SEC Connect
 

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
 
Commission File Number: 001-37752
 
CHROMADEX CORPORATION
(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.)
 
 
 
10005 Muirlands Blvd. Suite G,
Irvine, California
 
92618
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (949) 419-0288
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No     
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X  No     
 
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company or emerging growth company. See definition of “large accelerated filer, accelerated filer, smaller reporting company and emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ____                                                                                         Accelerated filer   X  
Non-accelerated filer ____                                                                                           Smaller reporting company ____
(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 August 9, 2017 there were 46,093,894 shares of the registrant’s common stock issued and outstanding. 
 
 

 
 
CHROMADEX CORPORATION
 
 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 
 
 
 
1
 
2
 
3
 
4
 
5
 
6
 
15
 
21
 
21
 
 
 
 
 
22
 
23
 
23
 
39
 
39
 
39
 
39
 
40
 
 
 
 
-i-
 
PART I – FINANCIAL INFORMATION (UNAUDITED)
 
ITEM 1. FINANCIAL STATEMENTS
 
ChromaDex Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
July 1, 2017 and December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2017
 
 
December 31, 2016
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash
 $14,138,607 
 $1,642,429 
Trade receivables, net of allowances of $736,000 and $1,081,000, respectively
  4,579,253 
  5,852,030 
Inventories
  7,794,182 
  7,912,630 
Prepaid expenses and other assets
  864,935 
  329,854 
Total current assets
  27,376,977 
  15,736,943 
 
    
    
Leasehold Improvements and Equipment, net
  3,372,879 
  3,111,374 
Deposits
  402,497 
  397,207 
Intangible assets, net
  1,767,811 
  486,226 
Longterm investment
  - 
  20,318 
 
    
    
Total assets
 $32,920,164 
 $19,752,068 
 
    
    
Liabilities and Stockholders' Equity
    
    
 
    
    
Current Liabilities
    
    
Accounts payable
 $3,131,759 
 $5,978,288 
Accrued expenses
  2,111,205 
  2,170,172 
Current maturities of capital lease obligations
  299,103 
  255,461 
Customer deposits and other
  503,850 
  389,010 
Deferred rent, current
  114,101 
  76,219 
Due to officer
  100,000 
  - 
Total current liabilities
  6,260,018 
  8,869,150 
 
    
    
Capital lease obligations, less current maturities
  393,184 
  343,589 
Deferred rent, less current
  547,539 
  564,971 
 
    
    
Total liabilities
  7,200,741 
  9,777,710 
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders' Equity
    
    
Common stock, $.001 par value; authorized 150,000,000 shares;
    
    
   issued and outstanding July 1, 2017 45,571,891 shares and
    
    
   December 31, 2016 37,544,531 shares
  45,572 
  37,545 
Additional paid-in capital
  75,590,304 
  55,160,387 
Accumulated deficit
  (49,916,453)
  (45,223,574)
Total stockholders' equity
  25,719,423 
  9,974,358 
 
    
    
Total liabilities and stockholders' equity
 $32,920,164 
 $19,752,068 
 
See Notes to Consolidated Financial Statements.
 
 
 
-1-
 
ChromaDex Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
For the Three Month Periods Ended July 1, 2017 and July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
Sales, net
 $5,306,855 
 $8,829,579 
Cost of sales
  3,044,086 
  4,702,132 
 
    
    
Gross profit
  2,262,769 
  4,127,447 
 
    
    
Operating expenses:
    
    
Sales and marketing
  728,299 
  698,031 
Research and development
  849,962 
  751,726 
General and administrative
  2,657,573 
  2,306,559 
Other
  745,773 
  - 
Operating expenses
  4,981,607 
  3,756,316 
 
    
    
Operating income (loss)
  (2,718,838)
  371,131 
 
    
    
Nonoperating expense:
    
    
Interest expense, net
  (45,286)
  (144,786)
Loss on debt extinguishment
  - 
  (313,099)
Nonoperating expenses
  (45,286)
  (457,885)
 
    
    
Loss before taxes
  (2,764,124)
  (86,754)
Provision for taxes
  - 
  4,087 
 
    
    
Net loss
 $(2,764,124)
 $(82,667)
 
    
    
Basic and diluted loss per common share
 $(0.07)
 $(0.00)
 
    
    
Basic and diluted weighted average common shares outstanding
  42,121,150 
  36,990,032 
 
See Notes to Consolidated Financial Statements.
 
 
 
-2-
 
ChromaDex Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
For the Six Month Periods Ended July 1, 2017 and July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
Sales, net
 $9,755,977 
 $16,161,524 
Cost of sales
  5,740,555 
  8,582,658 
 
    
    
Gross profit
  4,015,422 
  7,578,866 
 
    
    
Operating expenses:
    
    
Sales and marketing
  1,324,461 
  1,242,753 
Research and development
  1,514,152 
  1,215,798 
General and administrative
  5,040,719 
  4,295,118 
Other
  745,773 
  - 
Operating expenses
  8,625,105 
  6,753,669 
 
    
    
Operating income (loss)
  (4,609,683)
  825,197 
 
    
    
Nonoperating expense:
    
    
Interest expense, net
  (83,196)
  (332,487)
Loss on debt extinguishment
  - 
  (313,099)
Nonoperating expenses
  (83,196)
  (645,586)
 
    
    
Income (loss) before income taxes
  (4,692,879)
  179,611 
Provision for taxes
  - 
  (6,653)
 
    
    
Net income (loss)
 $(4,692,879)
 $172,958 
 
    
    
Basic earnings (loss) per common share
 $(0.12)
 $0.00 
 
    
    
Diluted earnings (loss) per common share
 $(0.12)
 $0.00 
 
    
    
Basic weighted average common shares outstanding
  40,075,920 
  36,702,037 
 
    
    
Diluted weighted average common shares outstanding
  40,075,920 
  37,470,066 
 
See Notes to Consolidated Financial Statements.
 
