Niagen Bioscience, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS (unaudited) ChromaDex Corporation and Subsidiaries Unaudited Condensed Consolidated Balance Sheets (In thousands except par values, unless otherwise indicated) Sep 30, 2022 Dec 31, 2021 Assets Current assets Cash and cash equivalents, including restricted cash of $ 0.2 million as of both dates $ 13,262 $ 28,219 Trade receivables, net of allowances of $ 51 and $ 65 , respectively; Including receivables from Related Party of: $ 2.4 million and $ 2.1 million, respectively 4,744 5,226 Inventories 15,636 13,601 Prepaid expenses and other assets 4,259 1,859 Total current assets 37,901 48,905 Leasehold improvements and equipment, net 2,791 3,003 Intangible assets, net 714 857 Right-of-use assets 3,714 4,352 Other long-term assets 545 723 Total assets $ 45,665 $ 57,840 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 9,119 $ 10,423 Accrued expenses 6,756 6,481 Current maturities of operating lease obligations 684 528 Current maturities of finance lease obligations 10 20 Customer deposits 158 161 Total current liabilities 16,727 17,613 Deferred revenue 4,228 4,346 Operating lease obligations, less current maturities 3,687 4,154 Total liabilities 24,642 26,113 Commitments and Contingencies (Note 10) Stockholders' Equity Common stock, $ 0.001 par value; authorized 150,000 shares; 68,169 shares and 68,126 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 68 68 Additional paid-in capital 205,027 200,614 Accumulated deficit ( 184,075 ) ( 168,953 ) Cumulative translation adjustments 3 ( 2 ) Total stockholders' equity 21,023 31,727 Total liabilities and stockholders' equity $ 45,665 $ 57,840 See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 3 ChromaDex Corporation and Subsidiaries Unaudited Condensed Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Sales, net $ 17,063 $ 17,308 $ 51,054 $ 49,690 Cost of sales 6,856 6,730 20,273 19,068 Gross profit 10,207 10,578 30,781 30,622 Operating expenses: Sales and marketing 5,868 7,221 22,126 19,711 Research and development 1,224 996 3,547 2,787 General and administrative 6,180 11,202 22,292 29,881 Total operating expenses 13,272 19,419 47,965 52,379 Operating loss ( 3,065 ) ( 8,841 ) ( 17,184 ) ( 21,757 ) Other income, net - Employee Retention Tax Credit 2,085 — 2,085 — Interest expense, net ( 5 ) ( 15 ) ( 23 ) ( 46 ) Net loss $ ( 985 ) $ ( 8,856 ) $ ( 15,122 ) $ ( 21,803 ) Basic and diluted loss per common share attributable to ChromaDex Corporation $ ( 0.01 ) $ ( 0.13 ) $ ( 0.22 ) $ ( 0.33 ) Basic and diluted weighted average common shares outstanding 68,345 68,236 68,331 66,811 See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 4 ChromaDex Corporation and Subsidiaries Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands, unless otherwise indicated) Three Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Cumulative Translation Adjustments Total Stockholders' Equity Shares Amount Balance, July 1, 2022 68,155 $ 68 $ 203,798 $ ( 183,090 ) $ 2 $ 20,778 Issuance of restricted stock 14 — — — — — Share-based compensation — — 1,229 — — 1,229 Translation adjustment — — — — 1 1 Net loss — — — ( 985 ) — ( 985 ) Balance, September 30, 2022 68,169 $ 68 $ 205,027 $ ( 184,075 ) $ 3 $ 21,023 Nine Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Cumulative Translation Adjustments Total Stockholders' Equity Shares Amount Balance, January 1, 2022 68,126 $ 68 $ 200,614 $ ( 168,953 ) $ ( 2 ) $ 31,727 Issuance of restricted stock 43 — — — — — Share-based compensation — — 4,413 — — 4,413 Translation adjustment — — — — 5 5 Net loss — — — ( 15,122 ) — ( 15,122 ) Balance, September 30, 2022 68,169 $ 68 $ 205,027 $ ( 184,075 ) $ 3 $ 21,023 See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 5 ChromaDex Corporation and Subsidiaries Unaudited Condensed Consolidated Statements of Stockholders' Equity - Continued (In thousands, unless otherwise indicated) Three Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Accumulated Deficit Cumulative Translation Adjustments Total Stockholders' Equity Shares Amount Balance, July 1, 2021 68,009 $ 68 $ 196,848 $ ( 154,772 ) $ ( 2 ) $ 42,142 Issuance of common stock resulting from the exercise of stock options 85 — 341 — — 341 Share-based compensation — — 1,822 — — 1,822 Net loss — — — ( 8,856 ) — ( 8,856 ) Balance, September 30, 2021 68,094 $ 68 $ 199,011 $ ( 163,628 ) $ ( 2 ) $ 35,449 Nine Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Accumulated Deficit Cumulative Translation Adjustments Total Stockholders' Equity Shares Amount Balance, January 1, 2021 61,881 $ 62 $ 158,190 $ ( 141,825 ) $ ( 3 ) $ 16,424 Issuance of common stock, net of offering costs of $ 0.4 million 4,059 4 26,736 — — 26,740 Issuance of common stock resulting from the exercise of stock options 2,154 2 9,363 — — 9,365 Share-based compensation — — 4,722 — — 4,722 Translation adjustment — — — — 1 1 Net loss — — — ( 21,803 ) — ( 21,803 ) Balance, September 30, 2021 68,094 $ 68 $ 199,011 $ ( 163,628 ) $ ( 2 ) $ 35,449 See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 6 ChromaDex Corporation and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (In thousands, unless otherwise indicated) Nine Months Ended September 30, 2022 2021 Cash Flows From Operating Activities Net loss $ ( 15,122 ) $ ( 21,803 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of leasehold improvements and equipment 648 679 Amortization of intangibles 143 174 Amortization of right of use assets 638 385 Share-based compensation expense 4,413 4,722 Loss on disposal of leasehold improvements and equipment 7 — Provision for doubtful trade receivables 28 ( 152 ) Non-cash financing costs 54 87 Changes in operating assets and liabilities: Trade receivables 454 ( 2,448 ) Inventories ( 2,035 ) ( 992 ) Implementation costs for cloud computing arrangement ( 281 ) ( 150 ) Prepaid expenses and other assets ( 2,261 ) ( 608 ) Accounts payable ( 1,304 ) 1,359 Accrued expenses 275 198 Deferred revenue ( 118 ) ( 95 ) Customer deposits and other 2 ( 103 ) Operating lease liabilities ( 311 ) ( 472 ) Net cash used in operating activities ( 14,770 ) ( 19,219 ) Cash Flows From Investing Activities Purchases of leasehold improvements and equipment ( 162 ) ( 407 ) Net cash used in investing activities ( 162 ) ( 407 ) Cash Flows From Financing Activities Proceeds from issuance of common stock, net — 26,740 Proceeds from exercise of stock options — 9,365 Payment of debt issuance costs ( 15 ) ( 47 ) Principal payments on finance leases ( 10 ) ( 27 ) Net cash (used in) provided by financing activities ( 25 ) 36,031 Net (decrease) increase in cash and cash equivalents ( 14,957 ) 16,405 Cash and cash equivalents, including restricted cash of $ 0.2 million for both periods - beginning of period 28,219 16,697 Cash and cash equivalents, including restricted cash of $ 0.2 million for both periods - end of period $ 13,262 $ 33,102 Supplemental Disclosures of Cash Flow Information Cash payments for interest on finance leases $ — $ 1 Cash payments for principal on operating lease liabilities $ 372 $ 472 Supplemental Schedule of Noncash Operating Activity Right-of-use assets and operating lease obligations incurred for entering into lease amendment $ — $ 2,209 See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 7 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 1. Nature of Business ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex International, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited, Asia Pacific Scientific, Inc., ChromaDex Europa B.V. and ChromaDex Sağlik Ürünleri Anonim Şirketi (collectively, “ChromaDex” or the “Company”) are a global bioscience company dedicated to healthy aging. The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (NAD+), an essential coenzyme that is a key regulator of cellular metabolism and is found in every cell of the human body. NAD+ levels in humans have been shown to decline with age, among other factors, and may be increased through supplementation with NAD+ precursors. ChromaDex is the innovator behind the NAD+ precursor nicotinamide riboside (NR), commercialized as the flagship ingredient Niagen®. Nicotinamide riboside and other NAD+ precursors are protected by ChromaDex’s patent and/or licensed rights portfolio. The Company delivers Niagen® as the sole active ingredient in its consumer product Tru Niagen®. The Company further develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products. Additionally, the Company offers natural product fine chemicals, known as phytochemicals, and related research and development services. Note 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation: The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim Unaudited Condensed Consolidated Financial Statements include all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows for such periods. Results of operations for any interim period are not necessarily indicative of results for any other interim period or for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC. Basis of Consolidation : The accompanying Unaudited Condensed Financial Statements and notes thereto 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. Significant Accounting Policies : There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2022, that have had a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements and related notes. Recent Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The new guidance represents significant changes to accounting for credit losses: (i) full lifetime expected credit losses will be recognized upon initial recognition of an asset in scope; (ii) the current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold; and (iii) the expected credit losses estimate will be based upon historical information, current conditions, and reasonable and supportable forecasts. ASU 2016-13 introduces two distinctive credit loss impairment models: (i) current expected credit loss impairment model (Subtopic 326-20) applicable to financial assets measured at amortized cost; and (ii) available-for-sale debt securities impairment model (Subtopic 326-30). ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Public entities that qualify as a smaller reporting company can elect to defer compliance effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. 8 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 3. Liquidity Evaluation of Ability to Maintain Current Level of Operations In connection with the preparation of these U naudited C ondensed Consolidated Financial Statements for the nine months ended September 30, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they became due over the next twelve months from the date of issuance of the Company’s third quarter of 2022 interim U naudited C ondensed Consolidated Financial Statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued impact of the COVID-19 pandemic and inflationary pressures. For the nine months ended September 30, 2022, t he Company incurred a net loss of $ 15.1 million and used net cash in operating activities of $ 14.8 million. As of September 30, 2022, the Company had unrestricted cash and cash equivalents of $ 13.1 million which consists of bank deposits or highly liquid investment-grade debt instruments with an original maturity of three months or less. The fair value of the Company’s cash and cash equivalents is derived using Level 1 inputs. Subsequent to September 30, 2022, the Company closed two separate securities purchase agreements and received proceeds of approximately $ 7.7 million, net of offering costs of $ 0.4 million. For further discussion of the securities purchase agreements, see Note 12, Subsequent Events . Management evaluated these conditions and anticipates that its current unrestricted cash and cash equivalents, cash generated from the securities purchase agreements and cash to be generated from net sales will be sufficient to meet its financial obligations as they become due over at least the next twelve months from the issuance date of these financial statements. The Company may, however, seek additional capital within the next twelve months, both to fund its projected operating plans after the next twelve months and/or to fund the Company’s longer-term strategic objectives. The Company has an available line of credit with Western Alliance Bank for up to $ 10.0 million, subject to certain terms and conditions which currently allow for $ 4.3 million of borrowing. There are no outstanding borrowings as of September 30, 2022. In June 2020, the Company filed a $ 125 million registration statement on Form S-3 with the SEC, utilizing a “shelf” registration process. Under this shelf registration process, the Company may sell securities from time to time, including up to $ 50 million pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B. Riley FBR, Inc. and Raymond James & Associates, Inc. (ATM Facility). As of September 30, 2022, approximately $ 47.8 million remains available under the ATM Facility. The Company’s potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well market conditions. As a result, the Company’s ability to rely on the ATM Facility to raise liquidity is limited to a material extent. 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 nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except per share data) 2022 2021 2022 2021 Net loss $ ( 985 ) $ ( 8,856 ) $ ( 15,122 ) $ ( 21,803 ) Basic and diluted loss per common share $ ( 0.01 ) $ ( 0.13 ) $ ( 0.22 ) $ ( 0.33 ) Basic and diluted weighted average common shares outstanding (1): 68,345 68,236 68,331 66,811 Potentially dilutive securities (2): Stock options 10,064 10,540 10,064 10,540 Restricted stock units 748 116 748 116 (1) Includes approximately 0.2 million nonvested shares of restricted stock for each of the three and nine months ended September 30, 2022 and 2021 which are participating securities that feature voting and dividend rights. (2) Excluded from the computation of loss per share as their impact is antidilutive. 9 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 5. Business Segments The Company has the following three reportable segments: • Consumer Products segment: provides finished dietary supplement products that contain the Company's proprietary ingredients directly to consumers as well as to distributors; • Ingredients segment : develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products; and, • Analytical Reference Standards and Services segment: offers the supply of phytochemical reference standards and other research and development services. The Company’s reportable segments are significant operating segments that offer differentiated services. This structure reflects the Company’s current operational and financial management and provides the best structure to maximize the Company's objectives and investment strategy, while maintaining financial discipline. The Company's Chief Executive Officer, who is its chief operating decision maker (CODM), reviews financial information for each operating segment to evaluate performance and allocate resources. The Company evaluates performance and allocates resources based on reviewing gross margin by reportable segment. The Company's CODM does not review assets by segment in his evaluation and therefore assets by segment are not disclosed below. There are no intersegment sales that require elimination. The “Corporate and other” classification includes corporate items not allocated by the Company to each reportable segment. The following tables set forth financial information by segment: Three months ended September 30, 2022 Consumer Products segment Ingredients segment Analytical Reference Standards and Services segment Corporate and other Total (In thousands) Net sales $ 14,561 $ 1,819 $ 683 $ — $ 17,063 Cost of sales 5,224 899 733 — 6,856 Gross profit (loss) 9,337 920 ( 50 ) — 10,207 Operating expenses: Sales and marketing 5,696 12 160 — 5,868 Research and development 1,089 135 — — 1,224 General and administrative — — — 6,180 6,180 Operating expenses 6,785 147 160 6,180 13,272 Operating income (loss) $ 2,552 $ 773 $ ( 210 ) $ ( 6,180 ) $ ( 3,065 ) Nine Months Ended September 30, 2022 Consumer Products segment Ingredients segment Analytical Reference Standards and Services segment Corporate and other Total (In thousands) Net sales $ 44,018 $ 4,710 $ 2,326 $ — $ 51,054 Cost of sales 15,694 2,302 2,277 — 20,273 Gross profit 28,324 2,408 49 — 30,781 Operating expenses: Sales and marketing 21,634 36 456 — 22,126 Research and development 3,204 343 — — 3,547 General and administrative — — — 22,292 22,292 Operating expenses 24,838 379 456 22,292 47,965 Operating income (loss) $ 3,486 $ 2,029 $ ( 407 ) $ ( 22,292 ) $ ( 17,184 ) 10 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Three months ended September 30, 2021 Consumer Products segment Ingredients segment Analytical Reference Standards and Services segment Corporate and other Total (In thousands) Net sales $ 14,772 $ 1,789 $ 747 $ — $ 17,308 Cost of sales 5,253 732 745 — 6,730 Gross profit 9,519 1,057 2 — 10,578 Operating expenses: Sales and marketing 7,067 10 144 — 7,221 Research and development 895 101 — — 996 General and administrative — — — 11,202 11,202 Operating expenses 7,962 111 144 11,202 19,419 Operating income (loss) $ 1,557 $ 946 $ ( 142 ) $ ( 11,202 ) $ ( 8,841 ) Nine Months Ended September 30, 2021 Consumer Products segment Ingredients segment Analytical Reference Standards and Services segment Corporate and other Total (In thousands) Net sales $ 42,605 $ 4,608 $ 2,477 $ — $ 49,690 Cost of sales 15,003 1,970 2,095 — 19,068 Gross profit 27,602 2,638 382 — 30,622 Operating expenses: Sales and marketing 19,368 21 322 — 19,711 Research and development 2,539 248 — — 2,787 General and administrative — — — 29,881 29,881 Operating expenses 21,907 269 322 29,881 52,379 Operating income (loss) $ 5,695 $ 2,369 $ 60 $ ( 29,881 ) $ ( 21,757 ) Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers by type of goods or services for each of its segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. Disaggregated revenues are as follows: Three Months Ended September 30, 2022 Consumer Products Segment Ingredients Segment Analytical Reference Standards and Services Segment Total (In thousands) Tru Niagen®, Consumer Product $ 14,561 $ — $ — $ 14,561 