
adopted ASU 2016-02 applying the modified retrospective approach.
For leases with a term of 12 months or less, the Company made an
accounting policy election by class of underlying asset not to
recognize lease assets and lease liabilities. The Company’s
leased assets and corresponding liabilities exclude non-lease
components.
-5-
Within
the opening balances for the fiscal year beginning January 1, 2019,
the Company recognized right of use assets of approximately $1.5
million and corresponding operating lease obligations liabilities
of approximately $2.1 million which includes approximately $0.6
million deferred rent liability the Company previously recognized
as of December 31, 2018. The Company determines if an arrangement
is a lease at inception and classifies it as finance or operating.
Leased assets and corresponding liabilities are recognized based on
the present value of the lease payments over the lease term
utilizing an estimated borrowing rate for a secured loan with a
maturity corresponding to the remaining lease term. Leases
primarily consist of real property and laboratory
equipment.
Note
4. Earnings
Per Share Applicable to Common Stockholders
The
following table sets forth the computations of earnings per share
amounts applicable to common stockholders for the three months
ended March 31, 2019 and March 31, 2018:
In
December 2018, we entered into a supply agreement with Nestec Ltd.
(“Nestlé”), pursuant to which Nestlé is our
exclusive customer for NIAGEN® for human use in the (i)
medical nutritional and (ii) functional food and beverage
categories in certain territories. As consideration for the rights
granted to Nestlé, we received an upfront fee of $4 million in
January 2019. We determined that the $4 million upfront fee is
treated as advance payment for future goods or services and to
utilize the output method to recognize the upfront fee as revenue
as the product is delivered to Nestlé. In utilizing the output
method, the Company estimated total delivery volume to Nestlé
over the course of the supply agreement. For the three months ended
March 2019, the Company recognized approximately $38,000 in revenue
related to the $4 million upfront fee received. The remaining
balance, $3,962,000 is recorded as deferred revenue.
-7-
Note
8. Leases
Operating Leases
As of
March 31, 2019, the Company had operating lease assets in right of
use assets of approximately $1.3 million and corresponding
operating lease liabilities of approximately $2.0 million. For the
three months ended March 31, 2019, following were expenses incurred
in connection with our operating leases:
As of
March 31, 2019, the Company had finance lease assets in equipment
assets of approximately $0.5 million and corresponding finance
lease liabilities of approximately $0.3 million. For the three
months ended March 31, 2019 and March 31, 2018, following were
expenses incurred in connection with our finance
leases:
Our
contract assets consist of unbilled amounts typically resulting
from sales under contracts when the cost-to-cost method of revenue
recognition is utilized and revenue recognized exceeds the amount
billed to the customer. Our contract liabilities consist of advance
payments and billings in excess of costs incurred and deferred
revenue.
Net
contract assets (liabilities) consisted of the
following:
(1) For contract assets, the amount represents amount billed to the
customer.
For contract liabilities, the amount
represents reductions for revenue recognized.
(2) For contract assets, the amount represents revenue recognized
during the period using the cost-to-cost method.
For contract liabilities, the amount
represents advance payments received during the
period.
(3) Contract liablities from ongoing consulting
projects.
(4) Other customer deposts include payments received for orders not
fulfilled and other advance payments.
In the
three months ended March 31, 2019, we recognized revenue of
approximately $58,000 related to our contract liabilities at the
beginning of the fiscal year 2019.
Note
10. Share-Based
Compensation
Stock Option Plans
On June20, 2017, the stockholders of the Company approved the ChromaDex
Corporation 2017 Equity Incentive Plan (the "2017 Plan"). The
Company's Board of Directors amended the 2017 Plan in January 2018
and the stockholders of the Company approved an amendment to the
2017 plan on June 22, 2018. The 2017 Plan is the successor to the
ChromaDex Corporation Second Amended and Restated 2007 Equity
Incentive Plan (the "2007 Plan"). As of March 31, 2019, under the
2017 Plan, the Company is authorized to issue stock options that
total no more than the sum of (i) 9,000,000 new shares, (ii)
approximately 384,000 unallocated shares remaining available for
the grant of new awards under the 2007 Plan, (iii) any returning
shares from the 2007 Plan or the 2017 Plan, such as forfeited,
cancelled, or expired shares and (iv) 500,000 shares pursuant to an
inducement award. The remaining number of shares available for
issuance under the 2017 Plan totaled approximately 3.7 million
shares at March 31, 2019.
-9-
Service Period Based Stock Options
The
following table summarizes activity of service period based stock
options at March 31, 2019 and changes during the three months then
ended (in thousands except per share data and remaining contractual
term):
*The
aggregate intrinsic values in the table above are based on the
Company’s stock price of $4.19, which is the closing price of
the Company’s stock on the last day of business for the
period ended March 31, 2019.
The
fair value of the Company’s stock options was estimated at
the date of grant using the Black-Scholes option pricing model. The
table below outlines the weighted average assumptions for options
granted during the three months ended March 31, 2019.
As of
March 31, 2019, there
was approximately $10.8 million of total unrecognized compensation
expense related to non-vested share-based compensation arrangements
granted under the plans for employee stock options. That cost is
expected to be recognized over a weighted average period of 2.1
years.
Performance Stock Award
On
March 13, 2019, the Compensation Committee of the Board of
Directors of the Company approved a grant of 166,666 shares of
fully-vested restricted stock to Robert Fried, the Company's Chief
Executive Officer. The shares were granted pursuant to his amended
employment agreement, which provided for the restricted stock grant
upon the achievement of certain performance goals. The expense for
the awarded shares was approximately $0.7 million and was
recognized during the first quarter of 2019.
-10-
Share-Based Compensation
The
Company recognized compensation expense of approximately $2.0
million and $1.3 million in the statement of operations for the
three months ended March 31, 2019 and March 31, 2018,
respectively.
The
Company has the following three reportable segments for the
three-month period ended March 31, 2019:
●
Consumer products
segment: provides finished dietary supplement products that contain
the Company's proprietary ingredients directly to consumers as well
as to distributors.
●
Ingredients
segment: develops and commercializes proprietary-based ingredient
technologies and supplies these ingredients as raw materials to the
manufacturers of consumer products in various industries including
the nutritional supplement, food, beverage and animal health
industries.
●
Analytical
reference standards and services segment: includes (i) supply of
phytochemical reference standards, (ii) scientific and regulatory
consulting and (iii) other research and development
services.
The
“Corporate and other” classification includes corporate
items not allocated by the Company to each reportable segment.
Further, there are no intersegment sales that require elimination.
The Company evaluates performance and allocates resources based on
reviewing gross margin by reportable segment.
We
disaggregate our revenue from contracts with customers by type of
goods or services for each of our segments, as we believe it best
depicts how the nature, amount, timing and uncertainty of our
revenue and cash flows are affected by economic factors. See
details in the tables below.
(1)
There is ongoing litigation with Elysium Health
Note
12. Commitments
and Contingencies
Legal proceedings - Elysium
Health, LLC
(A) California Action
On
December 29, 2016,
ChromaDex, Inc. filed a complaint in the United States District
Court for the Central District of California, naming Elysium
Health, Inc. (together with Elysium Health, LLC,
“Elysium”) as defendant (the “Complaint”).
On January 25, 2017, Elysium filed an answer and counterclaims in
response to the Complaint (together with the Complaint, the
“California Action”). Over the course of the California
Action, the parties have each filed amended pleadings several times
and have each engaged in several rounds of motions to dismiss and
one round of motion for judgment on the pleadings with respect to
various claims. Most recently, on November 27, 2018, ChromaDex,
Inc. filed a fifth amended complaint that added an individual, Mark
Morris, as a defendant. Elysium and Morris (“the
Defendants”) moved to dismiss on December 21, 2018. The court
denied Defendants’ motion on February 4, 2019.
Following
the court’s February 4, 2019 order, the claims that
ChromaDex, Inc. presently asserts in the California Action, among
other allegations, are that (i) Elysium breached the Supply
Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and
Elysium (the “pTeroPure® Supply Agreement”), by
failing to make payments to ChromaDex, Inc. for purchases of
pTeroPure® and by improper disclosure of confidential
ChromaDex, Inc. information pursuant to the pTeroPure® Supply
Agreement, (ii) Elysium breached the Supply Agreement, dated
February 3, 2014, by and between ChromaDex, Inc. and Elysium, as
amended (the “NIAGEN® Supply Agreement”), by
failing to make payments to ChromaDex, Inc. for purchases of
NIAGEN® and by improper disclosure of confidential ChromaDex,
Inc. information pursuant to the NIAGEN® Supply Agreement,
(iii) Defendants willfully and maliciously misappropriated
ChromaDex, Inc. trade secrets concerning its ingredient sales
business under both the California Uniform Trade Secrets Act and
the Federal Defend Trade Secrets Act, (iv) Morris breached two
confidentiality agreements he signed by improperly stealing
confidential ChromaDex, Inc. documents and information, (v) Morris
breached his fiduciary duty to ChromaDex, Inc. by lying to and
competing with ChromaDex, Inc. while still employed there, and (vi)
Elysium aided and abetted Morris’s breach of fiduciary duty.
ChromaDex, Inc. is seeking damages and interest for Elysium’s
alleged breaches of the NIAGEN® Supply Agreement and
pTeroPure® Supply Agreement and Morris’s alleged
breaches of his confidentiality agreements, compensatory damages
and interest, punitive damages, injunctive relief, and
attorney’s fees for Defendants’ alleged willful and
malicious misappropriation of ChromaDex, Inc.’s trade
secrets, and compensatory damages and interest, disgorgement of all
benefits received, and punitive damages for Morris’s alleged
breach of his fiduciary duty and Elysium’s aiding and
abetting of that alleged breach. Defendants filed their answer to
ChromaDex, Inc.'s fifth amended complaint on February 19,2019.