 
-3-
 
ChromaDex Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Month Period Ended July 1, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Additional
 
 
Accumulated
 
 
Stockholders'
 
 
 
Shares
 
 
 Amount
 
 
 Paid-in Capital
 
 
 Deficit
 
 
 Equity
 
Balance, January 1, 2017
  37,544,531 
 $37,545 
 $55,160,387 
 $(45,223,574)
  9,974,358 
 
    
    
    
    
    
    Issuance of common stock associated with
    
    
    
    
    
       the acquisition of Healthspan Research LLC
  367,648 
  367 
  999,635 
  - 
  1,000,002 
 
    
    
    
    
    
Exercise of stock options
  3,202 
  3 
  6,620 
  - 
  6,623 
 
    
    
    
    
    
Vested restricted stock
  2,667 
  3 
  (3)
  - 
  - 
 
    
    
    
    
    
Share-based compensation
  - 
  - 
  319,830 
  - 
  319,830 
 
    
    
    
    
    
Net loss
  - 
  - 
  - 
  (1,928,755)
  (1,928,755)
 
    
    
    
    
    
Balance, April 1, 2017
  37,918,048 
 $37,918 
 $56,486,469 
 $(47,152,329)
 $9,372,058 
 
    
    
    
    
    
    Issuance of common stock,
    
    
    
    
    
       net of offering costs of $1,184,000
  7,649,968 
  7,650 
  18,698,634 
  - 
  18,706,284 
 
    
    
    
    
    
Exercise of stock options
  1,875 
  2 
  5,342 
  - 
  5,344 
 
    
    
    
    
    
Vested restricted stock
  2,000 
  2 
  (2)
  - 
  - 
 
    
    
    
    
    
Share-based compensation
  - 
  - 
  399,861 
  - 
  399,861 
 
    
    
    
    
    
Net loss
  - 
  - 
  - 
  (2,764,124)
  (2,764,124)
 
    
    
    
    
    
Balance, July 1, 2017
  45,571,891 
 $45,572 
 $75,590,304 
 $(49,916,453)
 $25,719,423 
 
See Notes to Consolidated Financial Statements.
 
 
-4-
 
ChromaDex Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
For the Six Month Periods Ended July 1, 2017 and July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities
 
 
 
 
 
 
  Net income (loss)
 $(4,692,879)
 $172,958 
  Adjustments to reconcile net income (loss) to net cash used in operating activities:
    
    
    Depreciation of leasehold improvements and equipment
  264,235 
  159,370 
    Amortization of intangibles
  89,803 
  38,415 
    Share-based compensation expense
  719,691 
  657,637 
    Allowance for doubtful trade receivables
  (344,055)
  29,649 
    Loss from disposal of equipment
  1,452 
  - 
    Non-cash loss on debt extinguishment
  - 
  32,007 
    Non-cash financing costs
  56,587 
  94,080 
  Changes in operating assets and liabilities:
    
    
    Trade receivables
  1,628,288 
  (4,372,837)
    Inventories
  179,362 
  3,628,678 
    Prepaid expenses and other assets
  (554,679)
  (266,831)
    Accounts payable
  (2,950,302)
  (3,892,582)
    Accrued expenses
  (62,174)
  634,562 
    Customer deposits and other
  114,840 
  (9,150)
    Deferred rent
  20,451 
  106,657 
    Due to officer
  (32,500)
  - 
Net cash used in operating activities
  (5,561,880)
  (2,987,387)
 
    
    
Cash Flows From Investing Activities
    
    
  Purchases of leasehold improvements and equipment
  (295,078)
  (231,201)
  Purchases of intangible assets
  (183,958)
  (195,000)
Net cash used in investing activities
  (479,036)
  (426,201)
 
    
    
Cash Flows From Financing Activities
    
    
  Proceeds from issuance of common stock, net of issuance costs
  18,706,284 
  5,720,000 
  Proceeds from exercise of stock options
  11,966 
  622,384 
  Payment of debt issuance costs
  (42,279)
  - 
  Principal payment on loan payable
  - 
  (5,000,000)
  Principal payments on capital leases
  (138,877)
  (108,249)
Net cash provided by financing activities
  18,537,094 
  1,234,135 
 
    
    
Net increase (decrease) in cash
  12,496,178 
  (2,179,453)
 
    
    
Cash Beginning of Period
  1,642,429 
  5,549,672 
 
    
    
Cash Ending of Period
 $14,138,607 
 $3,370,219 
 
    
    
Supplemental Disclosures of Cash Flow Information
    
    
  Cash payments for interest
 $26,611 
 $239,839 
 
    
    
Supplemental Schedule of Noncash Investing Activity
    
    
  Noncash consideration transferred for the acquisition of Healthspan Research LLC
 $1,187,430 
 $- 
  Capital lease obligation incurred for the purchase of equipment
 $232,114 
 $- 
  Inventory supplied to Healthspan Research LLC for equity interest, at cost
 $- 
 $20,318 
  Retirement of fully depreciated equipment - cost
 $55,947 
 $28,083 
  Retirement of fully depreciated equipment - accumulated depreciation
 $(55,947)
 $(28,083)
 
See Notes to Consolidated Financial Statements.
 