Niagen® Ingredient — 1,804 — 1,804 Subtotal Niagen® Related 14,561 1,804 — 16,365 Other Ingredients — 15 — 15 Reference Standards — — 661 661 Consulting and Other — — 22 22 Subtotal Other Goods and Services — 15 683 698 Total Net Sales $ 14,561 $ 1,819 $ 683 $ 17,063 11 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Nine Months Ended September 30, 2022 Consumer Products Segment Ingredients Segment Analytical Reference Standards and Services Segment Total (In thousands) Tru Niagen®, Consumer Product $ 44,018 $ — $ — $ 44,018 Niagen® Ingredient — 4,389 — 4,389 Subtotal Niagen® Related 44,018 4,389 — 48,407 Other Ingredients — 321 — 321 Reference Standards — — 2,248 2,248 Consulting and Other — — 78 78 Subtotal Other Goods and Services — 321 2,326 2,647 Total Net Sales $ 44,018 $ 4,710 $ 2,326 $ 51,054 Three Months Ended September 30, 2021 Consumer Products Segment Ingredients Segment Analytical Reference Standards and Services Segment Total (In thousands) Tru Niagen®, Consumer Product $ 14,772 $ — $ — $ 14,772 Niagen® Ingredient — 1,665 — 1,665 Subtotal Niagen® Related 14,772 1,665 — 16,437 Other Ingredients — 124 — 124 Reference Standards — — 735 735 Consulting and Other — — 12 12 Subtotal Other Goods and Services — 124 747 871 Total Net Sales $ 14,772 $ 1,789 $ 747 $ 17,308 Nine Months Ended September 30, 2021 Consumer Products Segment Ingredients Segment Analytical Reference Standards and Services Segment Total (In thousands) Tru Niagen®, Consumer Product $ 42,605 $ — $ — $ 42,605 Niagen® Ingredient — 4,149 — 4,149 Subtotal Niagen® Related 42,605 4,149 — 46,754 Other Ingredients — 459 — 459 Reference Standards — — 2,230 2,230 Consulting and Other — — 247 247 Subtotal Other Goods and Services — 459 2,477 2,936 Total Net Sales $ 42,605 $ 4,608 $ 2,477 $ 49,690 12 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Disclosure of Major Customers Major customers are defined as customers whose sales or trade receivables individually consist of more than ten percent of total sales or total trade receivables, respectively. Percentage of net sales from major customers of the Company’s consumer products segment for the periods indicated were as follows: Three Months Ended September 30, Nine Months Ended September 30, Major Customers 2022 2021 2022 2021 A.S. Watson Group - Related Party 15.4 % 15.2 % 12.0 % 14.3 % The percentage of the amounts due from major customers to total trade receivables, net for the periods indicated were as follows: Major Customers At Sep 30, 2022 At Dec 31, 2021 A.S. Watson Group - Related Party 51.3 % 39.6 % Life Extension 15.7 % 22.1 % Amazon Marketplaces 21.6 % * Persona * 10.3 % * Represents less than 10% Note 6. Related Party Transactions A.S. Watson Group is a related party through common ownership of an enterprise that beneficially owns more than 10% of the common stock of the Company. The sale of consumer products and corresponding trade receivables to related parties during the periods indicated are as follows: Net Sales Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 A.S. Watson Group - Related Party $ 2.6 million $ 2.6 million $ 6.7 million $ 7.1 million Total Related Party Net Sales $ 2.6 million $ 2.6 million $ 6.7 million $ 7.1 million Trade Receivable as of Sep 30, 2022 Dec 31, 2021 A.S. Watson Group - Related Party $ 2.4 million $ 2.1 million Total Related Party Trade Receivables $ 2.4 million $ 2.1 million 13 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Joint Venture Agreement On May 19, 2022, the Company entered into an agreement to form a joint venture (the “May JV Agreement”) to expand the Company’s market strategy to include opportunities in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”). The May JV Agreement was among the Company, Crystal Lake Developments Limited (Crystal Lake), Pioneer Idea Holdings Limited (Pioneer Idea), and Hong Kong (China) Taikuk Group Ltd (Taikuk). Crystal Lake is indirectly wholly-owned by Li Ka-Shing, and Pioneer Idea is indirectly owned by Solina Chau, and each of Mr. Ka-Shing and Ms. Chau own through affiliated entities more than 5% of the Company’s common stock. On September 30, 2022, the Company entered into a Termination Agreement for the purpose of terminating the May JV Agreement. The Termination Agreement was approved by the Audit Committee of the Board in accordance with the Company’s Related-Persons Transaction Policy. In connection with the Termination Agreement, on September 30, 2022, Asia Pacific Scientific, Inc., an indirect wholly owned subsidiary of the Company, and Hong Kong (China) Taikuk Group Ltd (Taikuk) entered into a shareholders agreement (the “Shareholders Agreement”) pursuant to which Taikuk has agreed to contribute $ 1.0 million (the “Subscription Price”) in exchange for an 11 % non-voting equity interest in ChromaDex Asia Pacific Ventures Limited, a subsidiary of Asia Pacific Scientific, Inc. (the “Joint Venture” or “JV”). Additionally, the Company shall pay $ 1.0 million in cash to Taikuk (the “Taikuk Fee”) upon the closing of the Shareholders Agreement (the “Closing”). The Company and Taikuk have mutually agreed that no exchange of funds for the Taikuk Fee and Subscription Price was necessary and, accordingly, no cash has or will exchange hands related to these provisions of the Shareholders Agreement. The articles of association of the JV were amended and restated simultaneously with the Closing. The purpose of the JV is to commercialize Tru Niagen® and other products containing nicotinamide riboside to be developed by the Company in the ordinary course (the “Products”) in the Territory. The Shareholders Agreement has an initial term of 20 years, unless earlier terminated. The Company indirectly owns an 89 % equity interest (and all of the voting interests) in the JV and has the right to elect all three directors of the JV. Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the Peoples Republic of China State Administration for Market Regulation for Products in the name of the Company or its designee (collectively, the “Blue Hat Registration”). Upon completion of Blue Hat Registration, the Company shall make a payment of $ 1.0 million in cash to Taikuk (the “Blue Hat Registration Fee”). If the Blue Hat Registration is not obtained within 24 months of the Closing (which may be extended by an additional 12 months upon mutual consent of the parties), the JV may repurchase the 11 % non-voting interest purchased by Taikuk for $ 1 (the “Right of Repurchase”). The Right of Repurchase functions as a performance vesting condition under ASC 718 and the 11 % non-voting equity interest is accounted for as nonemployee share-based compensation. The equity interest will only vest if Blue Hat Registration is achieved, at which time the minority interest will be recorded. Consequently, no amounts related to the Blue Hat Registration Fee or the 11 % non-voting interest have been recognized in the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022. The fair value of the 11 % non-voting interest and corresponding share-based compensation expense of $ 1.0 million was determined as of the grant date of September 30, 2022 and based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs. The most significant of these inputs were the combined weighted averages of the a) discount rate at 27.5 %, b) present value of estimated future cash flows of $ 3.9 million and c) the present value of the terminal value at $ 5.6 million. Once Blue Hat Registration is complete and certain distribution agreements relating to the commercialization of the Products in the Territory are assigned and entered into (the “Distribution Agreements”), Taikuk would be entitled to certain royalty payments based on the Company’s and the JV’s net revenue for sales of the Products in the Territory under the Distribution Agreements. Operating activity under the JV was not material during the three months ended September 30, 2022. 