-14-
Among
other allegations, the claims that Elysium presently alleges in the
California Action are that (i) ChromaDex, Inc. breached the
NIAGEN® Supply Agreement by not issuing certain refunds or
credits to Elysium, by not supplying NIAGEN® manufactured
according to the defined standard, by distributing the NIAGEN®
product specifications attached to the parties’ agreement to
other customers, and by failing to provide Elysium with information
concerning the quality and identity of NIAGEN® pursuant to the
NIAGEN® Supply Agreement, (ii) ChromaDex, Inc. breached the
implied covenant of good faith and fair dealing pursuant to the
NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. fraudulently
induced Elysium into entering into the Trademark License and
Royalty Agreement, dated February 3, 2014, by and between
ChromaDex, Inc. and Elysium (the “License Agreement”),
(iv) ChromaDex, Inc.’s conduct constitutes misuse of its
patent rights, and (v) ChromaDex, Inc. was unjustly enriched by the
royalties Elysium paid pursuant to the License Agreement. Elysium
is seeking damages for ChromaDex, Inc.’s alleged breaches of
the NIAGEN® Supply Agreement and pTeroPure® Supply
Agreement, and compensatory damages, punitive damages, and/or
rescission of the License Agreement and restitution of any royalty
payments conveyed by Elysium pursuant to the License Agreement, and
a declaratory judgment that ChromaDex, Inc. has engaged in patent
misuse. ChromaDex, Inc. filed an answer to Elysium’s restated
counterclaims on March 5, 2019. The parties are currently in
discovery.
(B) Patent Office Proceedings
On July17, 2017, Elysium filed petitions with the U.S. Patent and
Trademark Office for inter
partes review of U.S. Patents 8,197,807 (the
“’807 Patent”) and 8,383,086 (the
“’086 Patent”), patents to which ChromaDex, Inc.
is the exclusive licensee. The Patent Trial and Appeal Board
(“PTAB”) denied institution of the inter partes review for the ’807
Patent on January 18, 2018. On January 29, 2018, the PTAB granted
institution of the inter
partes review as to claims 1 and 3-5 and denied institution
as to claim 2 of the ’086 Patent. Based upon a recent U.S.
Supreme Court decision, and solely on a procedural basis, the PTAB
was required to include claim 2 in the trial of the inter partes review. The matter was
heard on October 2, 2018. The PTAB issued its written decision on
January 16, 2019, upholding claim 2 of the ’086 Patent which
relates to the use of isolated NR in a pharmaceutical composition
as valid. Elysium is now prevented from raising invalidity
arguments against the ’086 Patent in the ongoing patent
litigation in Delaware that it brought or could have brought before
the PTAB in its inter
partes review. Elysium appealed the PTAB’s decision
with respect to claim 2 on March 6, 2019. A cross-appeal with
respect to claims 1 and 3–5 was filed on March 20,2019.
(C) Southern District of New York Action
On
September 27, 2017, Elysium Health Inc. ("Elysium Health") filed a
complaint in the United States District Court for the Southern
District of New York, against ChromaDex, Inc. (the “Elysium
SDNY Complaint”). Elysium Health alleges in the Elysium SDNY
Complaint that ChromaDex, Inc. made false and misleading statements
in a citizen petition to the Food and Drug Administration it filed
on or about August 18, 2017. Among other allegations, Elysium
Health avers that the citizen petition made Elysium Health’s
product appear dangerous, while casting ChromaDex, Inc.’s own
product as safe. The Elysium SDNY Complaint asserts four claims for
relief: (i) false advertising under the Lanham Act, 15 U.S.C.
§ 1125(a); (ii) trade libel; (iii) deceptive business
practices under New York General Business Law § 349; and (iv)
tortious interference with prospective economic relations.
ChromaDex, Inc. denies the claims in the Elysium SDNY Complaint and
intends to defend against them vigorously. On October 26, 2017,
ChromaDex, Inc. moved to dismiss the Elysium SDNY Complaint on the
grounds that, inter alia, its statements in the citizen petition
are immune from liability under the Noerr-Pennington Doctrine, the
litigation privilege, and New York’s Anti-SLAPP statute, and
that the Elysium SDNY Complaint failed to state a claim. Elysium
Health opposed the motion on November 2, 2017. ChromaDex, Inc.
filed its reply on November 9, 2017.
-15-
On
October 26, 2017, ChromaDex, Inc. filed a complaint in the United
States District Court for the Southern District of New York against
Elysium Health (the “ChromaDex SDNY Complaint”).
ChromaDex, Inc. alleges that Elysium Health made material false and
misleading statements to consumers in the promotion, marketing, and
sale of its health supplement product, Basis, and asserts five
claims for relief: (i) false advertising under the Lanham Act, 15
U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C.
§ 1125(a); (iii) deceptive practices under New York General
Business Law § 349; (iv) deceptive practices under New York
General Business Law § 350; and (v) tortious interference with
prospective economic advantage. On November 16, 2017, Elysium
Health moved to dismiss for failure to state a claim. ChromaDex,
Inc. opposed the motion on November 30, 2017 and Elysium Health
filed a reply on December 7, 2017.
On
November 3, 2017, the Court consolidated the Elysium SDNY Complaint
and the ChromaDex SDNY Complaint actions under the caption In re
Elysium Health-ChromaDex Litigation, 17-cv-7394, and stayed
discovery in the consolidated action pending a Court-ordered
mediation. The mediation was unsuccessful. On September 27, 2018,
the Court issued a combined ruling on both parties’ motions
to dismiss. For ChromaDex’s motion to dismiss, the Court
converted the part of the motion on the issue of whether the
citizen petition is immune under the Noerr-Pennington Doctrine into
a motion for summary judgment, and requested supplemental evidence
from both parties, which were submitted on October 29, 2018. The
Court otherwise denied the motion to dismiss. On January 3, 2019,
the Court granted ChromaDex, Inc.’s motion for summary
judgment under the Noerr-Pennington Doctrine and dismissed all
claims in the Elysium SDNY Complaint. Elysium moved for
reconsideration on January 17, 2019. The Court denied
Elysium’s motion for reconsideration on February 6, 2019, and
issued an amended final order granting ChromaDex, Inc.’s
motion for summary judgment as on February 7, 2019.
The
Court granted in part and denied in part Elysium’s motion to
dismiss, sustaining three grounds for ChromaDex’s Lanham Act
claims while dismissing two others, sustaining the claim under New
York General Business Law § 349, and dismissing the claims
under New York General Business Law § 350 and for tortious
interference. Elysium filed an answer and counterclaims on October10, 2018, alleging claims for (i) false advertising under the
Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under
15 U.S.C. § 1125(a); and (iii) deceptive practices under New
York General Business Law § 349. ChromaDex answered
Elysium’s counterclaims on November 2, 2018.
ChromaDex,
Inc. filed an amended complaint on March 27, 2019, adding new
claims against Elysium Health for false advertising and unfair
competition under the Lanham Act, 15 U.S.C. § 1125(a). On
April 10, Elysium Health answered the amended complaint and filed
amended counterclaims, also adding new claims against ChromaDex,
Inc. for false advertising and unfair competition under the Lanham
Act, 15 U.S.C. § 1125(a). The parties are currently in
discovery.
The
Company is unable to predict the outcome of these matters and, at
this time, cannot reasonably estimate the possible loss or range of
loss with respect to the legal proceedings discussed herein. As of
March 31, 2019, ChromaDex, Inc. did not accrue a potential loss for
the California Action or the Elysium SDNY Complaint because
ChromaDex, Inc. believes that the allegations are without merit and
thus it is not probable that a liability has been
incurred.
(D) Delaware – Patent Infringement Action
On
September 17, 2018, ChromaDex, Inc. and Trustees of Dartmouth
College filed a patent infringement complaint in the United States
District Court for the District of Delaware against Elysium Health,
Inc. The complaint alleges that Elysium’s BASIS® dietary
supplement violates U.S. Patents 8,197,807 (the “’807
Patent”) and 8,383,086 (the “’086 Patent”)
that comprise compositions containing isolated nicotinamide
riboside held by Dartmouth and licensed exclusively to ChromaDex,
Inc. On October 23, 2018, Elysium filed an answer to the complaint.
The answer asserts various affirmative defenses and denies that
Plaintiffs are entitled to any relief.
-16-
On
November 7, 2018, Elysium filed a motion to stay the patent
infringement proceedings pending resolution of (1) the inter partes review of the ’807
Patent and the ’086 Patent before the Patent Trial and Appeal
Board (“PTAB”) and (2) the outcome of the litigation in
the California Action. ChromaDex, Inc. filed an opposition brief on
November 21, 2018 detailing the issues with Elysium’s motion
to stay. In particular, ChromaDex, Inc. argued that given claim 2
of the ’086 Patent was only included in the PTAB’s
inter partes review for
procedural reasons the PTAB was unlikely to invalidate claim 2 and
therefore litigation in Delaware would continue regardless. In
addition, ChromaDex, Inc. argued that the litigation in the
California Action is unlikely to have a significant effect on the
ongoing patent litigation. After the PTAB released its written
decision upholding claim 2 of the ’086 Patent proving right
ChromaDex, Inc.’s prediction ChromaDex, Inc. informed the
Delaware court of the PTAB’s decision on January 17, 2019.
Both Elysium and ChromaDex, Inc. have informed the court that they
are available for oral argument on the motion to stay, and though
the court’s docket is very crowded, ChromaDex, Inc. currently
anticipates a ruling this spring.
Legal proceedings – Covance Laboratories Inc.
On
January 10, 2019, Covance Laboratories Inc. (“Covance”)
filed a complaint in the United States District Court for the
District of Delaware against ChromaDex, Inc. and ChromaDex
Analytics, Inc. (collectively “ChromaDex”). The
complaint alleges that ChromaDex breached an Asset Purchase
Agreement (“APA”), dated August 21, 2017, between
Covance and ChromaDex in which Covance purchased certain assets
related to ChromaDex’s Lab Business for $7,500,000.
Specifically, the complaint alleges that ChromaDex failed to
deliver to Covance its entire ComplyID library. On February 4,2019, ChromaDex filed an answer to the complaint. The answer
asserts various affirmative defenses and denies that Covance is
entitled to any relief.
Legal proceedings – Utah Lanham Act Action
On
March 6, 2019, Novex Biotech LLC (“Novex”) filed an
action in the Third Judicial District Court County of Salt Lake,
State of Utah against ChromaDex, Inc. and 10 fictional defendants.
The complaint alleges that Novex markets a dietary supplement,
Oxydrene Elite, that competes with ChromaDex’s product, TRU
NIAGEN. The complaint further alleges that ChromaDex, Inc. has
violated the Lanham Act by making false or misleading claims for
TRU NIAGEN. Novex is seeking an injunction and damages for the
competitive harm it alleges to have suffered. ChromaDex, Inc.
timely removed the action to federal court in the District of Utah
and its answer to the complaint is due May 27, 2019.