 
-5-
 
Note 1. Interim Financial Statements
 
The accompanying financial statements of ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLC, ChromaDex Analytics, Inc. and ChromaPharma, Inc. (collectively referred to herein as “ChromaDex” or the “Company” or, in the first person as “we”, “us” and “our”) include all adjustments, consisting of normal recurring adjustments and accruals, that, in the opinion of the management of the Company, are necessary for a fair presentation of the Company’s financial position as of July 1, 2017 and results of operations and cash flows for the three and six months ended July 1, 2017 and July 2, 2016. These unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2016 appearing in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Commission”) on March 16, 2017. Operating results for the six months ended July 1, 2017 are not necessarily indicative of the results to be achieved for the full year ending on December 30, 2017. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
 
The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
 
Note 2. Nature of Business and Liquidity
 
Nature of business: The Company is a natural products company that discovers, acquires, develops and commercializes patented and proprietary ingredient technologies that address the dietary supplement, food, beverage, skin care and pharmaceutical markets. With the acquisition of Healthspan Research, LLC in March 2017, the Company now has a consumer product, which it plans to further develop and market. Along with the Company's ingredients segment that includes our consumer product business, the Company also has a core standards and contract services segment, which focuses on natural product fine chemicals (known as “phytochemicals”) and chemistry and analytical testing services, and a regulatory consulting segment. As a result of the Company’s relationships with leading universities and research institutions, the Company is able to discover and license early stage, intellectual property-backed ingredient technologies. The Company then utilizes its business to develop commercially viable proprietary ingredients. The Company’s proprietary ingredient portfolio is backed with clinical and scientific research, as well as extensive intellectual property protection.
 
Liquidity: The Company has incurred loss from operations of approximately $4,610,000 and net loss of approximately $4,693,000 for the six-month period ended July 1, 2017. As of July 1, 2017, the cash and cash equivalents totaled approximately $14.1 million.
 
On April 26, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers named therein, pursuant to which the Company agreed to sell and issue up to $25.0 million of its Common Stock in three tranches. The first and second tranche closed on April 27, 2017 and May 24, 2017, respectively, and the Company received $3.5 million and $16.4 million, respectively. The third tranche is expected to close following a related stockholder approval at the Company's special meeting on August 10, 2017.
 
While we anticipate that our current cash, cash equivalents, cash to be generated from operations and the funds from the financing transaction described above will be sufficient to meet our projected operating plans through at least August 11, 2018, we may require additional funds, either through additional equity or debt financings or collaborative agreements or from other sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available, the Company will further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations. The inability to raise additional financing may have a material adverse effect on the future performance of the Company.
 
 
 
-6-
 
Note 3. Significant Accounting Policies
 
Basis of presentation: The financial statements and accompanying notes have been prepared on a consolidated basis and reflect the consolidated financial position of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated from these financial statements. The Company’s fiscal year ends on the Saturday closest to December 31, and the Company's normal fiscal quarters end on the Saturday 13 weeks after the last fiscal year end or fiscal quarter end. Every fifth or sixth fiscal year, the inclusion of an extra week occurs due to the Company’s floating year-end date. The fiscal year 2016 ended on December 31, 2016 consisted of normal 52 weeks. The fiscal year 2017 ending on December 30, 2017 will also include the normal 52 weeks.
 
Adopted Accounting Pronouncements Fiscal 2017: In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company early adopted the amendments in this ASU effective as of January 1, 2017. On March 12, 2017, the Company acquired all of the outstanding equity interests of Healthspan Research, LLC ("Healthspan") pursuant to a Membership Interest Purchase Agreement by and among (i) Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the “Sellers”) and (ii) ChromaDex Corporation. Under ASU 2017-01, this transaction was treated as an acquisition of assets, rather than a business. For details on the acquisition of Healthspan, please refer to Note 5. Acquisition and Related Party Transaction appearing later on this report.
 
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for stock compensation. It focuses on income tax accounting, award classification, estimating forfeitures, and cash flow presentation. The Company adopted the amendments in this ASU effective as of January 1, 2017. The adoption of ASU 2016-09 did not have a material effect on our consolidated financial statements.
 
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory, which requires that inventories, other than those accounted for under Last-In-First-Out, will be reported at the lower of cost or net realizable value. Net realizable value is the estimated selling price less costs of completion, disposal and transportation. The Company adopted the amendments in this ASU effective as of January 1, 2017. The adoption of ASU 2015-11 did not have a material effect on our consolidated financial statements.
 
Recent accounting standards: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles ("GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements. 
 
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 and six months ended July 1, 2017 and July 2, 2016:
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 $(2,764,124)
 $(82,667)
 $(4,692,879)
 $172,958 
 
    
    
    
    
Basic weighted average common shares outstanding (1):
  42,121,150 
  36,990,032 
  40,075,920 
  36,702,037 
 
    
    
    
    
Basic earnings (loss) per common share
 $(0.07)
 $(0.00)
 $(0.12)
 $0.00 
 
    
    
    
    
 
    
    
    
    
Dilutive effect of stock options, net
  - 
  - 
  - 
  726,879 
Dilutive effect of warrants, net
  - 
  - 
  - 
  41,750 
 
    
    
    
    
Diluted weighted average common shares outstanding :
  42,121,150 
  36,990,032 
  40,075,920 
  37,470,666 
 
    
    
    
    
Diluted earnings (loss) per common share
 $(0.07)
 $(0.00)
 $(0.12)
 $0.00 
 
    
    
    
    
Potentially dilutive securities, total (2):
    
    
    
    
  Stock options
  5,965,172 
  5,126,943 
  5,965,172 
  4,400,064 
  Warrants
  470,444 
  487,111 
  470,444 
  445,361 
 
(1)
Includes approximately 0.5 million weighted average nonvested shares of restricted stock for the three and six month periods ending July 1, 2017, respectively, and approximately 0.4 million weighted average nonvested shares of restricted stock for the three and six month periods ending July 2, 2016, respectively.  These shares are participating securities that feature voting and dividend rights.
 
(2)
Excluded from the computation of diluted earnings (loss) per share as their impact is antidilutive.
 
 
 
-7-
 
Note 5. Asset Acquisition and Related Party Transaction
 
On March 12, 2017, the Company acquired all of the outstanding equity interests of Healthspan from Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the "Sellers"). Robert Fried is a member of the Board of Directors ("Board") of the Company, a position he has held since July 2015.
 