14 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 7. Inventories The Company's major classes of inventory and corresponding balances as of September 30, 2022 and December 31, 2021 are as follows: (In thousands) Sep 30, 2022 Dec 31, 2021 Consumer Products - Finished Goods $ 9,214 $ 6,823 Consumer Products - Work in Process 3,157 4,131 Bulk ingredients 2,743 2,131 Reference standards 522 516 Total Inventory $ 15,636 $ 13,601 Note 8. Leases The Company accounts for its leases in accordance with ASU No. 2016-02 (Topic 842) which requires that a lessee recognize the assets and liabilities that arise from operating leases. The ASU requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use (ROU) asset on the balance sheet. The Company leases office space facilities and a research and development laboratory under non-cancelable operating leases with varying expirations extending through fiscal year 2028. The lease agreements provide for renewal options and rent escalation over the lease term as well as require the Company to pay maintenance, insurance and property taxes. Lease expense is recognized on a straight-line basis over the term of the lease. Operating Leases As of September 30, 2022, the Company had right-of-use assets and corresponding operating lease liabilities of approximately $ 3.7 million and $ 4.4 million, respectively. For the three and nine months ended September 30, 2022 and 2021, the components of operating lease expense are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Operating leases Operating lease expense $ 235 $ 152 $ 727 $ 359 Variable lease expense 47 51 132 139 Operating lease expense 282 203 859 498 Short-term lease rent expense 33 63 160 191 Total expense $ 315 $ 266 $ 1,019 $ 689 At September 30, 2022 Weighted-average remaining lease term (years), operating leases 4.6 Weighted-average discount rate, operating leases 5.9 % 15 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Future minimum lease payments under operating leases as of September 30, 2022 are as follows: Year (In thousands) 2022 (Remainder) $ 216 2023 949 2024 1,159 2025 1,141 2026 906 2027 498 Thereafter 179 Total 5,048 Less present value discount ( 677 ) Present value of total operating lease liabilities 4,371 Less current portion ( 684 ) Long-term obligations under operating leases $ 3,687 Note 9. Share-Based Compensation Equity Plans The Company grants awards to recipients through the 2017 Equity Incentive Plan, as amended (the “2017 Plan”), which was approved by stockholders and the Board of Directors. The 2017 Plan provides for the issuance of shares that total no more than the sum of (i) 14,500,000 new shares, (ii) approximately 384,000 unallocated shares remaining available for the grant of new awards under the Second Amended and Restated 2007 Equity Incentive Plan, (iii) any returning shares such as forfeited, cancelled, or expired shares and (iv) 500,000 shares pursuant to an inducement award. The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 1.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). As of September 30, 2022, there were approximately 4.4 million remaining shares available for issuance under the 2017 Plan. Options expire 10 years from the date of grant. The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards that are not market based. Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires judgment, including estimating stock price volatility and expected option life. The fair-value of the restricted stock unit awards at the grant date is based on the market price on the grant date. The Company develops estimates based on historical data and market information, which can change significantly over time, and adjusts for forfeitures as they occur. General Vesting Conditions The Company’s stock options and restricted stock unit awards are generally subject to a one-year cliff vesting period after which 1/3rd of the shares vest with the remaining shares vesting ratably each month over a two-year period subject to the passage of time. Beginning in the second quarter of 2022, restricted stock units are generally subject to a three-year vesting period with 1/3rd vesting per year on the anniversary of the grant date. Certain stock option awards are market or performance based and vest based on certain triggering events established by the Compensation Committee. Certain executive stock option and RSU awards provide for accelerated vesting if there is a change in control or termination without cause. Stock Options The Company used the following weighted average assumptions for options granted during the nine months ended September 30, 2022: Weighted Average: Nine Months Ended September 30, 2022 Expected term 6.7 years Expected volatility 76.5 % Risk-free rate 2.5 % Expected dividends — % 16 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Service Period Based Stock Options The following table summarizes activity of service period-based stock options during the nine months ended September 30, 2022 : Weighted Average (In thousands except per-share data and remaining contractual term) Number of Options Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at December 31, 2021 9,495 $ 4.65 6.5 $ 2,452 Options Granted 2,334 2.46 Options Exercised — — — Options Forfeited ( 2,806 ) 4.09 Outstanding at September 30, 2022 9,023 $ 4.25 6.3 $ — * Exercisable at September 30, 2022 6,112 $ 4.42 5.0 $ — * *The aggregate intrinsic values in the table above are based on the Company’s stock price of $ 1.23 , which is the closing price of the Company’s stock on the last day of business for the period ended September 30, 2022. Restricted Stock Units The following table summarizes activity of restricted stock units during the nine months ended September 30, 2022 : (In thousands except per share fair value) Number of RSUs Weighted Average Fair Value Unvested shares at December 31, 2021 115 $ 10.21 Granted 690 2.17 Vested ( 43 ) 11.10 Forfeited ( 14 ) 9.85 Unvested shares at September 30, 2022 748 $ 2.75 Expected to vest at September 30, 2022 748 $ 2.75 Total Share-Based Compensation Total share-based compensation expense was as follows: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Share-based compensation expense Cost of sales $ 73 $ 58 $ 203 $ 156 Sales and marketing 414 456 1,134 1,298 Research and development 252 275 730 633 General and administrative 490 1,033 2,346 2,635 Total $ 1,229 $ 1,822 $ 4,413 $ 4,722 In future periods, the Company expects to recognize approximately $ 6.2 million and $ 1.7 million in share-based compensation expense for unvested options and unvested restricted stock units, respectively, that were outstanding as of September 30, 2022. Future share-based compensation expense will be recognized over 1.8 and 1.9 weighted average years for unvested options and restricted stock units, respectively. The Company also has total unrecognized share-based compensation expense of $ 1.0 million pertaining to the Joint Venture. Such expense will only be recognized if Blue Hat Registration is achieved, the timing of which is uncertain as of September 30, 2022. 17 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 10. Commitments and Contingencies Legal proceedings 1. Elysium Health, LLC (A) California Action On December 29, 2016, ChromaDex filed a complaint in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with Elysium Health, LLC, “Elysium”) as defendant (Complaint). On January 25, 2017, Elysium filed an answer and counterclaims in response to the Complaint (together with the Complaint, the “California Action”). Over the course of the California Action, the parties have each filed amended pleadings several times and have each engaged in several rounds of motions to dismiss and one round of motion for judgment on the pleadings with respect to various claims. Most recently, on November 27, 2018, ChromaDex filed a fifth amended complaint that added an individual, Mark Morris, as a defendant. Elysium and Morris (Defendants) moved to dismiss on December 21, 2018. The court denied Defendants’ motion on February 4, 2019. Defendants filed their answer to ChromaDex’s fifth amended complaint on February 19, 2019. ChromaDex filed an answer to Elysium’s restated counterclaims on March 5, 2019. Discovery closed on August 9, 2019. On August 16, 2019, the parties filed motions for partial summary judgment as to certain claims and counterclaims. The parties filed opposition briefs on August 28, 2019, and reply briefs on September 4, 2019. On October 9, 2019, among other things, the court vacated the previously scheduled trial date, ordered supplemental briefing with respect to certain issues related to summary judgment. Elysium filed its opening supplemental brief on October 30, 2019, ChromaDex filed its opening supplemental brief on November 18, 2019, and Elysium filed a reply brief on November 27, 2019, and the court heard argument on January 13, 2020. On January 16, 2020, the court granted both parties’ motions for summary judgment in part and denied both in part. On ChromaDex’s motion, the court granted summary judgment in favor of ChromaDex on Elysium’s counterclaims for (i) breach of contract related to manufacturing Niagen® according to the defined standard, selling Niagen® and ingredients that are substantially similar to pterostilbene to other customers, distributing the Niagen® product specifications, and failing to provide information concerning the quality and identity of Niagen®, and (ii) breach of the implied covenant of good faith and fair dealing. The court denied summary judgment on Elysium’s counterclaims for (i) fraudulent inducement of the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex and Elysium (License Agreement), (ii) patent misuse, and (iii) unjust enrichment. On Elysium’s motion, the court granted summary judgment in favor of Elysium on ChromaDex’s claim for damages related to $ 110,000 in avoided costs arising from documents that Elysium used in violation of the Supply Agreement, dated February 3, 2014, by and between ChromaDex and Elysium, as amended (Niagen® Supply Agreement). The court denied summary judgment on Elysium’s counterclaim for breach of contract related to certain refunds or credits to Elysium. The court also denied summary judgment on ChromaDex’s breach of contract claim against Morris and claims for disgorgement of $ 8.3 million in Elysium’s resale profits, $ 600,000 for a price discount