The
Company is unable to predict the outcome of this matter and, at
this time, cannot reasonably estimate the possible loss or range of
loss with respect to the legal proceedings discussed herein. As of
March 31, 2019, ChromaDex, Inc. did not accrue a potential loss for
the Utah Lanham Act action because ChromaDex, Inc. believes that
the allegations are without merit and thus it is not probable that
a liability has been incurred.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there is no other
litigation pending that is likely to have, individually or in the
aggregate, a material adverse effect on our financial condition or
results of operations.
Note
13. Subsequent
Event
On May9, 2019, the Company entered into a note purchase agreement for the
sale of approximately $10.0 million of convertible notes in a
private placement. The transaction is expected to close on or about
May 17, 2019. The convertible notes will automatically convert into
shares of ChromaDex common stock 45 days following closing. The
convertible notes will convert at $4.59 per share, or if a common
stock financing occurs in the 45 day period following the closing
with a purchase price of less than $4.59 per share, at the price
per share at which shares are issued in that
financing.
-17-
ITEM
2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis
(“MD&A”), other than purely historical information,
including estimates, projections, statements relating to our
business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as
“may,”“would,”“expect,”“intend,”“could,”“estimate,”“should,”“anticipate,” or
“believe,” and similar
expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially
from the forward-looking statements. We undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events,
or otherwise. Readers should carefully review the risk
factors and related notes set forth below in Part II,
Item 1A, “Risk Factors” and included under Part I, Item
1A, “Risk Factors” of our Annual Report on Form 10-K
for the year ended December 31, 2018 filed with the Securities and
Exchange Commission on March 7, 2019 (our “Annual
Report”).
The following MD&A is intended to help readers understand the
results of our operation and financial condition, and is provided
as a supplement to, and should be read in conjunction with, our
Interim Unaudited Financial Statements and the accompanying Notes
to Interim Unaudited Financial Statements under Part 1, Item 1 of
this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to
the three months ended March 31, 2019 compared with the three
months ended March 31, 2018 unless otherwise noted. Unless
otherwise indicated or unless the context otherwise requires, all
references in this document to “we,”“us,”“our,” the “Company,” and similar
expressions refer to ChromaDex Corporation, and depending on the
context, its subsidiaries.
Company Overview
ChromaDex
is a science-based integrated nutraceutical company devoted to
improving the way people age. ChromaDex scientists partner with
leading universities and research institutions worldwide to
discover, develop and create products to deliver the full potential
of nicotinamide adenine dinucleotide ("NAD") and its impact on
human health.
NAD is
an essential coenzyme and a key regulator of cellular metabolism.
Best known for its role in cellular adenosine triphosphate ("ATP")
production, NAD is now thought to play an important role in healthy
aging. Many cellular functions related to health and healthy aging
are sensitive to levels of locally available NAD and this
represents an active area of research in the field of
NAD.
NAD
levels are not constant, and in humans, NAD levels have been shown
to decline by more than 50% from young adulthood to middle age. NAD
continues to decline as humans grow older. There are other causes
of reduced NAD levels such as over-nutrition, alcohol consumption
and a number of disease states. NAD may also be increased,
including through calorie restriction and exercise. Healthy aging,
mitochondria and NAD continue to be areas of focus in the research
community. In 2018, there were over 160 studies on NAD. The areas
of study include Alzheimer’s disease, Parkinson’s
disease, neuropathy and heart failure.
In
2013, ChromaDex commercialized NIAGEN® nicotinamide riboside
("NR"), a novel form of vitamin B3. Data from numerous animal
studies, and confirmed in human clinical trials, show that NR is a
highly efficient NAD precursor that significantly raises NAD
levels. NIAGEN® is safe for human consumption. NIAGEN®
has twice been successfully reviewed under FDA's new dietary
ingredient (“NDI”) notification program, and has also
been successfully notified to the FDA as generally recognized as
safe (“GRAS”). Animal studies of NIAGEN® have
demonstrated a variety of outcomes ranging from increased NAD
levels, increased cellular metabolism and energy production to
improvements in insulin sensitivity. NIAGEN® is the trade name
for our proprietary ingredient NR, and is protected by patents to
which we are the exclusive licensee.
-18-
ChromaDex
is the world leader in the emerging NAD space. ChromaDex has
approximately 170 partnerships with leading universities and
research institutions around the world including the National
Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts
Institute of Technology, University of Cambridge and the Mayo
Clinic. Other relationships are currently being
developed.
Our
scientific advisory board is led by Chairman Dr. Roger Kornberg,
Nobel Laureate Stanford Professor, Dr. Charles Brenner, one of the
world’s recognized experts in NAD and inventor of
nicotinamide riboside, Dr. Rudi Tanzi, the co-chair of the
department of neurology at Harvard Medical School and one of the
world’s leading experts in food and nutrition, Sir John
Walker, Nobel Laureate and Emeritus Director, MRC Mitochondrial
Biology Unit in the University of Cambridge, England, Dr. Bruce
German, Chairman of food, nutrition and health at the University of
California, Davis, and Dr. Robert Beudeker, Vice President of
Innovation, who leads the innovation program for human nutrition
and health at DSM.
Financial Condition and Results of Operations
The
discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of these financial
statements requires our management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
revenues, if any, and expenses during the reporting periods. On an
ongoing basis, we evaluate such estimates and judgments, including
those described in greater detail below. We base our estimates on
historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
As of
March 31, 2019, the Company had approximately $19.3 million cash
and cash equivalents on hand. We anticipate that our current cash,
cash equivalents and cash to be generated from operations will be
sufficient to meet our projected operating plans for at least the
next twelve months. We may, however, seek additional capital in the
next twelve months, both to meet our projected operating plans
after the next twelve months and/or to fund our longer term
strategic objectives.
Additional
capital may come from public and/or private stock or debt
offerings, borrowings under lines of credit or other sources. These
additional funds may not be available on favorable terms, or at
all. Further, if we issue equity or debt securities to raise
additional funds, our existing stockholders may experience dilution
and the new equity or debt securities we issue may have rights,
preferences and privileges senior to those of our existing
stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may be
necessary to relinquish valuable rights to our products or
proprietary technologies, or to grant licenses on terms that are
not favorable to us. If we cannot raise funds on acceptable terms,
we may not be able to develop or enhance our products, obtain the
required regulatory clearances or approvals, achieve long term
strategic objectives, take advantage of future opportunities, or
respond to competitive pressures or unanticipated customer
requirements. Any of these events could adversely affect our
ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
Some of
our operations are subject to regulation by various state and
federal agencies. In addition, we expect a significant increase in
the regulation of our target markets. Dietary supplements are
subject to Food and Drug Administration (the "FDA"), Federal Trade
Commission and U.S. Department of Agriculture regulations relating
to composition, labeling and advertising claims. These regulations
may in some cases, particularly with respect to those applicable to
new ingredients, require a notification that must be submitted to
the FDA along with evidence of safety. There are similar
regulations related to food additives.
-19-
Our net
sales and net loss for the three-month periods ending on March 31,2019 and March 31, 2018 were as follows:
We plan
to continue to increase marketing, research and development efforts
for our flagship ingredient, NIAGEN® nicotinamide riboside,
and our consumer branded product TRU NIAGEN®.
Net Sales
Net
sales consist of gross
sales less discounts and returns.
The Company's TRU
NIAGEN® sales for the consumer products segment continue to
increase after the Company's strategic shift towards consumer
products in 2017. The Company expects the sales for the consumer
products segment to continue to grow over the next twelve
months.
●
The decrease in
sales for the ingredients segment is largely due to the
Company’s focus on expanding consumer products business. The
Company made a strategic decision in 2017 to transition from an
ingredient company to a consumer driven nutraceutical company that
has resulted in a shift in our sales away from resellers of
ingredients.
●
The decrease in
sales for the analytical reference standards and services segment
is largely due to decreased sales of analytical reference
standards.
-20-
Cost of Sales
Cost of
sales include raw materials, labor, overhead, and
delivery costs.
The
cost of sales, as a percentage of net sales, decreased by 5% for
the three-month period ended March 31, 2019 compared to the
comparable period in 2018.
●
The cost of sales,
as a percentage of net sales, for the consumer products segment was
41% for the three-month period ended March 31, 2019, an increase of
4% compared to the comparable period in 2018. The increase was
partially due to a write off of certain inventory of approximately
$96,000. In addition, the Company has made investments in personnel
to strengthen its supply chain management operation. Compared to
the other segments, the consumer products segment experienced
better margins due to the positive impact of TRU NIAGEN®
consumer product sales.
●
The cost of sales,
as a percentage of net sales, for the ingredients segment decreased
9% for the three-month period ended March 31, 2019 compared to the
comparable period in 2018. In the first quarter of 2018, we had a
write off of approximately $312,000 related to our NIAGEN®
inventory. In the first quarter of 2019, we had an inventory write
off of approximately $154,000 related to our decision to wind down
sales for a certain ingredient.
●
The cost of sales,
as a percentage of net sales for the analytical reference standards
and services segment, increased 7%. The decrease in the analytical
reference standards sales led to a lower supply chain labor
utilization rate, which resulted in increasing our cost of sales as
a percentage of net sales.
Gross Profit
Gross
profit is net sales less the cost of sales and is affected by a
number of factors including product mix, competitive pricing and
costs of products and services.
The consumer
products segment posted gross profit of $4.4 million for the
three-month period ending March 31, 2019. The Company expects the
sales and gross profit for consumer products segment to continue to
grow over the next twelve months.
●
The decreased gross
profit for the ingredients segment was largely due to a decrease in
sales as the Company transitions from an ingredient company to a
consumer driven nutraceutical company.
●
The decreased gross
profit for the analytical reference standards and services segment
is largely due to the decreased sale of analytical reference
standards. Fixed supply chain labor costs make up a substantial
portion of the costs and these fixed labor costs did not decrease
in proportion to sales, hence yielding lower profit
margin.
-21-
Operating Expenses-Sales and Marketing
Sales
and marketing expenses consist of salaries, advertising
and marketing expenses.
For the consumer
products segment, we have increased staffing as well as direct
marketing expenses associated with social media and other customer
awareness and acquisition programs. We plan to continue to invest
in building out our own global branded consumer product
business.
●
For the ingredients
segment, the decrease during the three-month period ended March 31,2019 is largely due to decreased marketing efforts as the Company
shifts towards consumer products.
●
For the analytical
reference standards and services segment, the decrease for the
three-month period is mainly due to decreased sales and marketing
efforts.
Operating Expenses-Research and Development
Research
and development expenses mainly consist of clinical trials and
process development expenses.