Upon the closing of, and as consideration for, the acquisition, the Company issued an aggregate of 367,648 shares of the Company’s common stock to the Sellers. The fair value of these shares was approximately $1.0 million based on the closing price of $2.72 per share on March 12, 2017. Also on March 12, 2017, the Company appointed Robert Fried as President and Chief Strategy Officer, effective immediately. Mr. Fried continues to serve as a member of the Board, but resigned as a member of the Nominating and Corporate Governance Committee of the Board.
 
Healthspan was formed in August 2015 to offer and sell finished bottle products that contain NIAGEN® directly to consumers through internet-based selling platforms. NIAGEN® is the leading ingredient the Company currently sells. Prior to the acquisition, the Company has supplied certain amount of NIAGEN® to Healthspan as a raw material inventory in exchange for a 4% equity interest in Healthspan. An additional 5% equity interest was received for granting certain exclusive rights to resell NIAGEN®.
 
The Company acquired the consumer product business model that Healthspan has established. Included in the business model acquired is the know-how marketing to date, and the designs and procedures needed to operate a consumer product business. This transaction was accounted for as an acquisition of assets. An intangible asset of approximately $1.35 million was recorded as a result of this acquisition, which is the difference of consideration transferred and the net amount of assets acquired and liabilities assumed.
  
(A) Consideration transferred
 
 
 
(B) Net amount of assets and liabilities
 
 
 
 
 
 
 
 
 Fair value
 
 Assets acquired
 
 Fair value
Common Stock
$  1,000,000
 
 
 Cash and cash equivalents
 
$       19,000
Transaction costs
178,000
 
 
 Trade receivables
 
11,000
Previously held equity interest
20,000
 
 
 Inventory
 
61,000
 
 
 
 
 
 
 
 
$  1,198,000
 
 Liabilities assumed
 
 
 
 
 
 
 Due to officer
 
(132,000)
 
 
 
 
 Accounts payable
 
(74,000)
 
 
 
 
 Credit card payable
 
(30,000)
 
 
 
 
 Other accrued expenses
 
(3,000)
Consumer product business model,
 
 
 
 
 
 
    intangible asset (A) -(B)
$  1,346,000
 
 
 Net assets
 
$  (148,000)
 
 
 
 
 
 
 
 
The acquired intangible asset is considered to have a useful life of 10 years as we believe the economic benefits from the acquisition will last at least 10 years. The expense is amortized using the straight-line method over the useful life and the Company recognized an amortization expense of approximately $41,000 for the six months ended July 1, 2017.
 
In cancellation of a loan owed by Healthspan to Mr. Fried prior to the acquisition, the Company repaid $32,500 to Mr. Fried on March 13, 2017 and will also repay $100,000 on March 12, 2018. No interest is to be paid for the outstanding $100,000 due to Mr. Fried.
 
 
 
-8-
 
Note 6. Trade Receivables Allowances
 
 The allowance amounts for the periods ended July 1, 2017 and December 31, 2016 are as follows:
 
 
 
 
July 1,
2017
 
 
December 31,
2016
 
Allowances related to
 
 
 
 
 
 
     Customer C
 $500,000 
 $800,000 
     Customer E
  184,000 
  198,000 
Other allowances
  52,000 
  83,000 
 
 $736,000 
 $1,081,000 
 
Note 7. Inventories
 
The amounts of major classes of inventory as of July 1, 2017 and December 31, 2016 are as follows:
 
 
 
July 1,
2017
 
 
December 31,
2016
 
Bulk ingredients
 $6,833,000 
 $7,044,000 
Reference standards
  1,052,000 
  1,033,000 
Dietary supplement - finished bottles
  23,000 
  - 
Dietary supplement - work-in-process
  48,000 
  - 
 
  7,956,000 
  8,077,000 
Less valuation allowance
  (162,000)
  (164,000)
 
 $7,794,000 
 $7,913,000 
 
Note 8. Employee Share-Based Compensation
 
Stock Option Plans
 
On June 20, 2017, the stockholders of the Company approved the ChromaDex Corporation 2017 Equity Incentive Plan (the "2017 Plan"). The 2017 Plan is intended to be the successor to the ChromaDex Corporation Second Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"). Under the 2017 Plan, the Company is authorized to issue stock options that total no more than the sum of (i) 3,000,000 new shares, (ii) approximately 384,000 unallocated shares remaining available for the grant of new awards under the 2007 Plan, and (iii) any returning shares from the 2007 Plan or the 2017 Plan, such as forfeited, cancelled, or expired shares.
 
Share-Based Compensation for Robert Fried
 
On March 12, 2017, the Board appointed Robert Fried, as President and Chief Strategy Officer. In connection with his appointment as President and Chief Strategy Officer, the Company granted an option to purchase up to 500,000 shares of ChromaDex common stock under the 2007 Plan, subject to monthly vesting over a three-year period. The Company also granted 166,667 shares of restricted stock, subject to annual vesting over a three-year period. The fair value measured for the granted restricted stock was approximately $453,000 and the expense is amortized over the vesting period of three years.
 
Service Period Based Stock Options
 
The following table summarizes activity of service period based stock options granted to employees at July 1, 2017 and changes during the six months then ended:
 
 
 
 
 
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
 
Aggregate
 
 
 
Number of
 
 
Exercise
 
 
Contractual
 
 
Fair
 
 
Intrinsic
 
 
 
Shares
 
 
Price
 
 
Term
 
 
Value
 
 
Value
 
Outstanding at December 31, 2016
  4,281,151 
 $3.52 
  6.36 
 
 
 
 
 
 
 
    
    
    
 
 
 
 
 
 
Options Granted
  693,334 
  2.89 
  10.00 
 $1.85 
 
 
 
Options Exercised
  (3,202)
  2.07 
    
    
 $3,000 
Options Forfeited
  (33,419)
  3.53 
    
    
    
Outstanding at July 1, 2017
  4,937,864 
 $3.43 
  6.40 
    
 $3,072,000 
 
    
    
    
    
    
Exercisable at July 1, 2017
  3,348,382 
 $3.43 
  5.09 
    
 $2,246,000 
 
The aggregate intrinsic values in the table above are based on the Company’s stock price of $3.82, which is the closing price of the Company’s stock on the last day of business for the period ended July 1, 2017.
 
