Changes in accounting principle: In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs have not changed.

The Company early adopted the amendments in this ASU effective as of April 4, 2015. As of January 2, 2016 and January 3, 2015, the Company had unamortized debt issuance costs of approximately $65,000 and $91,000, respectively. The Company had previously presented the debt issuance costs as other noncurrent assets in its consolidated balance sheet as of January 3, 2015 in the Company’s Annual Report on Form 10-K filed with the Commission on March 19, 2015. The early adoption has resulted in adjustments to the Company’s consolidated balance sheet as of January 3, 2015, by reclassifying the debt issuance costs as a direct deduction from the carrying amount of the debt liability. Below are the effects of the change on the consolidated balance sheet as of January 3, 2015.

ChromaDex Corporation and Subsidiaries

Condensed Consolidated Balance Sheet
January 3, 2015

	Previously Reported	Adjustments	As Adjusted
Assets

Current Assets	$ 9,898,691	$ -	$ 9,898,691

Leasehold Improvements and Equipment, net	1,264,660	-	1,264,660

Other Noncurrent Assets	444,857	(91,361)	353,496

Total assets	$ 11,608,208	$ (91,361)	$ 11,516,847

Liabilities and Stockholders' Equity

Current Liabilities	$ 4,980,820	$ -	$ 4,980,820

Loan payable, less current maturities, net	2,068,474	(91,361)	1,977,113

Capital lease obligations, less current maturities	423,015	-	423,015

Deferred rent, less current	137,508	-	137,508

Total liabilities	7,609,817	(91,361)	7,518,456

Total stockholders' equity	3,998,391	-	3,998,391

Total liabilities and stockholders' equity	$ 11,608,208	$ (91,361)	$ 11,516,847

Changes in accounting estimates

Changes in accounting estimates: During the year ended January 3, 2015, the Company evaluated assumptions for estimating the fair value of the Company’s stock options. The Company uses the Black-Scholes based option valuation model, which requires assumptions on (i) volatility, (ii) expected dividends, (iii) expected term and (iv) risk-free rate. While evaluating the assumptions on volatility, the Company determined that the historical volatility the Company’s common stock needs to be considered when estimating the expected volatility. Previously, the Company calculated expected volatility based principally on the volatility rates of similarly situated publicly held companies, as the historical measurement period that was available to compute the volatility rate of the Company’s common stock was shorter than the expected life of the options.

For stock options granted during the years ended January 2, 2016 and January 3, 2015, the Company calculated the expected volatility rate based on the combined volatilities of publicly held companies in similar industries and volatility of the Company’s common stock. Based on the expected term of stock options, a 20~100% weight was assigned to the volatility of the Company’s common stock as the historical volatility of the Company’s common stock from June 2008 through April 2010 was exceptionally high due to a thinly traded market. Below table illustrates the Company’s historical volatility and the average daily trading volume of the Company’s common stock from June 2008 through April 2010 and from April 2010 through December 2015.

Period	Volatility	Average Daily Trading Volume
6/20/2008 ~ 4/19/2010	402%	11,455
4/20/2010 ~ 1/2/2016	74%	147,703

The weighted average expected volatilities for the stock options granted during the twelve-month period ended January 2, 2016 and January 3, 2015 following the update to our estimate are approximately 76% and 75%, respectively. The weighted average expected volatility would have been approximately 30~40% for these two years, had we computed solely based on the volatility rates of similarly situated public companies. For the year ended December 28, 2013, the weighted average expected volatility the Company used to estimate the fair value of the Company’s stock options granted was approximately 33%.

The following is a pro-forma disclosure of our historical calculation of estimated volatility over the expected term based on a grant with an expected term of 6 years:

Fiscal Year 2013			Fiscal Year 2013
Name	Use	Volatility	Name	Use	Volatility
Covance, Inc.	50%	35%	ChromaDex Corp.	20%	243%
Sigma-Aldrich Corp.	50%	30%	Covance Inc.	40%	35%
			Sigma-Aldrich Corp.	40%	30%
Weighted Average		33%	Weighted Average		75%

The change in our estimate of volatility did not result to a material additional expense to our statement of operations.

Cash concentration

Cash concentration: The Company maintains substantially all of its cash in three different accounts in one bank.

Inventories

Inventories: Inventories are comprised of raw materials, work-in-process and finished goods. They are stated at the lower of cost, determined by the first-in, first-out method (FIFO) method, or market. The inventory on the balance sheet is recorded net of valuation allowances. Labor and overhead has been added to inventory that was manufactured or characterized by the Company. The amounts of major classes of inventory for the periods ended January 2, 2016 and January 3, 2015 are as follows:

	2015	2014
Reference standards	$ 1,239,338	$ 1,760,305
Bulk ingredients	7,195,461	2,298,036
	8,434,799	4,058,341
Less valuation allowance	261,000	324,000
	$ 8,173,799	$ 3,734,341

Our normal operating cycle for reference standards is currently longer than one year. The Company has approximately 5,000 defined reference standards and holds a lot of these standards as inventory in small quantities, mostly in grams and milligrams. Due to the large number of different items we carry, certain groups of these reference standards have sales frequency that is slower than others and varies greatly year to year. In addition, for certain reference standards, the cost saving is advantageous when purchased in larger quantities and we have taken advantage of such opportunities when available. Such factors have resulted in an operating cycle to be more than one year on average. The Company gains competitive advantage through the broad offering of reference standards and it is critical for the Company to continue to expand its library of reference standards it offers for the growth of business. Nevertheless, the Company has recently made changes in its reference standards inventory purchasing practice, which the management believes will result in an improved turnover rate and shorter operating cycle without impacting our competitive advantage.

The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

Leasehold improvements and equipment

Leasehold improvements and equipment: Leasehold improvements and equipment are carried at cost and depreciated on the straight-line method over the lesser of the estimated useful life of each asset or lease term. Leasehold improvements and equipment are comprised of leasehold improvements, laboratory equipment, furniture and fixtures, and computer equipment. Depreciation on equipment under capital lease is included with depreciation on owned assets. Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized. Useful lives of leasehold improvements and equipment for each of the category are as follows:

	Useful Life
Leasehold improvements	Until the end of the lease term
Computer equipment	3 to 5 years
Furniture and fixtures	7 years
Laboratory equipment	10 years

Long-lived assets are reviewed for impairment on a periodic basis and when changes in circumstances indicate the possibility that the carrying amount may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the forecast of undiscounted future cash flows is less than the carrying amount of the assets, an impairment charge would be recognized to reduce the carrying value of the assets to fair value. If a possible impairment is identified, the asset group’s fair value is measured relying primarily on a discounted cash flow methodology.

Income taxes

Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company files tax returns in all appropriate jurisdictions, which include a federal tax return and various state tax returns. Open tax years for these jurisdictions are 2012 to 2015, which statutes expire in 2016 to 2019, respectively. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in general and administrative expenses in the statements of operations. As of January 2, 2016, the Company has no liability for unrecognized tax benefits.

Advertising

Advertising: The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense for the periods ended January 2, 2016, January 3, 2015 and December 28, 2013 were approximately $104,000, $171,000 and $355,000, respectively.

Fair Value Measurement

Fair Value Measurement: The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Recent accounting standards:

Recent accounting standards: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. 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.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-01 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.