received by Elysium, and $ 684,781 in Morris’s compensation. Following the court’s January 16, 2020 order, ChromaDex’s claims asserted in the California Action, among other allegations, were that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex and Elysium (pTeroPure® Supply Agreement), by failing to make payments to ChromaDex for purchases of pTeroPure® and by improper disclosure of confidential ChromaDex information pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the Niagen® Supply Agreement, by failing to make payments to ChromaDex for purchases of Niagen®, (iii) Defendants willfully and maliciously misappropriated ChromaDex trade secrets concerning its ingredient sales business under both the California Uniform Trade Secrets Act and the Federal Defend Trade Secrets Act, (iv) Morris breached two confidentiality agreements he signed by improperly stealing confidential ChromaDex documents and information, (v) Morris breached his fiduciary duty to ChromaDex by lying to and competing with ChromaDex while still employed there, and (vi) Elysium aided and abetted Morris’s breach of fiduciary duty. ChromaDex sought damages and interest for Elysium’s alleged breaches of the Niagen® Supply Agreement and pTeroPure® Supply Agreement and Morris’s alleged breaches of his confidentiality agreements, compensatory damages and interest, punitive damages, injunctive relief, and attorney’s fees for Defendants’ alleged willful and malicious misappropriation of ChromaDex’s trade secrets, and compensatory damages and interest, disgorgement of all benefits received, and punitive damages for Morris’s alleged breach of his fiduciary duty and Elysium’s aiding and abetting of that alleged breach. 18 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Elysium’s claims alleged in the California Action were that (i) ChromaDex breached the Niagen® Supply Agreement by not issuing certain refunds or credits to Elysium, (ii) ChromaDex fraudulently induced Elysium into entering into the License Agreement, (iv) ChromaDex’s conduct constitutes misuse of its patent rights, and (v) ChromaDex was unjustly enriched by the royalties Elysium paid pursuant to the License Agreement. Elysium sought damages for ChromaDex’s alleged breaches of the Niagen® Supply Agreement, and compensatory damages, punitive damages, and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement, and a declaratory judgment that ChromaDex has engaged in patent misuse. On January 17, 2020, Elysium moved to substitute its counsel. The same day, the court ordered hearing on that motion for January 21, 2020, and granted Elysium’s motion at the hearing. On January 23, 2020, the court issued a scheduling order that, among other things, set trial on the remaining claims to begin on May 12, 2020. On March 19, 2020, in light of the global 2019 coronavirus disease ("COVID-19" or "COVID") pandemic and ongoing private mediation efforts, the parties jointly stipulated to adjourn the trial date. The court vacated the trial date on March 20, 2020. The court held a telephonic status conference on June 9, 2020, during which the court indicated that it will reschedule the jury trial as soon as conditions permit. On November 4, 2020, the parties submitted a joint status report indicating that they will propose a new trial date as soon as the court announces that it will resume jury trials. On November 18, 2020, the court set trial to begin on September 21, 2021. On December 11, 2020, Elysium filed a “Notice of Correction of Depositions” related to the depositions of its chief executive officer, Eric Marcotulli, and chief operating officer, Daniel Alminana, both taken in March 2019. On March 8, 2021, based in part on information that Elysium submitted under seal with that notice, ChromaDex filed a motion for sanctions or, in the alternative, reconsideration of the court’s January 16, 2020 order regarding summary judgment, in which ChromaDex moved to dismiss Elysium’s third, fourth, and fifth counterclaims. Elysium’s opposition brief was filed on March 22, 2021. ChromaDex filed its reply brief on March 29, 2021. On April 27, 2021, the court denied ChromaDex, Inc’s motion for terminating sanctions, but concluded that the evidence at issue in the motion will be admissible at trial. The jury trial portion of the case commenced on September 21, 2021. The jury returned a verdict on September 27, 2021. The verdict found (i) Elysium liable for breaches of the Niagen® and pTeroPure® Supply Agreements for failing to pay for purchases of the ingredients totaling approximately $ 3.0 million, (ii) Mark Morris liable for breach of a confidentiality agreement, requiring him to disgorge approximately $ 17,307 , (iii) ChromaDex liable for breaching the Niagen® Supply Agreement for not issuing certain refunds or credits to Elysium in the amount of $ 625,000 , and (iv) ChromaDex liable for fraudulent inducement of the Licensing Agreement in the amount of $ 250,000 , along with $ 1,025,000 in punitive damages arising from the same counterclaim. On October 25, 2021, ChromaDex informed the court that it would request prejudgment interest on the approximately $ 3.0 million in damages awarded by the jury for Elysium’s breaches of the Niagen® and pTeroPure® Supply Agreements. Elysium’s opposition brief was filed on January 24, 2022, and ChromaDex, Inc.’s reply brief was filed on January 31, 2022. On February 10, 2022, the court denied ChromaDex Inc.’s motion for prejudgment interest. On February 18, 2022, ChromaDex, Inc. and Elysium jointly filed a notice informing the court that ChromaDex, Inc. had filed in the U.S. District Court for the Southern District of New York (SDNY Court) a motion to enforce a settlement agreement between ChromaDex, Inc. and Elysium that ChromaDex, Inc. asserts would materially affect the California Action. On April 22, 2022, ChromaDex, Inc. and Elysium jointly filed a notice informing the court that the SDNY Court had granted ChromaDex, Inc.’s motion to enforce the settlement agreement. On April 29, 2022, ChromaDex, Inc. filed a notice informing the court that the SDNY Court had dismissed the SDNY action with prejudice pursuant to the settlement agreement. On August 22, 2022, ChromaDex, Inc. filed a motion for entry of judgment pursuant to Federal Rule of Civil Procedure 54(b) on the basis that the settlement agreement was enforceable and resolved the claims and counterclaims tried to the jury in the California Action. Elysium’s opposition brief was filed on August 29, 2022, and ChromaDex, Inc.’s reply brief was filed on September 2, 2022. On September 13, 2022, the court denied ChromaDex, Inc.’s motion for entry of judgment pursuant to Rule 54(b). On September 28, 2022, ChromaDex, Inc., Elysium, and Mark Morris filed a joint stipulation requesting that the court stay the California Action pending the final resolution of ChromaDex, Inc.’s appeal in the U.S. Court of Appeals for the Federal Circuit captioned ChromaDex, Inc. v. Elysium Health, Inc., No. 2022-1116 (the “Federal Circuit Appeal”). On September 28, 2022, the court issued an order staying the California Action pending the final resolution of the Federal Circuit Appeal. 19 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements (B) Southern District of New York Action On September 27, 2017, Elysium Health Inc. (Elysium Health) filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex (Elysium SDNY Complaint). Elysium Health alleged in the Elysium SDNY Complaint that ChromaDex made false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017. Among other allegations, Elysium Health averred that the citizen petition made Elysium Health’s product appear dangerous, while casting ChromaDex’s own product as safe. The Elysium SDNY Complaint asserted four claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business Law § 349; and (iv) tortious interference with prospective economic relations. On October 26, 2017, ChromaDex moved to dismiss the Elysium SDNY Complaint on the grounds that, inter alia, its statements in the citizen petition are immune from liability under the Noerr-Pennington Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the Elysium SDNY Complaint failed to state a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex filed its reply on November 9, 2017. On October 26, 2017, ChromaDex filed a complaint in the United States District Court for the Southern District of New York against Elysium Health (ChromaDex SDNY Complaint). ChromaDex alleges that Elysium Health made material false and misleading statements to consumers in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v) tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to state a claim. ChromaDex opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017. On November 3, 2017, the Court consolidated the Elysium SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessful. On September 27, 2018, the Court issued a combined ruling on both parties’ motions to dismiss. For ChromaDex’s motion to dismiss, the Court converted the part of the motion on the issue of whether the citizen petition is immune under the Noerr-Pennington Doctrine into a motion for summary