 
 
-9-
 
The fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes option pricing model. The table below outlines the weighted average assumptions for options granted to employees during the six months ended July 1, 2017.
 
Six Months Ended July 1, 2017
 
 
 
 
Expected term
 
  
  5.8 years
 
Expected volatility
 
  73%
Expected dividends
 
  0.00%
Risk-free rate
 
  2.13%
 
As of July 1, 2017, there was approximately $3,081,000 of total unrecognized compensation expected to be recognized over a weighted average period of 2.4 years.
 
Employee Share-Based Compensation
 
The Company recognized compensation expense of approximately $371,000 and $677,000 in general and administrative expenses in the statement of operations for the three and six months ended July 1, 2017, respectively, and approximately $314,000 and $621,000 for the three and six months ended July 2, 2016, respectively.
 
Note 9. Stock Issuance
 
On April 26, 2017, the Company entered into a Securities Purchase Agreement (the "SPA") with certain purchasers named therein, pursuant to which the Company agreed to sell and issue up to $25.0 million of its common stock at a purchase price of $2.60 per share in three tranches of approximately $3.5 million, $16.4 million and $5.1 million, respectively. The first two tranches closed during the three months ended July 1, 2017, whereby approximately 7.6 million shares were issued for proceeds of $19.9 million. The third tranche is expected to close following a related stockholder approval at the Company's special meeting on August 10, 2017.
 
Note 10. Business Segments
 
Since the year ended December 31, 2016, the Company has made operational changes to merge its scientific and regulatory consulting segment into core standards and contract services segment. Additionally, the consumer product operations recently acquired in connection with the Healthspan acquisition are categorized as a part of the ingredients segment.
 
As a result, the Company has the following two reportable segments:
 
Ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients to consumers in finished products or as raw materials to the manufacturers of consumer products in various industries including the nutritional supplement, food and beverage and animal health industries.
 
Core standards and contract services segment includes (i) supply of phytochemical reference standards, (ii) analytical and chemistry based services and (iii) scientific and regulatory consulting.
 
The “Corporate and other” classification includes corporate items not allocated by the Company to each reportable segment. Further, there are no intersegment sales that require elimination. The Company evaluates performance and allocates resources based on reviewing gross margin by reportable segment.
 
Three months ended
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
July 1, 2017
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $3,004,656 
 $2,302,199 
 $- 
 $5,306,855 
Cost of sales
  1,356,845 
  1,687,241 
  - 
  3,044,086 
 
    
    
    
    
Gross profit
  1,647,811 
  614,958 
  - 
  2,262,769 
 
    
    
    
    
Operating expenses:
    
    
    
    
Sales and marketing
  453,668 
  274,631 
  - 
  728,299 
Research and development
  849,962 
  - 
  - 
  849,962 
General and administrative
  - 
  - 
  2,657,573 
  2,657,573 
Other
  745,773 
  - 
  - 
  745,773 
Operating expenses
  2,049,403 
  274,631 
  2,657,573 
  4,981,607 
 
    
    
    
    
Operating income (loss)
 $(401,592)
 $340,327 
 $(2,657,573)
 $(2,718,838)
 
 
 
 
-10-
 
Three months ended
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
July 2, 2016
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $6,241,749 
 $2,587,830 
 $- 
 $8,829,579 
Cost of sales
  3,034,389 
  1,667,743 
  - 
  4,702,132 
 
    
    
    
    
Gross profit
  3,207,360 
  920,087 
  - 
  4,127,447 
 
    
    
    
    
Operating expenses:
    
    
    
    
Sales and marketing
  399,700 
  298,331 
  - 
  698,031 
Research and development
  736,726 
  15,000 
  - 
  751,726 
General and administrative
  - 
  - 
  2,306,559 
  2,306,559 
Operating expenses
  1,136,426 
  313,331 
  2,306,559 
  3,756,316 
 
    
    
    
    
Operating income (loss)
 $2,070,934 
 $606,756 
 $(2,306,559)
 $371,131 
 
 
 
-11-
 
 
Six months ended
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
July 1, 2017
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $5,089,059 
 $4,666,918 
 $- 
 $9,755,977 
Cost of sales
  2,271,612 
  3,468,943 
  - 
  5,740,555 
 
    
    
    
    
Gross profit
  2,817,447 
  1,197,975 
  - 
  4,015,422 
 
    
    
    
    
Operating expenses:
    
    
    
    
Sales and marketing
  759,013 
  565,448 
  - 
  1,324,461 
Research and development
  1,514,152 
  - 
  - 
  1,514,152 
General and administrative
  - 
  - 
  5,040,719 
  5,040,719 
Other
  745,773 
  - 
  - 
  745,773 
Operating expenses
  3,018,938 
  565,448 
  5,040,719 
  8,625,105 
 
    
    
    
    
Operating income (loss)
 $(201,491)
 $632,527 
 $(5,040,719)
 $(4,609,683)
 
Six months ended
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
July 2, 2016
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $10,842,375 
 $5,319,149 
 $- 
 $16,161,524 
Cost of sales
  5,133,551 
  3,449,107 
  - 
  8,582,658 
 
    
    
    
    
Gross profit
  5,708,824 
  1,870,042 
  - 
  7,578,866 
 
    
    
    
    
Operating expenses:
    
    
    
    
Sales and marketing
  731,443 
  511,310 
  - 
  1,242,753 
Research and development
  1,200,798 
  15,000 
  - 
  1,215,798 
General and administrative
  - 
  - 
  4,295,118 
  4,295,118 
Operating expenses
  1,932,241 
  526,310 
  4,295,118 
  6,753,669 
 