In 2017, we began
allocating the research and development expenses related to our
NIAGEN® branded ingredient to the consumer products and
ingredients segment, based on revenues recorded. Overall, we
decreased our research and development efforts during the first
quarter of 2019 as we evaluate and realign the priorities of our
ongoing research and development efforts of our flagship
ingredient, NIAGEN® nicotinamide riboside.
-22-
Operating Expenses-General and Administrative
General
and administrative expenses consist of general
company administration, legal, IT, accounting and executive
management expenses.
The
following expenses contributed to the increase in general and
administrative expenses in the three-month period ended March 31,2019:
●
An increase in
share-based compensation. Our share-based compensation recorded as
general and administrative expense for three-month period ended
March 31, 2019 increased to approximately $1.8 million, compared to
approximately $1.1 million for the comparable period in
2018.
●
An increase in
royalties we paid to patent holders. Our royalty expense for the
three -month periods ended March 31, 2019 increased to
approximately $0.6 million, compared to approximately $0.3 million
for the comparable period in 2018. The increases are due to
increased sales for licensed products in the first three months of
2019.
●
An increase in
legal expenses. Our legal expenses increased to approximately $3.2
million in the three-month period ended March 31, 2019, compared to
approximately $3.0 million in the comparable period in 2018. The
ongoing litigation with Elysium and our increased efforts to file
and maintain patents related to the proprietary ingredient
technologies were the main reasons for the increase in legal
expenses.
Non-operating Income- Interest Income, net
Interest
income, net consists of interest earned from bank deposit accounts
less interest expenses on capital leases.
In the
first quarter of 2018, we had more interest expense then interest
earned as there were costs related to maintaining the line of
credit the Company established with Western Alliance Bank. In June
2018, the Company notified Western Alliance Banks that it did not
intend to draw from the line of credit. As a result, the Company
has not incurred maintenance costs related to the line of credit
since June 2018.
Income Taxes
At
March 31, 2019 and March 31, 2018, the Company maintained a full
valuation allowance against the entire deferred income tax balance
which resulted in an effective tax rate of approximately 0% for the
three-month periods ended March 31, 2019 and March 31, 2018,
respectively.
-23-
Depreciation and Amortization
Depreciation
expense for the three-month period ended March 31, 2019 was
approximately $173,000 as compared to $121,000 for the three-month
period ended March 31, 2018. We depreciate our assets on a
straight-line basis, based on the estimated useful lives of the
respective assets.
Amortization
expense of intangible assets for the three-month period ended March31, 2019 was approximately $61,000 as compared to $58,000 for the
three-month period ended March 31, 2018. We amortize intangible
assets using a straight-line method, generally over 10 years. For
licensed patent rights, the useful lives are 10 years or the
remaining term of the patents underlying licensing rights,
whichever is shorter. The useful lives of subsequent milestone
payments that are capitalized are the remaining useful life of the
initial licensing payment that was capitalized.
Amortization
expense of right of use assets for the three-month period ended
March 31, 2019 was approximately $138,000.
Liquidity and Capital Resources
From
inception through March 31, 2019, we have incurred aggregate losses
of approximately $98.1 million. These losses are primarily due to
expenses associated with the development and expansion of our
operations. These operations have been financed through capital
contributions, the issuance of common stock and warrants through
private placements, and the issuance of debt.
Our
board of directors periodically reviews our capital requirements in
light of our proposed business plan. Our future capital
requirements will remain dependent upon a variety of factors,
including cash flow from operations, the ability to increase sales,
increasing our gross profits from current levels, reducing selling
and administrative expenses as a percentage of net sales, continued
development of customer relationships, and our ability to market
our new products successfully. However, based on our results from
operations, we may determine that we need additional financing to
implement our business plan. There can be no assurance that any
such financing will be available on terms favorable to us or at
all. Without adequate financing we may have to further delay or
terminate product and service expansion and curtail certain
selling, general and administrative expenses. Any inability to
raise additional financing would have a material adverse effect on
us.
While
we anticipate that our current cash, cash equivalents and cash to
be generated from operations will be sufficient to meet our
projected operating plans for at least the next twelve months, we
may require additional funds, either through additional equity or
debt financings or collaborative agreements or from other sources.
We have no commitments to obtain such additional financing, and we
may not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
Net cash used in operating activities
Net
cash used in operating activities for the three months ended March31, 2019 was approximately $3.0 million as compared to
approximately $4.0 million for the three months ended March 31,2018. Along with the net loss, an increase in trade receivables and
inventories were the largest uses of cash during the three-month
period ended March 31, 2019, partially offset by an increase in
deferred revenue and noncash share-based compensation expense. Net
cash used in operating activities for the three months ended March31, 2018 largely reflects net loss, partially offset by an increase
in accounts payable, a decrease in trade receivables and
inventories, and noncash share-based compensation
expense.
We
expect our operating cash flows to fluctuate significantly in
future periods as a result of fluctuations in our operating
results, shipment timetables, accounts receivable collections,
inventory management, and the timing of our payments, among other
factors.
-24-
Net cash used in investing activities
Net
cash used in investing activities was approximately $0.3 million
for the three months ended March 31, 2019, compared to
approximately $0.2 million for the three months ended March 31,2018. Net cash used in investing activities for the three months
ended March 31, 2019 mainly consisted of purchases of leasehold
improvements and equipment. Net cash used in investing activities
for the three months ended March 31, 2018 also consisted of
purchases of leasehold improvements and equipment.
Net cash provided by (used in) financing activities
Net
cash provided by financing activities was approximately $0.1
million for the three months ended March 31, 2019, compared to
approximately $0.2 million used in financing activities for the
three months ended March 31, 2018. Net cash provided by financing
activities for the three months ended March 31, 2019 primarily
consisted of proceeds from the exercise of stock options, offset by
principal payments on capital leases. Net cash used in financing
activities for the three months ended March 31, 2018 mainly
consisted of repurchase of common stock, partially offset by
proceeds from exercise of stock options.
Contractual Obligations and Commitments
During
the three months ended March 31, 2019, there were no material
changes outside of the ordinary course of business in the specified
contractual obligations disclosed in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” as contained in our Annual Report, other than as
disclosed in “Item 1 Financial Statements” of this
Quarterly Report.
Off-Balance Sheet Arrangements
During
the three months ended March 31, 2019, we had no material
off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our management, with the supervision of our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and
principal financial officer, respectively), evaluated the
effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of the end of the period covered by this
Quarterly Report on Form 10-Q. In designing and evaluating the
disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure controls
and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment
in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of March 31, 2019, our
disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
An
evaluation was also performed under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of any change in our internal
control over financial reporting (as defined in Rule
13a−15(f) promulgated under the Exchange Act) that occurred
during our last fiscal quarter and that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting. There were no changes in internal control
over financial reporting that occurred during the Company’s
first fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
For a
description of our legal proceedings, see Note 12, Commitments and
Contingencies, Legal Proceedings of the Notes to Consolidated
Financial Statements, included in Item 1 of this Quarterly Report
on Form 10-Q.
Investing in our common stock involves a high degree of risk.
Current investors and potential investors should consider carefully
the risks and uncertainties described below and in our Annual
Report, together with all other information contained in this
Quarterly Report on Form 10-Q and our Annual Report, including our
financial statements, the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before making
investment decisions with respect to our common stock. If any of
the following risks actually occur, our business, financial
condition, results of operations and future growth prospects would
likely be materially and adversely affected. Under these
circumstances, the trading price and value of our common stock
could decline, and you may lose all or part of your investment. The
risks and uncertainties described in this Quarterly Report on
Form 10-Q and in our Annual Report are not the only ones
facing our Company. Additional risks and uncertainties of which we
are not presently aware, or that we currently consider immaterial,
may also impair our business operations. The risk factors set forth
below that are marked with an asterisk (*) contain changes to
the similarly titled risk factors included in Part I, Item 1A
of our Annual Report.
*We have a history of operating losses, may need additional
financing to meet our future long-term capital requirements and may
be unable to raise sufficient capital on favorable terms or at
all.
We have
recorded a net loss of approximately $8.4 million for the three
months ended March 31, 2019, and we have a history of losses and
may continue to incur operating and net losses for the foreseeable
future. We incurred net losses of approximately $33.3 million and
$11.4 million for the years ended December 31, 2018 and December30, 2017, respectively. As of March 31, 2019, our accumulated
deficit was approximately $98.1 million. We have not achieved
profitability on an annual basis. We may not be able to reach a
level of revenue to continue to achieve and sustain profitability.
If our revenues grow slower than anticipated, or if operating
expenses exceed expectations, then we may not be able to achieve
and sustain profitability in the near future or at all, which may
depress our stock price.
As of
March 31, 2019, our cash and cash equivalents totaled approximately
$19.3 million. While we anticipate that our current cash, cash
equivalents and cash to be generated from operations will be
sufficient to meet our projected operating plans through at least
the next twelve months, we may require additional funds, either
through additional equity or debt financings or collaborative
agreements or from other sources. We have no commitments to obtain
such additional financing, and we may not be able to obtain any
such additional financing on terms favorable to us, or at all. If
adequate financing is not available, the Company will further
delay, postpone or terminate product and service expansion and
curtail certain selling, general and administrative operations. The
inability to raise additional financing may have a material adverse
effect on the future performance of the Company.
-26-
Our capital requirements will depend on many factors.
Our
capital requirements will depend on many factors,
including:
●
the
revenues generated by sales of our products;
●
the
costs associated with expanding our sales and marketing efforts,
including efforts to hire independent agents and sales
representatives and obtain required regulatory approvals and
clearances;
●
the
expenses we incur in developing and commercializing our products,
including the cost of obtaining and maintaining regulatory
approvals; and
●
unanticipated
general and administrative expenses, including expenses involved
with our ongoing litigation with Elysium.
Because
of these factors, we may seek to raise additional capital within
the next twelve months both to meet our projected operating plans
after the next twelve months and to fund our longer term strategic
objectives. Additional capital may come from public and private
equity or debt offerings, borrowings under lines of credit or other
sources. These additional funds may not be available on favorable
terms, or at all. There can be no assurance we will be successful
in raising these additional funds. Furthermore, if we issue equity
or debt securities to raise additional funds, our existing
stockholders may experience dilution and the new equity or debt
securities we issue may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we
raise additional funds through collaboration, licensing or other
similar arrangements, it may be necessary to relinquish valuable
rights to our products or proprietary technologies, or grant
licenses on terms that are not favorable to us. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance
our products, obtain the required regulatory clearances or
approvals, execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
customer requirements. Any of these events could adversely affect
our ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
*We are currently engaged in substantial and complex litigation
with Elysium Health, Inc. and Elysium Health LLC ("Elysium"), the
outcome of which could materially harm our business and financial
results.
