SEC Connect
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
Commission
File Number: 001-37752
CHROMADEX CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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26-2940963
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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10005 Muirlands Blvd. Suite G,
Irvine, California
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92618
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (949) 419-0288
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes X No
Indicate
by check mark whether the registrant is a large accelerated filer,
accelerated filer, non-accelerated filer, smaller reporting company
or emerging growth company. See definition of “large
accelerated filer, accelerated filer, smaller reporting company and
emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
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
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1
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2
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3
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4
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5
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6
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15
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21
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21
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22
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23
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23
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39
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39
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39
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39
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40
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PART I – FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ChromaDex
Corporation and Subsidiaries
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Condensed
Consolidated Balance
Sheets
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July
1, 2017 and December 31, 2016
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Assets
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Current
Assets
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Cash
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$14,138,607
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$1,642,429
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Trade receivables,
net of allowances of $736,000 and $1,081,000,
respectively
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4,579,253
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5,852,030
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Inventories
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7,794,182
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7,912,630
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Prepaid expenses
and other assets
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864,935
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329,854
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Total
current assets
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27,376,977
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15,736,943
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Leasehold
Improvements and Equipment, net
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3,372,879
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3,111,374
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Deposits
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402,497
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397,207
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Intangible assets,
net
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1,767,811
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486,226
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Longterm
investment
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-
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20,318
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Total
assets
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$32,920,164
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$19,752,068
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Liabilities
and Stockholders' Equity
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Current
Liabilities
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Accounts
payable
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$3,131,759
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$5,978,288
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Accrued
expenses
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2,111,205
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2,170,172
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Current maturities
of capital lease obligations
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299,103
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255,461
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Customer deposits
and other
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503,850
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389,010
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Deferred rent,
current
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114,101
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76,219
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Due to
officer
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100,000
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-
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Total
current liabilities
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6,260,018
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8,869,150
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Capital lease
obligations, less current maturities
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393,184
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343,589
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Deferred rent, less
current
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547,539
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564,971
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Total
liabilities
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7,200,741
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9,777,710
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Commitments and
contingencies
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Stockholders'
Equity
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Common stock, $.001
par value; authorized 150,000,000 shares;
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issued
and outstanding July 1, 2017 45,571,891 shares and
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December
31, 2016 37,544,531 shares
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45,572
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37,545
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Additional paid-in
capital
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75,590,304
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55,160,387
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Accumulated
deficit
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(49,916,453)
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(45,223,574)
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Total
stockholders' equity
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25,719,423
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9,974,358
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Total
liabilities and stockholders' equity
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$32,920,164
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$19,752,068
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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Condensed Consolidated Statements of
Operations
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For
the Three Month Periods Ended July 1, 2017 and July 2,
2016
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Sales,
net
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$5,306,855
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$8,829,579
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Cost of
sales
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3,044,086
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4,702,132
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Gross
profit
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2,262,769
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4,127,447
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Operating
expenses:
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Sales and
marketing
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728,299
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698,031
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Research and
development
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849,962
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751,726
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General and
administrative
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2,657,573
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2,306,559
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Other
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745,773
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-
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Operating
expenses
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4,981,607
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3,756,316
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Operating
income (loss)
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(2,718,838)
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371,131
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Nonoperating
expense:
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Interest expense,
net
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(45,286)
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(144,786)
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Loss on debt
extinguishment
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(313,099)
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Nonoperating
expenses
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(45,286)
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(457,885)
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Loss before
taxes
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(2,764,124)
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(86,754)
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Provision for
taxes
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4,087
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Net
loss
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$(2,764,124)
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$(82,667)
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Basic and diluted
loss per common share
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$(0.07)
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$(0.00)
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Basic and diluted
weighted average common shares outstanding
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42,121,150
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36,990,032
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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Condensed Consolidated Statements of
Operations
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For
the Six Month Periods Ended July 1, 2017 and July 2,
2016
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Sales,
net
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$9,755,977
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$16,161,524
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Cost of
sales
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5,740,555
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8,582,658
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Gross
profit
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4,015,422
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7,578,866
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Operating
expenses:
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Sales and
marketing
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1,324,461
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1,242,753
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Research and
development
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1,514,152
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1,215,798
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General and
administrative
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5,040,719
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4,295,118
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Other
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745,773
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Operating
expenses
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8,625,105
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6,753,669
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Operating
income (loss)
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(4,609,683)
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825,197
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Nonoperating
expense:
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Interest expense,
net
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(83,196)
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(332,487)
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Loss on debt
extinguishment
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(313,099)
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Nonoperating
expenses
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(83,196)
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(645,586)
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Income (loss)
before income taxes
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(4,692,879)
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179,611
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Provision for
taxes
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(6,653)
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Net
income (loss)
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$(4,692,879)
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$172,958
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Basic earnings
(loss) per common share
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$(0.12)
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$0.00
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Diluted earnings
(loss) per common share
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$(0.12)
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$0.00
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Basic weighted
average common shares outstanding
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40,075,920
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36,702,037
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Diluted weighted