    
    
    
    
Operating income (loss)
 $3,776,583 
 $1,343,732 
 $(4,295,118)
 $825,197 
 
 
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
At July 1, 2017
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 $13,413,963 
 $3,982,296 
 $15,523,905 
 $32,920,164 
 
 
 
 
 
 
Core Standards and
 
 
 
 
 
 
 
At December 31, 2016
 
Ingredients
 
 
Contract Services
 
 
Corporate
 
 
 
 
 
 
segment
 
 
segment
 
 
and other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 $13,257,289 
 $3,918,440 
 $2,576,339 
 $19,752,068 
 
 
 
-12-
 
Disclosure of major customers
 
Major customers who accounted for more than 10% of the Company’s total sales were as follows:
 
 
 
Three months ended
 
 
       Six months ended 
 
Major Customers
 
July 1, 2017
 
 
July 2, 2016
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer C (Ingredients segment)
  * 
  34.5%
  * 
  31.3%
Customer F (Ingredients and Core segment)
  11.9%
  * 
  * 
  * 
 
    
    
    
    
* Represents less than 10%.
    
    
    
    
 
Major customers who accounted for more than 10% of the Company’s total trade receivables were as follows:
 
 
 
Percentage of the Company's Total Trade Receivables
 
 
 
 
 
 
 
 
Major Customers
 
At July 1, 2017
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
Customer C (Ingredients segment)
  48.8%
  45.8%
Customer D (Ingredients and Core segment)
  * 
  10.2%
 
    
    
* Represents less than 10%.
    
    
 
Note 11. Commitments and Contingencies
 
Legal proceedings
 
On December 29, 2016, ChromaDex, Inc. filed a complaint (the “Complaint”) in the United States District Court for the Central District of California, naming Elysium Health, Inc. as defendant. Among other allegations, ChromaDex, Inc. alleges in the Complaint that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and Elysium Health, LLC (“Elysium”) (the “pTeroPure® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of pTeroPure® pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the Supply Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium, as amended (the “NIAGEN® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of NIAGEN® pursuant to the NIAGEN® Supply Agreement, (iii) Elysium breached the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), by failing to make payments to ChromaDex, Inc. for royalties due pursuant to the License Agreement and (iv) certain officers of Elysium made false promises and representations to induce ChromaDex, Inc. into providing large supplies of pTeroPure® and NIAGEN® to Elysium pursuant to the pTeroPure® Supply Agreement and NIAGEN® Supply Agreement. ChromaDex, Inc. is seeking punitive damages, money damages and interest.
 
On January 25, 2017, Elysium filed an answer and counterclaims (the “Counterclaim”) in response to the Complaint. Among other allegations, Elysium alleges in the Counterclaim that (i) ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not issuing certain refunds or credits to Elysium and for violating certain confidential information provisions, (ii) ChromaDex, Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. breached certain confidential provisions of the pTeroPure® Supply Agreement, (iv) ChromaDex, Inc. fraudulently induced Elysium into entering into the License Agreement (the “Fraud Claim”), (v) ChromaDex, Inc.’s conduct constitutes misuse of its patent rights (the “Patent Claim”) and (vi) ChromaDex, Inc. has engaged in unlawful or unfair competition under California state law (the “Unfair Competition Claim”). Elysium is seeking damages for ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement, and compensatory damages, punitive damages and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement.
 
 
 
-13-
 
On February 15, 2017, ChromaDex, Inc. filed an amended complaint. In the amended complaint, ChromaDex, Inc. re-alleges the claims in the Complaint, and also alleges that Elysium willfully and maliciously misappropriated ChromaDex, Inc.’s trade secrets. On February 15, 2017, ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the Patent Claim and the Unfair Competition Claim. On March 1, 2017, Elysium filed a motion to dismiss ChromaDex, Inc.'s fraud and trade secret misappropriation causes of action. On March 6, 2017, Elysium filed a first amended counterclaim. On March 20, 2017, ChromaDex, Inc. moved to dismiss Elysium's amended fraud, patent misuse and the Unfair Competition Claim. On May 10, 2017, the court ruled on the motions to dismiss, denying ChromaDex, Inc.’s motion as to Elysium’s fraud and patent misuse claims and granting ChromaDex, Inc.’s motion with prejudice as to Elysium’s Unfair Competition Claim. With respect to Elysium’s motion, the court granted the motion with prejudice as to ChromaDex, Inc.’s fraud claim and granted with leave to amend the motion as to ChromaDex, Inc.’s trade secret misappropriation claims. On May 24, 2017, ChromaDex, Inc. answered the first amended counterclaim and asserted several affirmative defenses. Also on May 24, 2017, ChromaDex, Inc. filed a second amended complaint, amending the trade secret misappropriation claims and addressing Elysium’s patent misuse counterclaim. On June 7, 2017, ChromaDex, Inc. filed a third amended complaint dismissing the trade secret misappropriation claims and asserting two breach of contract claims for Elysium’s failure to pay for the product delivered. On June 16, 2017, Elysium answered the third amended complaint. On July 17, 2017, Elysium filed petitions with the U.S. Patent and Trademark Office for inter partes review of U.S. Patent No. 8,197,807 and 8,383,086, patents to which ChromaDex, Inc. is the exclusive licensee.
 
As of July 1, 2017, ChromaDex, Inc. did not accrue a potential loss for the Counterclaim because ChromaDex, Inc. believes that the allegations are without merit and thus it is not probable that a liability had been incurred, and the amount of loss cannot be reasonably estimated.
 
From time to time we are involved in legal proceedings arising in the ordinary course of our business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
 
Lease
 
Subsequent to the period ended July 1, 2017, the Company entered into a lease for an office space located in Los Angeles, California through September 2021. Pursuant to the lease, the Company will make monthly lease payments ranging from approximately $11,000 to $21,000, as the payments escalate during the term of the lease.
 
