Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's Second Quarter 2018 Earnings Conference Call. My name is Kevin, and I will be your conference operator today. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. This afternoon, ChromaDex issued a news release announcing the company's financial results for the second quarter 2018. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's Web site at www.chromadex.com. I would now like to turn the conference call over to Andrew Johnson, Director of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, and welcome to ChromaDex Corporations' second quarter 2018 results investor call. With us today are ChromaDex's Founder and Executive Chairman, Frank Jaksch; Chief Executive Officer, Rob Fried; and Chief Financial Officer, Kevin Farr. Today's conference call may include forward-looking statements, including statements related to ChromaDex's research and development and clinical trial plans, and the timing and results of such clinical trials, the timing of future regulatory filings, the expansion of the sales of TRU NIAGEN in new markets, plans to add to the management team, future financial results, business development opportunities, future cash needs, ChromaDex's operating performance in the future, future investor interest, and clinical trial studies that are subject to risks and uncertainties relating to ChromaDex's future business prospects and opportunities, as well as anticipated results of operations. Forward-looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurances as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties, many factors could cause ChromaDex's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These risk factors include those contained in ChromaDex's Annual Report on Form 10-K and Form 10-Q, most recently filed with the SEC. Please note, that the company assumes no obligation to update any forward-looking statements after the date of this conference call to confirm with the forward-looking statements, actual results or changes to its expectations. In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company's earnings release, which was issued this afternoon and is available on the company's Web site, presents reconciliations to the appropriate GAAP measures, and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our Web site at www.chromadex.com. With that, it is now my pleasure to turn over the call to Executive Chairman, Frank Jaksch.

Thank you, Andrew. Good afternoon, everyone, and thank you for joining our second quarter 2018 investor call. During the call, we will discuss how to science surrounding NIAGEN and the importance of NAD to aging in human health continue to expand, and review the growth of our sales of TRU NIAGEN. Rob and Kevin will take you through the details of this strong growth, but first I will provide you an update on the continued expansion of the scientific research into the benefits of NIAGEN. During the second quarter, the number of human studies on NIAGEN posted on clinicaltrials.gov has grown to a total of 22. The additional human studies are investigating NIAGEN's role in some very exciting new areas of human health. The University of Copenhagen published the results of the clinical trial that once again confirms NIAGEN safely increases NAD levels at the highest dose thus far published. This is the fourth published clinical study of NR and the results of this study corroborate previous findings that not only does NR effectively raise NAD levels in humans without adverse effects, but more importantly it showed that potential for improvement in liver health. The authors conducted a 12-week randomized double-blind placebo-controlled parallel group clinical trial in 40 middle-aged obese men taking 2 grams daily of NIAGEN. They observed that men taking NR had an average of 2% absolute reduction in liver fat content compared to a .2% absolute reduction in the placebo group. The authors also looked at the subset of men who started the trial with greater than 5% liver fat and they found that there was a trend that 69% of these men experienced a reduction in liver fat after 12 weeks of NIAGEN compared to only 39% of men taking the placebo. We finished the quarter…

Thank you, Frank. Our mission at ChromaDex is to be the most trusted science-based dietary supplement company in the world, with a focus on TRU NIAGEN and its impact on cellular energy and cellular repair. As Frank said, there's a large and rapidly growing body of scientific evidence that underscores the importance of NIAGEN. What is apparent after much research by dozens of institutions, looking at a wide range of health conditions is that NAD is essential to human health and that NIAGEN is effective in the production of NAD. Research has shown that when cardio cells, hearing cells, brain cells and neurons are in distress, they actually open a pathway called the NR kinase pathway, nicotinamide riboside kinase pathway to try to increase levels of NAD. This pathway is the discovery of Dr. Charles Brenner our Chief Scientific Advisor and is the essence of two of the important patents controlled by ChromaDex. In other words, cells in distress, the kind of distress that comes from illness, general aging, trauma, lack of sleep, excess alcohol, sun exposure, poor diet etcetera, cells in distress look for help and they actively seek nicotinamide riboside. We've already shown that NIAGEN is important for increased cellular energy. But this is also a story of cellular repair, specifically helping cells to repair themselves. This is why we say TRU NIAGEN can help us age better. Aging is the accumulation of damage, but it is also the diminished ability to repair that damage and TRU NIAGEN can help. Now let's turn to a review of how the business is performing. In the second quarter, net sales were up 85% with NIAGEN related revenue accounting for 73% of our total revenue and TRU NIAGEN accounting for 66% of NIAGEN related revenue. TRU NIAGEN accounted for 48% of…