We are currently engaged in litigation with Elysium, a customer
that represented 19% of our net sales for the year
ended December 31, 2016. Elysium has made no purchases
from us since August 9, 2016. The litigation includes multiple
complaints and counterclaims by us and Elysium in venues in
California and New York, as well as a patent infringement complaint
filed by the Company and Trustees of Dartmouth College. For further
details on this litigation, please refer to Part II, Item 1 of this
Quarterly Report on Form 10-Q.
The litigation is substantial and complex, and it has caused
and could continue to cause us to incur significant costs, as well
as distract our management over an extended period. The litigation
may substantially disrupt our business and we cannot assure you
that we will be able to resolve the litigation on terms favorable
to us. If we are unsuccessful in
resolving the litigation on favorable terms to us, we may be forced
to pay compensatory and punitive damages and restitution for any
royalty payments that we received from Elysium, which payments
could materially harm our business, or be subject to other
remedies, including injunctive relief. In addition, Elysium has not
paid us approximately $2.7 million for previous purchase orders. We
may not collect the full amount owed to us by Elysium, and as a
result, we may have to write off a large portion of that amount as
uncollectible expense. We cannot predict the outcome of our
litigation with Elysium, which could have any of the results
described above or other results that could materially adversely
affect our business.
-27-
*Interruptions in our relationships or declines in our business
with major customers could materially harm our business and
financial results.
One of our customers accounted for approximately 13% of our sales
during the quarter ended March 31, 2019. Any interruption in our
relationship or decline in our business with this customer or other
customers upon whom we become highly dependent could cause harm to
our business. Factors that could influence our relationship with
our customers upon whom we may become highly dependent
include:
●
our
ability to maintain our products at prices that are competitive
with those of our competitors;
●
our
ability to maintain quality levels for our products sufficient to
meet the expectations of our customers;
●
our
ability to produce, ship and deliver a sufficient quantity of our
products in a timely manner to meet the needs of our
customers;
●
our
ability to continue to develop and launch new products that our
customers feel meet their needs and requirements, with respect to
cost, timeliness, features, performance and other
factors;
●
our
ability to provide timely, responsive and accurate customer support
to our customers; and
●
the
ability of our customers to effectively deliver, market and
increase sales of their own products based on ours.
*In an effort to promote and better market our consumer products,
we have made a strategic decision to not ship NIAGEN® to
certain ingredient segment customers, which could potentially
materially adversely affect our overall sales.
By
developing and selling TRU NIAGEN®, our own consumer standalone
NIAGEN® supplement product, we are in direct competition with
some of our current ingredients segment customers that use
NIAGEN® in the products that are sold to consumers. In an
effort to promote and better market our consumer product, we have
made a strategic decision not to ship NIAGEN® to certain
ingredients segment customers, which will have a negative effect on
our ingredient segment sales. For example, sales for our
ingredients segment for the year ended December 31, 2018 decreased
23% compared to the year ended December 30, 2017. Additionally, as
our own consumer product becomes more prominent and widely adopted
by consumers, the competition with our consumer product could
potentially further harm the sales of our ingredients segment
business, and our sales of NIAGEN® for our ingredients segment
may further decrease. The sales of our consumer product may not
outweigh the decrease in sales of our ingredients segment, which
would lead to an overall decrease in our sales. Sales for our
ingredients segment represented approximately 15% of the
Company’s revenue for the first quarter of 2019, and sales of
NIAGEN® accounted for approximately 74% of our ingredient
segment’s total sales in the first quarter of 2019, or 11% of
our overall revenue, so any harm to our NIAGEN® ingredient
sales, if not compensated for by sales of our consumer product, may
materially adversely affect our business.
Our future success largely depends on sales of our TRU
NIAGEN®
product.
In
connection with our strategic shift from an ingredient and testing
company to a consumer focused company, we expect to generate a
significant percentage of our future revenue from sales of our TRU
NIAGEN® product. As a result, the market acceptance of TRU
NIAGEN® is critical to our continued success, and if we are
unable to expand market acceptance of TRU NIAGEN®, our
business, results of operations, financial condition, liquidity and
growth prospects would be materially adversely
affected.
-28-
Decline in the state of the global
economy and financial market conditions could adversely affect our
ability to conduct business and our results of
operations.
Global
economic and financial market conditions, including disruptions in
the credit markets and the impact of the global economic
deterioration may materially impact our customers and other parties
with whom we do business. These conditions could negatively affect
our future sales of our ingredient lines as many consumers consider
the purchase of nutritional products discretionary. Decline in
general economic and financial market conditions could materially
adversely affect our financial condition and results of operations.
Specifically, the impact of these volatile and negative conditions
may include decreased demand for our products and services, a
decrease in our ability to accurately forecast future product
trends and demand, and a negative impact on our ability to timely
collect receivables from our customers. The foregoing economic
conditions may lead to increased levels of bankruptcies,
restructurings and liquidations for our customers, scaling back of
research and development expenditures, delays in planned projects
and shifts in business strategies for many of our customers. Such
events could, in turn, adversely affect our business through loss
of sales.
We may need to increase the size of our organization, and we can
provide no assurance that we will successfully expand operations or
manage growth effectively.
Our
significant increase in the scope and the scale of our product
launches, including the hiring of additional personnel, has
resulted in significantly higher operating expenses. As a result,
we anticipate that our operating expenses will continue to
increase. Expansion of our operations may also cause a significant
demand on our management, finances and other resources. Our ability
to manage the anticipated future growth, should it occur, will
depend upon a significant expansion of our accounting and other
internal management systems and the implementation and subsequent
improvement of a variety of systems, procedures and controls. There
can be no assurance that significant problems in these areas will
not occur. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient
manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results of
operations. There can be no assurance that our attempts to expand
our marketing, sales, manufacturing and customer support efforts
will be successful or will result in additional sales or
profitability in any future period. As a result of the expansion of
our operations and the anticipated increase in our operating
expenses, as well as the difficulty in forecasting revenue levels,
we expect to continue to experience significant fluctuations in our
results of operations.
Changes in our business strategy, including entering the consumer
product market, or restructuring of our businesses may increase our
costs or otherwise affect the profitability of our
businesses.
As
changes in our business environment occur we may adjust our
business strategies to meet these changes or we may otherwise
decide to restructure our operations or businesses or assets. In
addition, external events including changing technology, changing
consumer patterns and changes in macroeconomic conditions may
impair the value of our assets. When these changes or events occur,
we may incur costs to change our business strategy and may need to
write down the value of assets. In any of these events, our costs
may increase, we may have significant charges associated with the
write-down of assets or returns on new investments may be lower
than prior to the change in strategy or restructuring. For example,
if we are not successful in developing our consumer product
business, our sales may decrease and our costs may
increase.
The success of our consumer product and ingredient business is
linked to the size and growth rate of the vitamin, mineral and
dietary supplement market and an adverse change in the size or
growth rate of that market could have a material adverse effect on
us.
An
adverse change in the size or growth rate of the vitamin, mineral
and dietary supplement market could have a material adverse effect
on our business. Underlying market conditions are subject to change
based on economic conditions, consumer preferences and other
factors that are beyond our control, including media attention and
scientific research, which may be positive or
negative.
-29-
The future growth and profitability of our consumer product
business will depend in large part upon the effectiveness and
efficiency of our marketing efforts and our ability to select
effective markets and media in which to market and
advertise.
Our consumer products business success depends on our ability to
attract and retain customers, which significantly depends on our
marketing practices. Our future growth and profitability will
depend in large part upon the effectiveness and efficiency of our
marketing efforts, including our ability to:
●
create greater awareness of our brand;
●
identify the most effective and efficient levels of spending in
each market, media and specific media vehicle;
●
determine the appropriate creative messages and media mix for
advertising, marketing and promotional expenditures;
●
effectively manage marketing costs (including creative and media)
to maintain acceptable customer acquisition costs;
●
acquire cost-effective television advertising;
●
select the most effective markets, media and specific media
vehicles in which to market and advertise; and
●
convert consumer inquiries into actual orders.
Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any product, or consistent
with earlier publicity. Future research reports, findings,
regulatory proceedings, litigation, media attention or other
publicity that are perceived as less favorable than, or that
question, such earlier research reports, findings or publicity
could have a material adverse effect on the demand for our products
and consequently on our business, results of operations, financial
condition and cash flows.
Our
dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, if accurate or with merit,
could have a material adverse effect on the demand for our products, the
availability and pricing of our ingredients, and our business,
results of operations, financial condition and cash flows. Further,
adverse public reports or other media attention regarding the
safety, efficacy and quality of nutritional supplements in general,
or our products specifically, or associating the consumption of
nutritional supplements with illness, could have such a material
adverse effect. Any such adverse public reports or other
media attention could arise even if the adverse effects associated
with such products resulted from consumers’ failure to
consume such products appropriately or as directed and the content
of such public reports and other media attention may be beyond our
control.
We may incur material product
liability claims, which could increase our costs and adversely
affect our reputation, revenues and operating
income.
As a
consumer product and ingredient supplier we market and manufacture
products designed for human and animal consumption, we are subject
to product liability claims if the use of our products is alleged
to have resulted in injury. Our products consist of vitamins,
minerals, herbs and other ingredients that are classified as food
ingredients, dietary supplements, or natural health products, and,
in most cases, are not necessarily subject to pre-market regulatory
approval in the United States. Some of our products contain
innovative ingredients that do not have long histories of human
consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur. In addition,
the products we sell are produced by third-party manufacturers. As
a marketer of products manufactured by third parties, we also may
be liable for various product liability claims for products we do
not manufacture. We may, in the future, be subject to various
product liability claims, including, among others, that our
products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with
other substances. A product liability claim against us could result
in increased costs and could adversely affect our reputation with
our customers, which, in turn, could have a materially adverse
effect on our business, results of operations, financial condition
and cash flows.
-30-
We acquire a significant amount of
key ingredients for our products from foreign suppliers, and may be
negatively affected by the risks associated with international
trade and importation issues.