Employment agreement with Robert Fried
 
On March 12, 2017, the Company entered into an Employment Agreement (the "Fried Agreement") with Robert Fried. Mr. Fried is entitled to receive certain severance payments per the terms of the Fried Agreement. The key terms of the Fried Agreement, including the severance terms are as follows:
 
Mr. Fried is entitled to: (i) an annual base salary of $300,000; (ii) an annual cash bonus equal to (a) 1% of net direct-to-consumer sales of products with nicotinamide riboside as a lead ingredient by the Company plus (b) 2% of direct to consumer net sales of products with nicotinamide riboside as a lead ingredient for the portion of such sales that exceeded prior year sales plus (c) 1% of the gross profit derived from nicotinamide riboside ingredient sales to dietary supplement producers; (iii) an option to purchase up to 500,000 shares of Common Stock under the 2007 plan, subject to monthly vesting over a three-year period; and (iv) 166,667 shares of restricted Common Stock, subject to annual vesting over a three-year period.
 
Subject to Mr. Fried’s continuous service through such date, Mr. Fried is also eligible to receive (i) on March 12, 2018, 166,667 shares of restricted Common Stock, subject to annual vesting over a two-year period, (ii) on March 12, 2019, 166,666 shares of restricted Common Stock that vest in full on the one year anniversary of the grant date and (iii) up to 500,000 shares of fully-vested restricted Common Stock that will be granted upon the achievement of certain performance goals. Any unvested options or shares of restricted stock will vest in full upon (a) a change in control of the Company, (b) Mr. Fried’s death, (c) Mr. Fried’s disability, (d) termination by the Company of Mr. Fried’s employment without cause or (e) Mr. Fried’s resignation for good reason, subject in each case to Mr. Fried’s continuous service as an employee or consultant of the Company or any of its subsidiaries though such event.
 
The severance terms of the Fried Agreement provide that if (i) Mr. Fried’s employment is terminated by the Company without cause, for death or disability, or Mr. Fried resigns for good reason, or (ii) (a) a change in control of the Company occurs and (b) within one month prior to the date of such change in control or twelve months after the date of such change in control R. Fried’s employment is terminated by the Company other than for cause, then, subject to executing a release, Mr. Fried will receive (w) continuation of his base salary for 12 months, (x) health care continuation coverage payments premiums for 12 months, (y) a prorated annual cash bonus earned for the fiscal year in which such termination or resignation occurs, and (z) an extended exercise period for his options
 
Note 12. Other Expense
 
Loss from an ongoing litigation, Elysium Health, Inc.
 
During the three months ended July 1, 2017, the Company, in relation to the ongoing litigation, incurred a write-off of approximately $746,000 in gross trade receivable from Elysium Health, Inc. related to royalties. As a result of this write-off and after further analysis, the Company made an adjustment to the total allowance amount from ($800,000) to ($500,000).
 
 
 
-14-
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Certain statements in this Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” or “believe,” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Readers should carefully review the risk factors and related notes set forth below in Part II, Item 1A, “Risk Factors” and included under Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 16, 2017 (our “Annual Report”).
 
The following MD&A is intended to help readers understand the results of our operation and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Interim Unaudited Financial Statements and the accompanying Notes to Interim Unaudited Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q.
 
Growth and percentage comparisons made herein generally refer to the three and six months ended July 1, 2017 compared with the three and six months ended July 2, 2016 unless otherwise noted. Unless otherwise indicated or unless the context otherwise requires, all references in this document to “we,” “us,” “our,” the “Company,” and similar expressions refer to ChromaDex Corporation, and depending on the context, its subsidiaries.
 
Company Overview
 
The business of ChromaDex Corporation is conducted by our principal subsidiaries, ChromaDex, Inc., Healthspan Research, LLC, ChromaDex Analytics, Inc. and ChromaPharma, Inc. The Company is a natural products company that leverages its complementary business units to discover, acquire, develop and commercialize patented and proprietary ingredient technologies that address the dietary supplement, food, beverage, skin care and pharmaceutical markets. With the recent acquisition of Healthspan Research, LLC, the Company is also selling consumer products. Along with our ingredients segment that includes our consumer product business, the Company also has a core standards and contract services segment, which focuses on (i) natural product fine chemicals (known as “phytochemicals”) (ii) chemistry and analytical testing services, and (iii) scientific and regulatory consulting. As a result of the Company’s relationships with leading universities and research institutions, the Company is able to discover and license early stage, intellectual property-backed ingredient technologies. The Company then utilizes the Company’s business segments to develop commercially viable proprietary ingredients. The Company’s proprietary ingredient portfolio is backed with clinical and scientific research, as well as extensive intellectual property protection.
 
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 July 1, 2017, the Company had approximately $14.1 million cash and cash equivalents on hand. On April 26, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers named therein, pursuant to which the Company agreed to sell and issue up to $25.0 million of its Common Stock in three tranches. The first and second tranche closed on April 27, 2017 and May 24, 2017, respectively, and the Company received $3.5 million and $16.4 million, respectively. The third tranche is expected to close following a related stockholder approval at the Company's special meeting on August 10, 2017. We anticipate that our current cash, cash equivalents, cash to be generated from operations and the funds from the financing transaction described above will be sufficient to meet our projected operating plans through at least August 11, 2018. We may, however, seek additional capital prior to August 11, 2018, both to meet our projected operating plans after August 11, 2018 and/or to fund our longer term strategic objectives.
 
 
 
-15-
 
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. If we are unable to establish small to medium scale production capabilities through our own plant or though collaboration, we may be unable to fulfill our customers’ requirements. This may cause a loss of future revenue streams as well as require us to look for third-party vendors to provide these services. These vendors may not be available, or charge fees that prevent us from pricing competitively within our markets.
 
