Sale of Product Line and Investment in Affiliate

3 Months Ended

Mar. 30, 2013

Sale Of Product Line And Investment In Affiliate

Note 4. Sale of Product Line and Investment in Affiliate

On March 28, 2013, the Company entered into an asset purchase and sale agreement with NeutriSci and consummated the sale of BluScience consumer product line to NeutriSci. The Company is using the cost recovery method to account for the sale transaction, which is estimated at approximately $3,157,804. The consideration received consists of following: (a) a $250,000 cash payment, which NeutriSci paid as a deposit in February 2013; (b) an additional $250,000 cash payment, which was paid at the closing of the sale; (c) an additional cash payment of $500,000 due no later than 60 days after the closing of the sale; (d) a $2,500,000 senior convertible secured note (convertible into 625,000 shares Series I Preferred Stock as described below) payable in quarterly installments of $416,667 beginning August 15, 2013; and (e) 669,708 shares of Series I Preferred Shares that are convertible into 2,678,832 Class “A” common shares of NeutriSci, representing an aggregate of 19% of the NeutriSci shares at a deemed price for each Class A common share of $1.00 per share. The transaction documents contain certain equity blockers that preclude the Company’s ownership in NeutriSci in excess of 9.99% and 19% without obtaining a waiver from NeutriSci. The Company will continue to generate revenue through a royalty on 6% of future net sales of BluScience products as well as a supply agreement with NeutriSci for the Company’s patented pTeroPure pterostilbene. As of March 30, 2013, the Company did not have any sales to NeutriSci under this supply agreement for pTeroPure pterostilbene.

The Company has applied the equity method of accounting for the 669,708 shares of Series I Preferred Shares that are convertible into 2,678,832 Class “A” common shares of NeutriSci and the carrying value, which includes the senior convertible secured note, is reflected as long-term investment in affiliate in the Company’s consolidated balance sheet as of March 30, 2013. The initial carrying value of this investment recognized, as restated, as of March 28, 2013 was $2,157,804, which is the Company’s unrecovered cost or the difference between the net assets transferred to NeutriSci and the initial monetary consideration received. Although, (i) other contemporaneous third party investments in NeutriSci’s Class “A” common shares were $1.00 per share and (ii) the face value of the senior convertible secured note was $2,500,000, management believed that $2,157,804 was the appropriate aggregate carrying value for the investment in affiliate, considering the fact that NeutriSci is a start-up company and has historically recorded significant operating losses. The Company is unable to determine NeutriSci’s likelihood of repaying the note, and because of this significant uncertainty, the amount of collectability of the senior convertible secured note is not ascertainable. There is a significant uncertainty in the realization of value of the Series I Preferred Shares as well. Consequently, management deemed it appropriate to consider that both the 669,708 shares of Series I Preferred Shares and the senior convertible secured note as one long term investment in affiliate. Under the cost recovery method, no gain on the sale will be recognized until the Company’s cost basis in the net assets transferred has been recovered. Prospective collection of payments under the note will be charged against the carrying value of the long-term investment in affiliate. The below table illustrates how the carrying value was determined.

	At March 28, 2013
Assets transferred
Trade receivables, less allowance for returns	$	(16,984	)
Inventories		3,467,530
Prepaid expenses and other assets		76,131
Total assets transferred		3,526,677
Liabilities transferred
Accounts payable		368,873
Total liabilities transferred		368,873
Total net assets transferred	$	3,157,804
Initial monetary consideration received
Cash	$	500,000
Non-trade receivable		500,000
Total initial monetary consideration received	$	1,000,000
Carrying Value of Long Term Investment in Affiliate	$	2,157,804

For the three months ended March 30, 2013, the Company did not record equity method adjustments in gains (losses) on the investment in NeutriSci, as the Company has elected to record equity method adjustments with a three-month lag, as the financial information of NeutriSci was not available in a timely manner. When the financial information is available at a later time, the Company will use NeutriSci’s financial statements for the period beginning on April 1, 2013. This will not cover the three-day period from March 28, 2013 to March 30, 2013, which is also a portion of the Company’s investment period since the Company’s investment started from March 28, 2013. However, the Company has determined that the amount of any impact to the Company for the three day period not covered was immaterial as NeutriSci did not have any significant transactions.

The cash payment of $500,000 that is due no later than 60 days after the closing of the sale is reflected as non-trade receivable in the Company’s consolidated balance sheet as of March 30, 2013.

The senior secured convertible note is secured by the Security Agreement, dated March 28, 2013 entered into between the Company and NeutriSci whereby NeutriSci granted the Company a security interest in substantially all of NeutriSci’s assets, including inventory, to secure its obligations pursuant to the note. In the event of default, the note can also be convertible into Series I Preferred Shares of NeutriSci at the option of ChromaDex. Each Series I Preferred Share can be convertible into 4 Class A common shares of NeutriSci. The conversion price will be (a) $4.00 per Series I Preferred Share prior to a Public Offering (as defined in the note); or (b) the closing price of Series I Preferred Share or four times the closing price of Class A common share on a stock exchange immediately prior to the conversion date.

Under the asset purchase and sale agreement entered into as of March 28, 2013 with the Company, NeutriSci is obligated to file an initial public offering prospectus with a securities commission in Canada no later than September 24, 2013 (or 180 days from the closing date of March 28, 2013) and to concurrently seek approval of the listing of its common shares on the TSX Venture Exchange or similar stock exchange in Canada.

As of March 30, 2013, the Company has determined that there is no other-than-temporary impairment, as the Company is not aware of any other-than-temporary impairment triggering events or indicators. The Company will continue to monitor NeutriSci’s performance and evaluate if there are any such events or indicators to consider.