We
acquire a significant amount of key ingredients for a number of our
products from suppliers outside of the United States, particularly
India and China. Accordingly, the acquisition of these
ingredients is subject to the risks generally associated with
importing raw materials, including, among other factors, delays in
shipments, changes in economic and political conditions, quality
assurance, nonconformity to specifications or laws and regulations,
tariffs, trade disputes and foreign currency fluctuations. While we
have a supplier certification program and audit and inspect our
suppliers’ facilities as necessary both in the United States
and internationally, we cannot assure you that raw materials
received from suppliers outside of the United States will conform
to all specifications, laws and regulations. There have
in the past been quality and safety issues in our industry with
certain items imported from overseas. We may incur
additional expenses and experience shipment delays due to
preventative measures adopted by the Indian and U.S. governments,
our suppliers and our company.
The insurance industry has become
more selective in offering some types of coverage and we may not be
able to obtain insurance coverage in the
future.
The
insurance industry has become more selective in offering some types
of insurance, such as product liability, product recall, property
and directors’ and officers’ liability insurance. Our
current insurance program is consistent with both our past level of
coverage and our risk management policies. However, we cannot
assure you that we will be able to obtain comparable insurance
coverage on favorable terms, or at all, in the
future. Certain of our customers as well as prospective
customers require that we maintain minimum levels of coverage for
our products. Lack of coverage or coverage below these minimum
required levels could cause these customers to materially change
business terms or to cease doing business with us
entirely.
If we experience product recalls, we may incur significant and
unexpected costs, and our business reputation could be adversely
affected.
We may be exposed to product recalls and adverse public relations
if our products are alleged to be mislabeled or to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
We depend on key personnel, the
loss of any of which could negatively affect our
business.
We
depend greatly on Frank L. Jaksch Jr., Robert N. Fried, Kevin M.
Farr, Mark J. Friedman, Lisa Bratkovich and Matthew Roberts, who
are our Executive Chairman of the Board, Chief Executive Officer,
Chief Financial Officer, General Counsel, Chief Marketing Officer
and Chief Scientific Officer, respectively. We also depend greatly
on other key employees, including key scientific and marketing
personnel. In general, only highly qualified and trained scientists
have the necessary skills to develop our products and provide our
services. Only marketing personnel with specific experience and
knowledge in health care are able to effectively market our
products. In addition, some of our manufacturing,
quality control, safety and compliance, information technology,
sales and e-commerce related positions are highly technical as
well. We face intense competition for these professionals from our
competitors, customers, marketing partners and other companies
throughout the
industries in which we compete. Our success will depend, in part,
upon our ability to attract and retain additional skilled
personnel, which will require substantial additional funds. There
can be no assurance that we will be able to find and attract
additional qualified employees or retain any such personnel. Our
inability to hire qualified personnel, the loss of services of our
key personnel, or the loss of services of executive officers or key
employees that may be hired in the future may have a material and
adverse effect on our business.
-31-
Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside of our
control.
We are
subject to the following factors, among others, that may negatively
affect our operating results:
●
the
announcement or introduction of new products by our
competitors;
●
our
ability to upgrade and develop our systems and infrastructure to
accommodate growth;
●
the
decision by significant customers to reduce purchases;
●
disputes
and litigation with competitors;
●
our
ability to attract and retain key personnel in a timely and
cost-effective manner;
●
technical
difficulties;
●
the
amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure;
●
regulation
by federal, state or local governments; and
●
general
economic conditions as well as economic conditions specific to the
healthcare industry.
As a
result of our limited operating history and the nature of the
markets in which we compete, it is extremely difficult for us to
make accurate forecasts. We have based our current and future
expense levels largely on our investment plans and estimates of
future events although certain of our expense levels are, to a
large extent, fixed. Assuming our products reach the market, we may
be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues relative to our planned expenditures would
have an immediate adverse effect on our business, results of
operations and financial condition. Further, as a strategic
response to changes in the competitive environment, we may from
time to time make certain pricing, service or marketing decisions
that could have a material and adverse effect on our business,
results of operations and financial condition. Due to the foregoing
factors, our revenues and operating results are and will remain
difficult to forecast.
We face significant competition, including changes in
pricing.
The
markets for our products and services are both competitive and
price sensitive. Many of our competitors have significant
financial, operations, sales and marketing resources and experience
in research and development. Competitors could develop new
technologies that compete with our products and services or even
render our products obsolete. If a competitor develops superior
technology or cost-effective alternatives to our products and
services, our business could be seriously harmed.
The
markets for some of our products are also subject to specific
competitive risks because these markets are highly price
competitive. Our competitors have competed in the past by lowering
prices on certain products. If they do so again, we may be forced
to respond by lowering our prices. This would reduce sales revenues
and increase losses. Failure to anticipate and respond to price
competition may also impact sales and aggravate
losses.
We
believe that customers in our markets display a significant amount
of loyalty to their supplier of a particular product. To the extent
we are not the first to develop, offer and/or supply new products,
customers may buy from our competitors or make materials
themselves, causing our competitive position to
suffer.
Many of our competitors are larger and have greater financial and
other resources than we do.
Our
products compete and will compete with other similar products
produced by our competitors. These competitive products could be
marketed by well-established, successful companies that possess
greater financial, marketing, distributional, personnel and other
resources than we possess. Using these resources, these companies
can implement extensive advertising and promotional campaigns, both
generally and in response to specific marketing efforts by
competitors, and enter into new markets more rapidly to introduce
new products. In certain instances, competitors with greater
financial resources also may be able to enter a market in direct
competition with us, offering attractive marketing tools to
encourage the sale of products that compete with our products or
present cost features that consumers may find
attractive.
-32-
We may never develop any additional products to
commercialize.
We have
invested a substantial amount of our time and resources in
developing various new products. Commercialization of these
products will require additional development, clinical evaluation,
regulatory approval, significant marketing efforts and substantial
additional investment before they can provide us with any revenue.
Despite our efforts, these products may not become commercially
successful products for a number of reasons, including but not
limited to:
●
we may
not be able to obtain regulatory approvals for our products, or the
approved indication may be narrower than we seek;
●
our
products may not prove to be safe and effective in clinical
trials;
●
we may
experience delays in our development program;
●
any
products that are approved may not be accepted in the
marketplace;
●
we may
not have adequate financial or other resources to complete the
development or to commence the commercialization of our products or
will not have adequate financial or other resources to achieve
significant commercialization of our products;
●
we may
not be able to manufacture any of our products in commercial
quantities or at an acceptable cost;
●
rapid
technological change may make our products obsolete;
●
we may
be unable to effectively protect our intellectual property rights
or we may become subject to claims that our activities have
infringed the intellectual property rights of others;
and
●
we may
be unable to obtain or defend patent rights for our
products.
We may not be able to partner with others for technological
capabilities and new products and services.
Our
ability to remain competitive may depend, in part, on our ability
to continue to seek partners that can offer technological
improvements and improve existing products and services that are
offered to our customers. We are committed to attempting to keep
pace with technological change, to stay abreast of technology
changes and to look for partners that will develop new products and
services for our customer base. We cannot assure prospective
investors that we will be successful in finding partners or be able
to continue to incorporate new developments in technology, to
improve existing products and services, or to develop successful
new products and services, nor can we be certain that newly
developed products and services will perform satisfactorily or be
widely accepted in the marketplace or that the costs involved in
these efforts will not be substantial.
If we fail to maintain adequate quality standards for our products
and services, our business may be adversely affected and our
reputation harmed.
Dietary
supplement, nutraceutical, food and beverage, functional food,
analytical laboratories, pharmaceutical and cosmetic customers are
often subject to rigorous quality standards to obtain and maintain
regulatory approval of their products and the manufacturing
processes that generate them. A failure to maintain, or, in some
instances, upgrade our quality standards to meet our
customers’ needs, could cause damage to our reputation and
potentially substantial sales losses.
-33-
Our ability to protect our intellectual property and proprietary
technology through patents and other means is uncertain and may be
inadequate, which would have a material and adverse effect on
us.
Our
success depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of copyright,
trade secret and trademark laws and nondisclosure, confidentiality
and other contractual restrictions to protect our proprietary
technology, including our licensed technology. However, these legal
means afford only limited protection and may not adequately protect
our rights or permit us to gain or keep any competitive advantage.
For example, our pending United States and foreign patent
applications may not issue as patents in a form that will be
advantageous to us or may issue and be subsequently successfully
challenged by others and invalidated. In addition, our pending
patent applications include claims to material aspects of our
products and procedures that are not currently protected by issued
patents. Both the patent application process and the process of
managing patent disputes can be time consuming and expensive.
Competitors may be able to design around our patents or develop
products which provide outcomes which are comparable or even
superior to ours. Steps that we have taken to protect our
intellectual property and proprietary technology, including
entering into confidentiality agreements and intellectual property
assignment agreements with some of our officers, employees,
consultants and advisors, may not provide us with meaningful
protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of
the agreements. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as do
the laws of the United States.
In the
event a competitor infringes our licensed or pending patent or
other intellectual property rights, enforcing those rights may be
costly, uncertain, difficult and time consuming. Even if
successful, litigation to enforce our intellectual property rights
or to defend our patents against challenge could be expensive and
time consuming and could divert our management’s attention.
We may not have sufficient resources to enforce our intellectual
property rights or to defend our patents rights against a
challenge. The failure to obtain patents and/or protect our
intellectual property rights could have a material and adverse
effect on our business, results of operations and financial
condition.
Our patents and licenses may be subject to challenge on validity
grounds, and our patent applications may be rejected.
We rely
on our patents, patent applications, licenses and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application should
be granted, is a complex matter of science and law, and therefore
we cannot be certain that, if challenged, our patents, patent
applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications,
licenses and other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any
competitive advantage we might otherwise have had.
We may become subject to claims of infringement or misappropriation
of the intellectual property rights of others, which could prohibit
us from developing our products, require us to obtain licenses from
third parties or to develop non-infringing alternatives and subject
us to substantial monetary damages.
Third
parties could, in the future, assert infringement or
misappropriation claims against us with respect to products we
develop. Whether a product infringes a patent or misappropriates
other intellectual property involves complex legal and factual
issues, the determination of which is often uncertain. Therefore,
we cannot be certain that we have not infringed the intellectual
property rights of others. There may be third-party patents or
patent applications with claims to materials, formulations, methods
of manufacture or methods for use related to the use or manufacture
of our products, and our potential competitors may assert that some
aspect of our product infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents upon which our products could infringe.
There also may be existing patents or pending patent applications
of which we are unaware upon which our products may inadvertently
infringe.