Financial Condition and Results of Operations
 
The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Some of our operations are subject to regulation by various state and federal agencies. In addition, we expect a significant increase in the regulation of our target markets. Dietary supplements are subject to 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.
 
Our net sales and net income (loss) for the three- and six-month periods ending on July 1, 2017 and July 2, 2016 were as follows:
 
 
 
 
 
Three months ending
 
 
Six months ending
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
July 1, 2017
 
 
July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $5,307,000 
 $8,830,000 
 $9,756,000 
 $16,162,000 
Net income (loss)
  (2,764,000)
  (83,000)
  (4,693,000)
  173,000 
 
    
    
    
    
Basic earnings (loss) per common share
 $(0.07)
 $(0.00)
 $(0.12)
 $0.00 
Diluted earnings (loss) per common share
 $(0.07)
 $(0.00)
 $(0.12)
 $0.00 
 
Over the next twelve months, we plan to continue to increase research and development efforts for our line of proprietary ingredients, subject to available financial resources.
 
 
 
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Net Sales
 
Net sales consist of gross sales less discounts and returns.
 
 
 
Three months ending
 
 
Six months ending
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Ingredients
 $3,005,000 
 $6,242,000 
  -52%
 $5,089,000 
 $10,842,000 
  -53%
  Core standards and contract services
  2,302,000 
  2,588,000 
  -11%
  4,667,000 
  5,320,000 
  -12%
 
    
    
    
    
    
    
     Total net sales
 $5,307,000 
 $8,830,000 
  -40%
 $9,756,000 
 $16,162,000 
  -40%
 
The decrease in sales for the ingredients segment for the three and six months ended July 1, 2017 is mainly due to decreased sales of “NIAGEN®.” During the six months ended July 1, 2017, we did not ship NIAGEN® to certain customers that placed large orders during the six months ended July 2, 2016.
 
The decrease in sales for the core standards and contract services segment is primarily due to decreased sales of analytical testing and contract services.
 
Cost of Sales
 
Cost of sales include raw materials, labor, overhead, and delivery costs.
 
 
 
Three months ending
 
 
Six months ending
 
 
July 1, 2017
 July 2, 2016
July 1, 2017
July 2, 2016
 
 
Amount
 
 
% of net sales
 
 
Amount
 
 
% of net sales
 
 
Amount
 
 
% of net sales
 
 
Amount
 
 
% of net sales
 
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Ingredients
 $1,357,000 
  45%
 $3,035,000 
  49%
 $2,272,000 
  45%
 $5,134,000 
  47%
  Core standards and contract services
  1,687,000 
  73%
  1,667,000 
  64%
  3,469,000 
  74%
  3,449,000 
  65%
 
    
    
    
    
    
    
    
    
     Total cost of sales
 $3,044,000 
  57%
 $4,702,000 
  53%
 $5,741,000 
  59%
 $8,583,000 
  53%
 
The cost of sales, as a percentage of net sales, increased 4% and 6% for the three- and six-month periods ended July 1, 2017, respectively, compared to the comparable periods in 2016.
 
The cost of sales, as a percentage of net sales, for the ingredients segment decreased 4% and 2% for the three- and six-month periods, respectively, as we were able to manage favorable pricing levels.
 
The cost of sales, as a percentage of net sales for the core standards and contract services segment, increased 9% for both the three- and six-month periods ended July 1, 2017, compared to the comparable periods in 2016. The decrease in analytical testing and contract services sales led to a lower labor utilization rate, which resulted in increasing our cost of sales as a percentage of net sales.
 
Gross Profit
 
Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products and services.
 
 
 
Three months ending
 
 
Six months ending
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Ingredients
 $1,648,000 
 $3,207,000 
  -49%
 $2,817,000 
 $5,709,000 
  -51%
  Core standards and contract services
  615,000 
  920,000 
  -33%
  1,198,000 
  1,870,000 
  -36%
 
    
    
    
    
    
    
     Total gross profit
 $2,263,000 
 $4,127,000 
  -45%
 $4,015,000 
 $7,579,000 
  -47%
 
The decreased gross profit for the ingredients segment for the three and six months ended July 1, 2017 is due to the decreased sales of “NIAGEN®.
 
The decreased gross profit for the core standards and contract services segment is largely due to the decreased sale of analytical testing and contract services. Fixed labor costs make up the majority of costs for analytical testing and contract services and these fixed labor costs did not decrease in proportion to sales, hence yielding lower profit margin.
 
 
 
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Operating Expenses-Sales and Marketing
 
Sales and marketing expenses consist of salaries, advertising and marketing expenses.
 
 
 
Three months ending
 
 
Six months ending
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
Sales and marketing expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Ingredients
 $454,000 
 $400,000 
  14%
 $759,000 
 $732,000 
  4%
  Core standards and contract services
  274,000 
  298,000 
  -8%
  565,000 
  511,000 
  11%
 
    
    
    
    
    
    
     Total sales and marketing expenses
 $728,000 
 $698,000 
  4%
 $1,324,000 
 $1,243,000 
  7%
 
For the ingredients segment, the increase for the three and six months ended July 1, 2017 is largely due to marketing expenses related to our recently acquired consumer product business through Healthspan Research LLC. Subject to available financial resources, we plan to increase our marketing efforts for our consumer product business.
 
For the core standards and contract services segment, the decrease for the three months ended July 1, 2017 is largely due to decreased marketing efforts, while the increase for the six months ended July 1, 2017 is mainly due to hiring additional staff.
 
Operating Expenses-Research and Development
 
Research and development expenses mainly consist of clinical trials and process development expenses.
 
 
 
Three months ending
 
 
Six months ending
 
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
 
July 1, 2017
 
 
July 2, 2016
 
 
Change
 
Research and development expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Ingredients
 $850,000 
 $737,000 
  15%
 $1,514,000 
 $1,201,000 
  26%
  Core standards and contract services
  - 
  15,000 
  -100%
  - 
  15,000 
  -100%