average common shares outstanding
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40,075,920
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37,470,066
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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Condensed Consolidated Statement of Stockholders'
Equity
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For
the Six Month Period Ended July 1, 2017
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Balance, January 1,
2017
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37,544,531
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$37,545
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$55,160,387
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$(45,223,574)
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9,974,358
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Issuance
of common stock associated with
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the
acquisition of Healthspan Research LLC
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367,648
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367
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999,635
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-
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1,000,002
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Exercise of stock
options
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3,202
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3
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6,620
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-
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6,623
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Vested restricted
stock
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2,667
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3
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(3)
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-
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-
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Share-based
compensation
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-
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-
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319,830
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-
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319,830
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Net
loss
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(1,928,755)
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(1,928,755)
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Balance, April 1,
2017
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37,918,048
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$37,918
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$56,486,469
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$(47,152,329)
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$9,372,058
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Issuance
of common stock,
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net
of offering costs of $1,184,000
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7,649,968
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7,650
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18,698,634
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-
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18,706,284
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Exercise of stock
options
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1,875
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2
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5,342
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-
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5,344
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Vested restricted
stock
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2,000
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2
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(2)
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-
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-
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Share-based
compensation
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-
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-
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399,861
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-
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399,861
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Net
loss
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-
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-
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-
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(2,764,124)
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(2,764,124)
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Balance,
July 1, 2017
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45,571,891
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$45,572
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$75,590,304
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$(49,916,453)
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$25,719,423
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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Condensed Consolidated Statements of Cash
Flows
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For
the Six Month Periods Ended July 1, 2017 and July 2,
2016
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Cash Flows From
Operating Activities
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Net
income (loss)
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$(4,692,879)
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$172,958
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Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
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Depreciation
of leasehold improvements and equipment
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264,235
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159,370
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Amortization
of intangibles
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89,803
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38,415
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Share-based
compensation expense
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719,691
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657,637
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Allowance
for doubtful trade receivables
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(344,055)
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29,649
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Loss
from disposal of equipment
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1,452
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-
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Non-cash
loss on debt extinguishment
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-
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32,007
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Non-cash
financing costs
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56,587
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94,080
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Changes
in operating assets and liabilities:
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Trade
receivables
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1,628,288
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(4,372,837)
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Inventories
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179,362
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3,628,678
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Prepaid
expenses and other assets
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(554,679)
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(266,831)
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Accounts
payable
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(2,950,302)
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(3,892,582)
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Accrued
expenses
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(62,174)
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634,562
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Customer
deposits and other
|
114,840
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(9,150)
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Deferred
rent
|
20,451
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106,657
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Due
to officer
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(32,500)
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-
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Net
cash used in operating activities
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(5,561,880)
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(2,987,387)
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Cash Flows From
Investing Activities
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Purchases
of leasehold improvements and equipment
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(295,078)
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(231,201)
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Purchases
of intangible assets
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(183,958)
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(195,000)
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Net
cash used in investing activities
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(479,036)
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(426,201)
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Cash Flows From
Financing Activities
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Proceeds
from issuance of common stock, net of issuance costs
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18,706,284
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5,720,000
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Proceeds
from exercise of stock options
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11,966
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622,384
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Payment
of debt issuance costs
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(42,279)
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-
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Principal
payment on loan payable
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-
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(5,000,000)
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Principal
payments on capital leases
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(138,877)
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(108,249)
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Net
cash provided by financing activities
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18,537,094
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1,234,135
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Net increase
(decrease) in cash
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12,496,178
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(2,179,453)
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Cash Beginning of
Period
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1,642,429
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5,549,672
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Cash Ending of
Period
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$14,138,607
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$3,370,219
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Supplemental
Disclosures of Cash Flow Information
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Cash
payments for interest
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$26,611
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$239,839
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Supplemental
Schedule of Noncash Investing Activity
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Noncash
consideration transferred for the acquisition of Healthspan
Research LLC
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$1,187,430
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$-
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Capital
lease obligation incurred for the purchase of
equipment
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$232,114
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$-
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Inventory
supplied to Healthspan Research LLC for equity interest, at
cost
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$-
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$20,318
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Retirement
of fully depreciated equipment - cost
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$55,947
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$28,083
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Retirement
of fully depreciated equipment - accumulated
depreciation
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$(55,947)
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$(28,083)
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See Notes to
Consolidated Financial Statements.
Note 1. Interim
Financial Statements
The
accompanying financial statements of ChromaDex Corporation and its
wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research,
LLC, 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
Note
6. Trade
Receivables Allowances
The
allowance amounts for the periods ended July 1, 2017 and December
31, 2016 are as follows:
|
|
|
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:
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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
|
|
|
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
|
|
|
|
|
July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
Three months
ended
|
|
|
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Six months
ended
|
|
|
|
|
July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
At July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$13,413,963
|
$3,982,296
|
$15,523,905
|
$32,920,164
|
|
|
|
|
|
At December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$13,257,289
|
$3,918,440
|
$2,576,339
|
$19,752,068
|
Disclosure of major customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
|
|
|
Major
Customers
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
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.
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).
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Net Sales
Net
sales consist of gross
sales less discounts and returns.
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
July 1,
2017
|
July 2,
2016
|
July 1, 2017
|
July 2, 2016
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
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.
Operating Expenses-Sales and Marketing
Sales
and marketing expenses consist of salaries, advertising
and marketing expenses.
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
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%
|
|
|
|
|