-34-
Any
infringement or misappropriation claim could cause us to incur
significant costs, place significant strain on our financial
resources, divert management’s attention from our business
and harm our reputation. If the relevant patents in such claim were
upheld as valid and enforceable and we were found to infringe them,
we could be prohibited from manufacturing or selling any product
that is found to infringe unless we could obtain licenses to use
the technology covered by the patent or are able to design around
the patent. We may be unable to obtain such a license on terms
acceptable to us, if at all, and we may not be able to redesign our
products to avoid infringement, which could materially impact our
revenue. A court could also order us to pay compensatory damages
for such infringement, plus prejudgment interest and could, in
addition, treble the compensatory damages and award attorney fees.
These damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court also
could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, or selling
products, and could enter an order mandating that we undertake
certain remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional damages
to third parties.
The prosecution and enforcement of patents licensed to us by third
parties are not within our control. Without these technologies, our
products may not be successful and our business would be harmed if
the patents were infringed on or misappropriated without action by
such third parties.
We have
obtained licenses from third parties for patents and patent
application rights related to the products we are developing,
allowing us to use intellectual property rights owned by or
licensed to these third parties. We do not control the maintenance,
prosecution, enforcement or strategy for many of these patents or
patent application rights and as such are dependent in part on the
owners of the intellectual property rights to maintain their
viability. If any third party licensor is unable to successfully
maintain, prosecute or enforce the licensed patents and/or patent
application rights related to our products, we may become subject
to infringement or misappropriate claims or lose our competitive
advantage. Without access to these technologies or suitable
design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our
employees, or our independent contractors have wrongfully used or
disclosed alleged trade secrets of others.
Some of
our employees were previously employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic companies. We may also
hire additional employees who are currently employed at other such
companies, including our competitors. Additionally, consultants or
other independent agents with which we may contract may be or have
been in a contractual arrangement with one or more of our
competitors. We may be subject to claims that these employees or
independent contractors have used or disclosed such other
party’s trade secrets or other proprietary information.
Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to our
management. If we fail to defend such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to market existing or new products,
which could severely harm our business.
*Litigation may harm our business.
Substantial,
complex or extended litigation could cause us to incur significant
costs and distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers,
competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such
companies, organizations or individuals are not uncommon, and we
cannot assure you that we will always be able to resolve such
disputes or on terms favorable to us. As further described in Part
II, Item 1 of this Quarterly Report on Form 10-Q, we are currently
involved in substantial and complex litigation with Elysium.
Unexpected results could cause us to have financial exposure in
these matters in excess of recorded reserves and insurance
coverage, requiring us to provide additional reserves to address
these liabilities, therefore impacting profits.
-35-
Our sales and results of operations for our analytical reference
standards and services segment depend on our customers’
research and development efforts and their ability to obtain
funding for these efforts.
Our
analytical reference standards and services segment customers
include researchers at pharmaceutical and biotechnology companies,
chemical and related companies, academic institutions, government
laboratories and private foundations. Fluctuations in the research
and development budgets of these researchers and their
organizations could have a significant effect on the demand for our
products. Our customers determine their research and development
budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding,
competition and the general availability of resources. As we
continue to expand our international operations, we expect research
and development spending levels in markets outside of the United
States will become increasingly important to us.
Research
and development budgets fluctuate due to changes in available
resources, spending priorities, general economic conditions,
institutional and governmental budgetary limitations and mergers of
pharmaceutical and biotechnology companies. Our business could be
harmed by any significant decrease in life science and high
technology research and development expenditures by our customers.
In particular, a small portion of our sales has been to researchers
whose funding is dependent on grants from government agencies such
as the United States National Institute of Health, the National
Science Foundation, the National Cancer Institute and similar
agencies or organizations. Government funding of research and
development is subject to the political process, which is often
unpredictable. Other departments, such as Homeland Security or
Defense, or general efforts to reduce the United States federal
budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high
technology research and development or delays surrounding the
approval of governmental budget proposals may cause our customers
to delay or forego purchases of our products and services, which
could seriously damage our business.
Some of
our customers receive funds from approved grants at a particular
time of year, many times set by government budget cycles. In the
past, such grants have been frozen for extended periods or have
otherwise become unavailable to various institutions without
notice. The timing of the receipt of grant funds may affect the
timing of purchase decisions by our customers and, as a result,
cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial
success of our customers’ products, which may vary for
reasons outside our control.
Even if
we are successful in securing utilization of our products in a
customer’s manufacturing process, sales of many of our
products and services remain dependent on the timing and volume of
the customer’s production, over which we have no control. The
demand for our products depends on regulatory approvals and
frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are
complex, lengthy, expensive, and can often take years to
complete.
We may bear financial risk if we under-price our contracts or
overrun cost estimates.
In
cases where our contracts are structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we
initially under-price our contracts or otherwise overrun our cost
estimates. Such underpricing or significant cost overruns could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for
the raw materials required to produce our products.
Our
dependence on a limited number of third-party suppliers or on a
single supplier, and the challenges we may face in obtaining
adequate supplies of raw materials, involve several risks,
including limited control over pricing, availability, quality and
delivery schedules. We cannot be certain that our current suppliers
will continue to provide us with the quantities of these raw
materials that we require or satisfy our anticipated specifications
and quality requirements. Any supply interruption in limited or
sole sourced raw materials could materially harm our ability to
manufacture our products until a new source of supply, if any,
could be identified and qualified. Although we believe there are
other suppliers of these raw materials, we may be unable to find a
sufficient alternative supply channel in a reasonable time or on
commercially reasonable terms. Any performance failure on the part
of our suppliers could delay the development and commercialization
of our products, or interrupt production of then existing products
that are already marketed, which would have a material adverse
effect on our business.
-36-
We may not
be successful in acquiring complementary businesses or products on
favorable terms.
As part of our business strategy, we intend to consider
acquisitions of similar or complementary businesses or products. No
assurance can be given that we will be successful in identifying
attractive acquisition candidates or completing acquisitions on
favorable terms. In addition, any future acquisitions will be
accompanied by the risks commonly associated with acquisitions.
These risks include potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses, the
difficulty and expense of integrating the operations and personnel
of the acquired companies, the potential disruption to the business
of the combined company and potential diversion of our management's
time and attention, the impairment of relationships with and the
possible loss of key employees and clients as a result of the
changes in management, the incurrence of amortization expenses and
write-downs and dilution to the shareholders of the combined
company if the acquisition is made for stock of the combined
company. In addition, successful completion of an acquisition may
depend on consents from third parties, including regulatory
authorities and private parties, which consents are beyond our
control. There can be no assurance that products, technologies or
businesses of acquired companies will be effectively assimilated
into the business or product offerings of the combined company or
will have a positive effect on the combined company's revenues or
earnings. Further, the combined company may incur significant
expense to complete acquisitions and to support the acquired
products and businesses. Any such acquisitions may be funded with
cash, debt or equity, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of our
existing stockholders.
If we experience a significant disruption in our information
technology systems or if we fail to implement new systems and
software successfully, our business could be adversely
affected.
We
depend on information systems throughout our company to control our
manufacturing processes, process orders, manage inventory, process
and bill shipments and collect cash from our customers, respond to
customer inquiries, contribute to our overall internal control
processes, maintain records of our property, plant and equipment,
and record and pay amounts due vendors and other creditors. If we
were to experience a prolonged disruption in our information
systems that involve interactions with customers and suppliers, it
could result in the loss of sales and customers and/or increased
costs, which could adversely affect our overall business
operation.
If we are unable to maintain sales, marketing and distribution
capabilities or maintain arrangements with third parties to sell,
market and distribute our products, our business may be
harmed.
To
achieve commercial success for our products, we must sell our
product lines and/or technologies at favorable prices. In addition
to being expensive, maintaining such a sales force is
time-consuming. Qualified direct sales personnel with experience in
the natural products industry are in high demand, and there can be
no assurance that we will be able to hire or retain an effective
direct sales team. Similarly, qualified independent sales
representatives both within and outside the United States are in
high demand, and we may not be able to build an effective network
for the distribution of our product through such representatives.
There can be no assurance that we will be able to enter into
contracts with representatives on terms acceptable to us.
Furthermore, there can be no assurance that we will be able to
build an alternate distribution framework should we attempt to do
so.
We may
also need to contract with third parties in order to market our
products. To the extent that we enter into arrangements with third
parties to perform marketing and distribution services, our product
revenue could be lower and our costs higher than if we directly
marketed our products. Furthermore, to the extent that we enter
into co-promotion or other marketing and sales arrangements with
other companies, any revenue received will depend on the skills and
efforts of others, and we do not know whether these efforts will be
successful. If we are unable to establish and maintain adequate
sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue, and
may not become profitable.
-37-
Our business could be negatively impacted by cyber security
threats.
In the
ordinary course of our business, we use our data centers and our
networks to store and access our proprietary business information.
We face various cyber security threats, including cyber security
attacks to our information technology infrastructure and attempts
by others to gain access to our proprietary or sensitive
information. The procedures and controls we use to monitor these
threats and mitigate our exposure may not be sufficient to prevent
cyber security incidents. The result of these incidents could
include disrupted operations, lost opportunities, misstated
financial data, liability for stolen assets or information,
increased costs arising from the implementation of additional
security protective measures, litigation and reputational damage.
Any remedial costs or other liabilities related to cyber security
incidents may not be fully insured or indemnified by other
means.
Risks Related to Regulatory Approval of Our Products and Other
Government Regulations
We are subject to regulation by various federal, state and foreign
agencies that require us to comply with a wide variety of
regulations, including those regarding the manufacture of products,
advertising and product label claims, the distribution of our
products and environmental matters. Failure to comply with these
regulations could subject us to fines, penalties and additional
costs.
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Department of Commerce, the FDA, the FTC, the
Department of Transportation and the Department of Agriculture.
These regulations govern a wide variety of product activities, from
design and development to labeling, manufacturing, handling, sales
and distribution of products. If we fail to comply with any of
these regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
We are
also subject to various federal, state, local and international
laws and regulations that govern the handling, transportation,
manufacture, use and sale of substances that are or could be
classified as toxic or hazardous substances. Some risk of
environmental damage is inherent in our operations and the products
we manufacture, sell, or distribute. Any failure by us to comply
with the applicable government regulations could also result in
product recalls or impositions of fines and restrictions on our
ability to carry on with or expand in a portion or possibly all of
our operations. If we fail to comply with any or all of these
regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
Government regulations of our customer’s business are
extensive and are constantly changing. Changes in these regulations
can significantly affect customer demand for our products and
services.