judgment, and requested supplemental evidence from both parties, which were submitted on October 29, 2018. The Court otherwise denied the motion to dismiss. On January 3, 2019, the Court granted ChromaDex’s motion for summary judgment under the Noerr-Pennington Doctrine and dismissed all claims in the Elysium SDNY Complaint. Elysium moved for reconsideration on January 17, 2019. The Court denied Elysium’s motion for reconsideration on February 6, 2019, and issued an amended final order granting ChromaDex’s motion for summary judgment on February 7, 2019. The Court granted in part and denied in part Elysium’s motion to dismiss, sustaining three grounds for ChromaDex’s Lanham Act claims while dismissing two others, sustaining the claim under New York General Business Law § 349, and dismissing the claims under New York General Business Law § 350 and for tortious interference. Elysium filed an answer and counterclaims on October 10, 2018, alleging claims for (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); and (iii) deceptive practices under New York General Business Law § 349. ChromaDex answered Elysium’s counterclaims on November 2, 2018. ChromaDex filed an amended complaint on March 27, 2019, adding new claims against Elysium Health for false advertising and unfair competition under the Lanham Act, 15 U.S.C. § 1125(a). On April 10, 2019, Elysium Health answered the amended complaint and filed amended counterclaims, also adding new claims against ChromaDex for false advertising and unfair competition under the Lanham Act, 15 U.S.C. § 1125(a). On July 1, 2019, Elysium Health filed further amended counterclaims, adding new claims under the Copyright Act §§ 106 & 501. On February 9, 2020, ChromaDex filed a motion for leave to amend its complaint to add additional claims against Elysium Health for false advertising and unfair competition. On February 10, 2020, Elysium Health filed a motion for leave to amend its counterclaims to identify allegedly false and misleading statements in ChromaDex’s advertising. Those motions were both granted after respective stipulations. On March 12, 2020, Elysium Health answered the second amended complaint. On March 13, 2020, ChromaDex filed an answer and objection to Elysium Health’s third amended counterclaims. 20 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements On December 14, 2020, Elysium Health filed a motion to supplement and amend its counterclaims to add claims regarding alleged advertising related to COVID, to add an allegation about a change to the ChromaDex website, and to remove its copyright infringement claim under the Copyright Act. On January 19, 2021, the Court denied Elysium Health’s motion to add claims regarding alleged advertising related to COVID. The Court granted the unopposed requests to add an allegation about a change to ChromaDex’s website and to remove Elysium’s Copyright Act claim. Pursuant to the Court’s order, Elysium filed fourth amended counterclaims on April 21, 2021. All discovery closed on April 23, 2021. The Court vacated a previously scheduled joint pretrial order and trial date because of COVID-19, and the Court has informed the Parties that trial date will be rescheduled in November or December 2021. Both parties filed dispositive and Daubert motions on June 4, 2021. Opposition papers were filed by both parties on June 25, 2021, and reply papers were filed on July 9, 2021. On January 10, 2022, both parties appeared for oral argument on the dispositive and Daubert motions. On February 3, 2022, ChromaDex reached a settlement in order to resolve the SDNY action in its entirety as well as the claims tried to the jury in the Central District of California (the “Settlement Agreement”). Shortly thereafter, before the parties could notify the Court, the Court issued a ruling on the pending dispositive and Daubert motions, dismissing ChromaDex’s SDNY complaint in its entirety on the grounds that ChromaDex’s damages were uncertain, and dismissing some of Elysium’s claims. Elysium then asserted that a settlement had not been reached. ChromaDex thereafter filed a motion to enforce the Settlement Agreement in its entirety on February 16, 2022. Elysium’s opposition to that motion was filed on March 2, 2022, and ChromaDex’s reply was filed on March 9, 2022. On April 19, 2022, the Court concluded that a settlement had been reached and granted ChromaDex’s motion to enforce the Settlement Agreement. On April 28, 2022, pursuant to the Settlement Agreement, the Court dismissed the entire action with prejudice. On May 11, 2022, Elysium filed a notice of appeal. On May 25, 2022, ChromaDex filed a notice of cross-appeal. Elysium filed its opening brief on August 24, 2022. ChromaDex’s brief is due on November 22, 2022. The Company is unable to predict the outcome of the Elysium SDNY Complaint or any possible appeals and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceeding discussed herein. As of September 30, 2022, ChromaDex did not accrue a potential loss for the Elysium SDNY Complaint because ChromaDex believes that the allegations are without merit and thus it is not probable that a liability has been incurred. (C) Delaware - Patent Infringement Action On September 17, 2018, ChromaDex and Trustees of Dartmouth College filed a patent infringement complaint in the United States District Court for the District of Delaware against Elysium Health, Inc. The complaint alleges that Elysium’s BASIS® dietary supplement infringes U.S. Patent Nos. 8,197,807 (‘807 Patent) and 8,383,086 (‘086 Patent) that comprise compositions containing isolated nicotinamide riboside held by Dartmouth and licensed exclusively to ChromaDex On October 23, 2018, Elysium filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief. On November 7, 2018, Elysium filed a motion to stay the patent infringement proceedings pending resolution of (1) the inter partes review of the ‘807 Patent and the ‘086 Patent before the Patent Trial and Appeal Board (PTAB) and (2) the outcome of the litigation in the California Action. ChromaDex filed an opposition brief on November 21, 2018 detailing the issues with Elysium’s motion to stay. In particular, ChromaDex argued that given claim 2 of the ‘086 Patent was only included in the PTAB’s inter partes review for procedural reasons the PTAB was unlikely to invalidate claim 2 and therefore litigation in Delaware would continue regardless. In addition, ChromaDex argued that the litigation in the California Action is unlikely to have a significant effect on the ongoing patent litigation. After the PTAB released its written decision upholding claim 2 of the ‘086 Patent, proving right ChromaDex’s prediction, ChromaDex informed the Delaware court of the PTAB’s decision on January 17, 2019. On June 19, 2019, the Delaware court granted in part and denied in part Elysium’s motion, ordering that the case was stayed pending the resolution of Elysium’s patent misuse counterclaim in the California Action. 21 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements On November 1, 2019, ChromaDex filed a motion to lift the stay due to changed circumstances in the California Action, among other reasons. Briefing on the motion was completed on November 22, 2019. On January 6, 2020, the Delaware court issued an oral order instructing the parties to submit a joint status report after the January 13, 2020 motions hearing in the California Action. The joint status report was submitted on January 30, 2020. On February 4, 2020, the Delaware court issued an order granting ChromaDex’s motion to lift the stay and setting a scheduling conference for March 10, 2020. On March 19, 2020, the Delaware court entered a scheduling order, which, among other things, set the claim-construction hearing for December 17, 2020 and trial for the week of September 27, 2021. On April 17, 2020, ChromaDex served infringement contentions. Elysium filed a Second Amended Answer on July 10, 2020. On April 24, 2020, ChromaDex moved for leave to amend the complaint to add Healthspan Research, LLC as a plaintiff. On May 5, 2020, Elysium filed its opposition to ChromaDex’s motion for leave to amend and moved to dismiss ChromaDex for alleged lack of standing. ChromaDex filed its opposition to Elysium’s motion to dismiss and reply in support of its motion to amend on May 19, 2020. Elysium filed its reply in support of its motion to dismiss on May 26, 2020. The Court held a hearing on the motion for leave to amend the complaint and Elysium’s motion to dismiss on September 16, 2020. On December 15, 2020, the Court entered orders (i) granting in part and denying in part Elysium’s motion to dismiss ChromaDex for alleged lack of standing; and (ii) denying ChromaDex’s motion for leave to amend. ChromaDex filed a motion for reargument on December 29, 2020. Elysium filed a response to the motion for reargument on January 28, 2021. ChromaDex filed a motion for leave to file a reply on February 8, 2021. Elysium filed a response to the motion for leave to file a reply on February 12, 2021. ChromaDex filed a reply to the motion for leave to file a reply on February 19, 2021. The Court granted the motion for leave to file the reply on April 26, 2021, and denied the motion for reargument on April 27, 2021. On July 22, 2020 the parties filed a Joint Claim Construction Chart and respective motions for claim construction. The parties filed a Joint Claim Construction Brief on November 5, 2020. The Court held a Markman hearing on claim-construction issues on December 17, 2020. The Court entered a claim-construction ruling on January 5, 2021. Fact discovery closed on January 26, 2021. Opening expert reports were served on February 9, 2021. Responsive expert reports were served on March 9, 2021. Reply expert reports were served on March 30, 2021. Both parties filed dispositive and Daubert motions on April 27, 2021. On September 21, 2021, the Court granted Elysium’s motion for summary judgment that the claims of the ‘807 and ‘086 patents are invalid based on patent-ineligible subject matter. ChromaDex filed a notice of appeal on November 2, 2021. ChromaDex’s opening brief was filed on February 2, 2022. Elysium’s response brief was filed on April 11, 2022. ChromaDex’s reply brief was filed on May 9, 2022. Oral argument has been scheduled for December 6, 2022. If the appeal is unsuccessful, or, if on remand the Court dismisses ChromaDex’s claims for some other reason, it will impact any competitive advantage the Company may otherwise have had. 2. Thorne Research, Inc . (A) Inter Partes Review Proceedings On or around September 28, 2020, Thorne Research, Inc. (Thorne) provided notice to ChromaDex that it intended to terminate its March 25, 2019 Supply Agreement and subsequent amendments with ChromaDex, effective as of December 31, 2020. A discussion between ChromaDex and Thorne followed, and Thorne asserted that it could challenge the ‘086 Patent in an inter partes review (IPR) proceeding on the basis of prior art, but would be willing to enter into a mutual existence agreement that would permit Thorne to source NR from a third party. Thorne did not offer substantive information supporting a prior art claim or about the nature of the threatened IPR. On December 1, 2020, Thorne filed a petition for IPR of the ‘086 Patent. Dartmouth’s preliminary response to the petition was filed on March 15, 2021. On June 10, 2021, the Patent Trial and Appeal Board (PTAB) issued a decision instituting an IPR on the ‘086 Patent. On September 21, 2021, Dartmouth filed its Patent Owner Response. On December 21, 2021, Thorne filed its reply. Oral argument was held on March 15, 2022. On May 31, 2022, the PTAB issued a final written decision holding that the challenged claim was unpatentable. On August 2, 2022, Dartmouth filed a notice of appeal. On February 1, 2021, Thorne filed a petition for IPR of the ‘807 Patent. Dartmouth’s preliminary response to the petition was filed on May 18, 2021. On August 12, 2021, the Patent Trial and Appeal Board (PTAB) issued a decision instituting an IPR on the ‘807 Patent. On November 9, 2021, Dartmouth filed its Patent Owner Response. On February 15, 2022, Thorne filed its reply. Oral argument was held on May 17, 2022. On August 10, 2022, the PTAB issued a final written decision holding that the challenged claims were not unpatentable. On October 12, 2022, Thorne filed a notice of appeal. 22 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements (B) Southern District of New York – Patent Infringement Action On May 12, 2021, ChromaDex and Trustees of Dartmouth College filed a patent infringement complaint in the United States District Court for the Southern District of New York. The complaint alleges that certain of Thorne’s dietary supplements containing isolated NR infringe the ‘807 and ‘086 Patents, which claim compositions containing isolated nicotinamide riboside and are held by Dartmouth and licensed exclusively to ChromaDex. On July 6, 2021, Thorne filed an answer and counterclaims to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief. The counterclaims seek declaratory judgment of patent invalidity for the ‘807 and ‘086 Patents. On July 8, 2021, the parties filed a proposed stipulation and order staying the matter pending issuance of the institution decision in the ‘807 Patent IPR. On July 9, 2021, the Court granted the stipulation and order to stay. On August 19, 2021, the parties filed a proposed stipulation and order staying the matter pending issuance of final written decisions in the IPRs. On August 20, 2021, the Court granted the stipulation and order to stay. On August 24, 2022, the parties filed a status report agreeing to continue to stay until fourteen days after the deadline to appeal the final written notice decision in the ‘807 Patent IPR. On October 26, 2022, the parties filed a further status report agreeing to continue the stay through resolution of the appeals. 3. Erica Martinez (A) California Action On October 1, 2021, Erica Martinez, a former employee of ChromaDex, filed a complaint in the Orange County Superior Court alleging claims against ChromaDex for: (1) disability discrimination, (2) failure to accommodate a disability, (3) failure to engage in the interactive process, (4) retaliation for taking California Family Rights Act leave, and (5) failure to prevent discrimination and harassment. Martinez’s allegations are based primarily upon Martinez’s claim that her son was allegedly diagnosed with Autism Spectrum Disorder in or around July 17, 2019, and ChromaDex allegedly retaliated against, and ultimately terminated, her for taking time off to care for her son and attend his doctors’ appointments. ChromaDex has not been served with the Summons and Complaint. The parties have settled this matter and the request for dismissal, with prejudice, of Martinez’s claims was entered on January 25, 2022. The resolution of such matter was not material to the Company. 4. Lynda Power (A) Florida Action On April 18, 2022, Lynda Power, a citizen of the state of Florida, filed a complaint in the United States District Court for the Middle District of Florida, Orlando Division alleging claims against the Company for (1) product liability (2) personal injury (3) strict liability and (4) negligence. Power's allegations are based primarily upon Power's claim that she suffered an adverse event after consuming the Company’s products. On April 26, 2022, the Court ordered Power to serve an amended complaint due to the failure to properly plead subject matter jurisdiction. On May 6, 2022, Power filed an amended complaint. On May 11, 2022, the Court issued another order that Power had not properly pleaded subject matter jurisdiction. On May 23, 2022, Power filed a second amended complaint. On August 2, 2022, the Magistrate Judge issued a Report and Recommendation on Power’s motion to proceed in forma pauperis , which included an analysis of the second amended complaint. The Report and Recommendation recommended that the Court (i) deny the motion to proceed in forma pauperis , (ii) dismiss the second amended complaint with prejudice, and (iii) direct the Clerk of the Court to close the file. On August 2, 2022, Power filed an objection to the Report and Recommendation. On September 20, 2022, the Court (i) dismissed the complaint without prejudice, but without leave to amend (ii) denied the motion to proceed in forma pauperis , and (iii) directed the Clerk of the Court to close the file. On October 11, 2022, Power filed a motion to extend the time to object to the Report and Recommendation. On October 28, 2022, the Court denied the motion to extend. As of November 2, 2022, the Company has not been served with the complaint. The Company believes these claims are without merit, will aggressively defend itself, and does not anticipate that the ultimate resolution of this matter will be material to the Company’s operations, financial condition, or cash flows. 23 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements 5. Other (A) Rejuvenation Therapeutics On September 15, 2020, the Company received a letter from a customer, Rejuvenation Therapeutics Corp. (Rejuvenation), and has received subsequent correspondence, requesting a full refund of approximately $ 1.6 million of Niagen® it purchased, alleging breaches of the supply agreement between the parties. On May 13, 2021, Rejuvenation filed a complaint in the Superior Court of the State of California, County of Orange, asserting causes of action for Concealment and Negligent Misrepresentation. On July 20, 2021, Rejuvenation filed an amended complaint adding a claim for Declaratory Relief. The Company filed a demurrer on September 3, 2021. On February 1, 2022, the Court sustained ChromaDex’s demurrer in its entirety with leave to amend as to the claims for Concealment and Negligent Misrepresentation, and without leave to amend as to the claim for Declaratory Relief. On February 16, 2022, Rejuvenation filed a Second Amended Complaint, asserting causes of action for Fraud and Negligent Misrepresentation. On May 16, 2022, ChromaDex filed a demurrer to the Second Amended Complaint. On June 23, 2022, Rejuvenation filed for a motion for leave to file a third amended complaint. On October 21, 2022, the parties reached a settlement on confidential terms and the resolution was not material to the Company. 