The
process by which our customers’ industries are regulated is
controlled by government agencies and depending on the market
segment can be very expensive, time consuming, and uncertain.
Changes in regulations or the enforcement practices of current
regulations could have a negative impact on our customers and, in
turn, our business. At this time, it is unknown how the FDA will
interpret and to what extent it will enforce GMPs, regulations that
will likely affect many of our customers. These uncertainties may
have a material impact on our results of operations, as lack of
enforcement or an interpretation of the regulations that lessens
the burden of compliance for the dietary supplement marketplace may
cause a reduced demand for our products and services.
Changes in government regulation or in practices relating to the
pharmaceutical, dietary supplement, food and cosmetic industry
could decrease the need for the services we provide.
Governmental
agencies throughout the world, including in the United States,
strictly regulate the pharmaceutical, dietary supplement, food and
cosmetic industries. Our business involves helping pharmaceutical
and biotechnology companies navigate the regulatory drug approval
process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval
procedures, or an increase in regulatory requirements that we have
difficulty satisfying or that make our services less competitive,
could eliminate or substantially reduce the demand for our
services. Also, if the government makes efforts to contain drug
costs and pharmaceutical and biotechnology company profits from new
drugs, our customers may spend less, or reduce their spending on
research and development. If health insurers were to change their
practices with respect to reimbursements for pharmaceutical
products, our customers may spend less, or reduce their spending on
research and development.
-38-
If we should in the future become required to obtain regulatory
approval to market and sell our goods we will not be able to
generate any revenues until such approval is received.
The
pharmaceutical industry is subject to stringent regulation by a
wide range of authorities. While we believe that, given our present
business, we are not currently required to obtain regulatory
approval to market our goods because, among other things, we do not
(i) produce or market any clinical devices or other products, or
(ii) sell any medical products or services to the customer, we
cannot predict whether regulatory clearance will be required in the
future and, if so, whether such clearance will at such time be
obtained for any products that we are developing or may attempt to
develop. Should such regulatory approval in the future be required,
our goods may be suspended or may not be able to be marketed and
sold in the United States until we have completed the regulatory
clearance process as and if implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product or service and
would require the expenditure of substantial
resources.
If
regulatory clearance of a good that we propose to propose to market
and sell is granted, this clearance may be limited to those
particular states and conditions for which the good is demonstrated
to be safe and effective, which would limit our ability to generate
revenue. We cannot ensure that any good that we develop will meet
all of the applicable regulatory requirements needed to receive
marketing clearance. Failure to obtain regulatory approval will
prevent commercialization of our goods where such clearance is
necessary. There can be no assurance that we will obtain regulatory
approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity
Securities
The market price of our common stock may be volatile and adversely
affected by several factors.
The
market price of our common stock could fluctuate significantly in
response to various factors and events, including, but not limited
to:
●
our ability to
integrate operations, technology, products and
services;
●
our ability to
execute our business plan;
●
our operating
results are below expectations;
●
our issuance of
additional securities, including debt or equity or a combination
thereof,;
●
announcements of
technological innovations or new products by us or our
competitors;
●
acceptance of and
demand for our products by consumers;
●
media coverage
regarding our industry or us;
●
litigation;
●
disputes with or
our inability to collect from significant customers;
●
loss of any
strategic relationship;
●
industry
developments, including, without limitation, changes in healthcare
policies or practices;
-39-
●
economic and other
external factors;
●
reductions in
purchases from our large customers;
●
period-to-period
fluctuations in our financial results; and
●
whether an active
trading market in our common stock develops and is
maintained.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our shares of common stock may be thinly traded, so you may be
unable to sell at or near ask prices or at all.
We
cannot predict the extent to which an active public market for our
common stock will develop or be sustained. This situation may be
attributable to a number of factors, including the fact that we are
a small company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community who generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk
averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such
time as we have become more seasoned and viable. As a consequence,
there may be periods of several days or weeks when trading activity
in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect
on share price. We cannot assure you that a broader or more active
public trading market for our common stock will develop or be
sustained, or that current trading levels will be sustained or not
diminish.
We have not paid cash dividends in the past and do not expect to
pay cash dividends in the foreseeable future. Any return on
investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our capital stock and do not
anticipate paying cash dividends on our capital stock in the
foreseeable future. The payment of dividends on our capital stock
will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on your
investment will only occur if the common stock price
appreciates.
Comprehensive tax reform could adversely affect our business and
financial condition.
On
December 22, 2017, U.S. federal income tax signed into law (H.R. 1,
“An Act to provide for reconciliation pursuant to titles II
and V of the concurrent resolution on the budget for fiscal year
2018”), informally titled the Tax Cuts and Jobs Act, that
significantly revises the Internal Revenue Code of 1986, as
amended. The Tax Cuts and Jobs Act, among other things,
contains significant changes to corporate taxation, including
reduction of the corporate tax rate from a top marginal rate of 35%
to a flat rate of 21%, limitation of the tax deduction for interest
expense to 30% of adjusted taxable income (except for certain small
businesses), limitation of the deduction for net operating losses
carried forward from taxable years beginning after December 31,2017 to 80% of current year taxable income and elimination of net
operating loss carrybacks, one time taxation of offshore earnings
at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain
important exceptions), immediate deductions for certain new
investments instead of deductions for depreciation expense over
time, and modifying or repealing many business deductions and
credits (including reducing the business tax credit for certain
clinical testing expenses incurred in the testing of certain drugs
for rare diseases or conditions). Notwithstanding the
reduction in the corporate income tax rate, the overall impact of
the Tax Cuts and Jobs Act is uncertain and our business and
financial condition could be adversely affected. In addition,
it is unknown if and to what extent various states will conform to
the Tax Cuts and Jobs Act. The impact of the Tax Cuts and
Jobs Act on holders of our common stock is likewise uncertain and
could be adverse. We urge our stockholders to consult with
their legal and tax advisors with respect to this legislation and
the potential tax consequences of investing in or holding our
common stock.
-40-
Our ability to use our net operating loss carryforwards and certain
other tax attributes may be limited.
Our
federal net operating losses (“NOL”s) generated in
taxable years ending prior to 2018 could expire unused. Under the
Tax Cuts and Jobs Act, federal NOLs incurred in taxable years
ending after December 31, 2017, may be carried forward
indefinitely, but the deductibility of federal NOLs generated in
tax years beginning after December 31, 2017, is limited. It is
uncertain if and to what extent various states will conform to the
Tax Cuts and Jobs Act. In addition, under Sections 382 and 383
of the Internal Revenue Code of 1986, as amended, and corresponding
provisions of state law, if a corporation undergoes an
“ownership change,” which is generally defined as a
greater than 50% change (by value) in its equity ownership over a
three-year period, the corporation’s ability to use its
pre-change NOL carryforwards, or NOLs, and other pre-change tax
attributes (such as research tax credits) to offset its post-change
income may be limited. In addition, we may also experience
ownership changes in the future as a result of subsequent shifts in
our stock ownership some of which may be outside of our control. As
a result, if we earn net taxable income, our ability to use our
pre-ownership change NOL carryforwards to offset U.S. federal
taxable income may be subject to limitations, which could
potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could
accelerate or permanently increase state taxes owed.
Stockholders may experience significant dilution if future equity
offerings are used to fund operations or acquire complementary
businesses.
If
future operations or acquisitions are financed through the issuance
of additional equity securities, stockholders could experience
significant dilution. Securities issued in connection with future
financing activities or potential acquisitions may have rights and
preferences senior to the rights and preferences of our common
stock. In addition, the issuance of shares of our common stock upon
the exercise of outstanding options or warrants may result in
dilution to our stockholders.
We may become involved in securities class action litigation that
could divert management’s attention and harm our
business.
The
stock market in general, and the stocks of early stage companies in
particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to
the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has
often been brought against that company. If the market price or
volume of our shares suffers extreme fluctuations, then we may
become involved in this type of litigation, which would be
expensive and divert management’s attention and resources
from managing our business.
As a
public company, we may also from time to time make forward-looking
statements about future operating results and provide some
financial guidance to the public markets. Projections may not be
made in a timely manner or we might fail to reach expected
performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements
that adversely affect the stock price could result in losses to
investors, stockholder lawsuits or other litigation, sanctions or
restrictions issued by the Securities and Exchange
Commission.
*We have a significant number of outstanding options and warrants,
and future sales of these shares could adversely affect the market
price of our common stock.
As of
March 31, 2019, we had outstanding options for an aggregate
of approximately 10.1 million shares of common stock at a
weighted average exercise price of $3.81 per share and outstanding
warrants exercisable for an aggregate of approximately 0.1 million
shares of common stock at an exercise price of $3.19 per share. The
holders may sell many of these shares in the public markets from
time to time, without limitations on the timing, amount or method
of sale. As and when our stock price rises, if at all, more
outstanding options and warrants will be in-the-money and the
holders may exercise their options and warrants and sell a large
number of shares. This could cause the market price of our common
stock to decline.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Asset
Purchase Agreement, dated as of August 21, 2017, by and among
Covance Laboratories Inc., ChromaDex, Inc., ChromaDex Analytics,
Inc., and ChromaDex Corporation (incorporated by reference from,
and filed as Exhibit 2.2 to the Company’s Quarterly Report on
Form 10-Q (File No. 001-37752) filed with the Commission on
November 9, 2017)*
Amendment
to Asset Purchase Agreement, dated as of September 5, 2017, by and
among Covance Laboratories Inc., ChromaDex, Inc., ChromaDex
Analytics, Inc., and ChromaDex Corporation (incorporated by
reference from, and filed as Exhibit 2.2 to the Company’s
Quarterly Report on Form 10-Q (File No. 001-37752) filed with the
Commission on November 9, 2017)
Tag-Along
Agreement effective as of December 31, 2005, by and among the
Registrant, Frank Louis Jaksch, Snr. & Maria Jaksch, Trustees
of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily
Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University
of Mississippi Research Foundation (incorporated by reference to,
and filed as Exhibit 4.2 to the Registrant’s Current Report
on Form 8-K (File No. 333-140056) filed with the Commission on June24, 2008)
Plan and related
Forms were assumed by ChromaDex Corporation pursuant to Agreement
and Planof Merger, dated as of May 21, 2008, among ChromaDex
Corporation (formerly Cody Resources,Inc.), CDI Acquisition, Inc.
and ChromaDex, Inc.
*
This Exhibit has
been granted confidential treatment and has been filed separately
with theCommission. The confidential portions of this Exhibit have
been omitted and are marked by anasterisk.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