6. Contingencies (A) In September 2019, the Company received a letter from a licensor stating that the Company owed the licensor $ 1.6 million plus interest for sublicense fees as a result of the Company entering into a supply agreement with a customer. After reviewing the relevant facts and circumstances, the Company believes that the Company does not owe any sublicense fees to the licensor and has corresponded with the licensor to resolve the matter. The Company does not believe that the ultimate resolution of this matter will be material to the Company’s results of operations, financial condition or cash flows. (B) On November 17, 2020, the Company received a warning letter (the Letter) from the United States Food and Drug Administration (FDA) and Federal Trade Commission (FTC). The Letter references statements issued by the Company relating to preclinical and clinical research results involving nicotinamide riboside and COVID-19. The statements were included in press releases and referenced in social media posts. On November 18, 2020, the Company provided a response to the Letter stating that the Company disagrees with the assertion in the Letter that the Company’s products are intended to mitigate, prevent, treat, diagnose or cure COVID-19 in violation of certain sections of the Federal Food, Drug, and Cosmetic Act or that they were unsubstantiated under the FTC Act, but rather accurately reflected the state of the science and the results of scientific research. Nonetheless, the Company also responded that it had deleted social media references to the studies and removed related press releases from its website. On April 30, 2021, the Company received an additional warning letter (the Second Letter) from only the FTC. The Second Letter references the original Letter, and cites additional statements issued by the Company and certain officers and advisors of the Company relating to nicotinamide riboside and scientific studies related to COVID-19. The Second Letter asserts that such statements contain coronavirus-related prevention or treatment claims and are deceptive in violation of the Federal Trade Commission Act. On May 4, 2021, the Company provided a response to the Second Letter stating that it had removed the social posts from its accounts identified in the Second Letter and requested that third parties remove the post from their accounts that were identified in the Second Letter. The Company stated that the press release identified in the Second Letter is appropriate and not a deceptive act or practice under applicable law. The Company affirmed its belief in the need to accurately report on the scientific results of its studies to its investors and welcomed the opportunity to discuss its research and development program with the FTC and receive guidance on future releases. The Company does not believe that the ultimate resolution of this matter will be material to the Company’s results of operations, financial condition or cash flows. 24 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 11. Employee Retention Tax Credit In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (ERTC): a refundable tax credit against certain employment taxes for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. During the third quarter of 2022, the Company evaluated its eligibility for the ERTC and is eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to fifty percent (50%) of the qualified wages paid to employees between March 27, 2020 and December 31, 2020 and seventy percent (70%) of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. For fiscal year 2020, qualified wages are limited to $10,000 annually per employee for a maximum allowable ERTC per employee of $5,000 annually and qualified wages are limited to $10,000 per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 for each calendar quarter in 2021. The Company qualified for the ERTC in the last three quarters of 2020 and all three quarters of 2021 and filed a claim for the credit in August 2022. During the quarter ended September 30, 2022, the Company recorded an aggregate benefit of approximately $ 2.1 million in Other income, net - Employee Retention Tax Credit in its Unaudited Condensed Consolidated Statements of Operations to reflect the ERTC for all eligible quarters. The receivable for the ERTC benefit is included within Prepaid expenses and other current assets on the Company’s Unaudited Condensed Consolidated Balance Sheets at September 30, 2022. 25 ChromaDex Corporation and Subsidiaries Notes to the Unaudited Condensed Consolidated Financial Statements Note 12. Subsequent Events Securities Purchase Agreement and Registration Rights Agreement - Related Parties On September 30, 2022, the Company entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which the Company agreed to sell and issue approximately 2.5 million shares of common stock at a price of $ 1.25 per share (the “Financing”). Champion is indirectly owned by Li Ka-Shing and Pioneer Step is indirectly owned by Solina Chau, and each of Mr. Ka-Shing and Ms. Chau own through affiliated entities more than 5 % of the Company’s common stock. Pursuant to previous agreements, each of Pioneer Step and Champion have appointed a member of the Company’s Board. Mr. Fried is the Company’s Chief Executive Officer. The transaction and related agreements were approved by the Audit Committee of the Board in accordance with the Company’s Related-Persons Transaction Policy. On October 7, 2022, the Company closed the Financing and received proceeds of approximately $ 2.9 million, net of offering costs of $ 0.2 million. In connection with the Financing, on September 30, 2022, the Company also entered into a Registration Rights Agreement with the Purchasers (the “Registration Rights Agreement”), pursuant to which the Company agreed to (i) file one or more registration statements with the SEC to cover the resale of the shares of Common Stock issued to the Purchasers, (ii) use reasonable best efforts to have all such registration statements declared effective within the timeframes set forth in the Registration Rights Agreement, and (iii) use commercially reasonable efforts to keep such registration statements effective during the timeframes set forth in the Registration Rights Agreement. In the event that such registration statements are not filed or declared effective within the timeframes set forth in the Registration Rights Agreement, any such effective registration statements subsequently become unavailable, or the Purchasers are unable to sell the shares of Common Stock issued pursuant to the Financing due to failure by the Company to satisfy the current public information requirement of Rule 144 under the Securities Act, the Company would be required to pay liquidated damages to the Purchasers equal to 1.0% of the aggregate purchase price per month for each default (up to a maximum of 5.0% of such aggregate purchase price). NHSc Agreement On October 10, 2022, the Company and Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as successor-in-interest to NESTEC Ltd., entered into an amended and restated supply agreement (the “Supply Agreement”), which amends and restates the supply agreement, dated December 19, 2018, entered into by the Company and NESTEC Ltd. Pursuant to the Supply Agreement, NHSc and its affiliates will exclusively purchase nicotinamide riboside chloride (NRCL) from the Company and NHSc and its affiliates will have the non-exclusive right to manufacture, market, distribute, and sell products using NRCL for human use in the (i) medical nutritional, (ii) functional food and beverage and (iii) multi-ingredient dietary supplements categories sold under one of the NHSc brands (the “Approved Products”) world-wide, but excluding certain countries and ingredient combinations. The term of the Supply Agreement is five years , unless earlier terminated, and is subject to automatic extensions provided certain minimum purchases by NHSc are met. As consideration for the rights granted to NHSc under the Supply Agreement, NHSc agreed to an initial purchase commitment of NRCL equal to approximately $ 2.0 million. The Supply Agreement additionally provides for NHSc to pay a royalty to the Company at tiered percentage rates in the low-single digits based on worldwide annual net sales of the Approved Products, subject to certain deductions. Furthermore, the Supply Agreement provides for NHSc to pay the Company two separate one-time milestone payments in the low seven figures depending on whether NHSc achieves certain net sales targets in any contract year. In connection with the entry into the Supply Agreement, the Company entered into a Securities Purchase Agreement with NHSc, pursuant to which NHSc agreed to purchase 3.8 million shares of common stock at a price of $ 1.31 which is equal to the volume weighted average price of the Company’s common stock for the ten trading days preceding October 10, 2022 (the “Securities Purchase Agreement”). On October 17, 2022, the Company closed the Securities Purchase Agreement and received proceeds of approximately $ 4.8 million , net of offering costs of $ 0.2 million. 26