Thank you, Rob. Let's look at our financial results for the second quarter of 2018. For the three months ended June 30, 2018, ChromaDex reported net sales of $7.8 million, up 85% compared to $4.2 million from continuing operations in the second quarter of 2017. The increase in the second quarter was driven by the growth in sales of TRU NIAGEN. For the second quarter, NIAGEN related revenues were $5.7 million, up 168% compared to 2017, which represented 73% of second quarter sales as compared to 50% in the second quarter of 2017. TRU NIAGEN sales were 60% of NIAGEN related revenues in the second quarter of this year compared to just 7% in the prior year. Gross profits for the second quarter grew by 82% compared to last year. Gross margins remained relatively flat at 49.3% for the second quarter compared to 50% for the prior period. In 2018, we elected to account for shipping and handling activities as cost of sales and that is sales adjustments. The impact of the selection on the second quarter was approximately $0.4 million, which had a negative impact of 290 basis points on our gross margin rate. Excluding the impact of elected to account for shipping and handling activities as cost of sales, we experienced better gross margins due to positive impact of TRU NIAGEN sales, which we anticipate will continue. For the balance of the year, we expected gross margin rate including the impact of shipping and handling activities to improve versus the prior quarters and to exceed 50% of net sales. Our operating expenses for the second quarter were up $7 million to $11.8 million as compared to the prior period of $4.8 million from continuing operations. Consistent with our expectations, we made incremental investments in sales and marketing expenditures,…

[Operator Instructions] Our first question comes from Jeffrey Cohen with Ladenburg Thalmann.

Hi, guys. Can you hear me okay?

Yes.

Perfect. So firstly, can you go back through those numbers, I know that Rob ran through them the first time and then Kevin followed up with them as far as what was after the annual percent on the top line when you alluded to the 5.7 NIAGEN and as a percentage TRU NIAGEN and then there is another number there as well.

Yes, let me go ahead and give those to you. I think returns of the investment there, fits to we sent to you and turn -- can you turn to Page 10, that we said the sales were up 85% to $7.8 million, TRU NIAGEN was basically 60% of NIAGEN related sales. And NIAGEN related sales grew 168% compared to Q2. And NIAGEN related sales in Q2, 2018 were 73% of total sales whereas last year it was 50% [technical difficulty] 2017.

Okay, perfect. So should we infer from that there were no longer going to see revenue breakout by ingredients consumer products, core standards and our scientific and regulatory consultant?

No, I don’t think so. I think within the deck that is broken out on Page 9, with regard to net sales. That gives you both information for 2016, '17 and for the first and second quarter of 2018.

Okay. So you will have no change in that going forward, in the short-term at least?

At this point, no, I don’t see any change.

Okay, perfect. And then could you talk a little bit about the shipping and its relation to the margins. You talked about -- so you’re including the shipping and the net effect was 290 basis points or $4 million for the quarter?

That is correct. So we made the election last year to treat shipping cost as a cost of goods sold. And in the quarter, if you exclude that, that essentially our gross margin rate was negatively impacted by 290 basis points. So if you add that to the 49.3, it actually was higher than last year which was at 50%. And I think I’ve said in the call, in my prepared remarks that as we look at the balance of the year and we include net shipping in cost of goods sold, we should see year-over-year increase in gross margins in each of the next two quarters as well as it should be above 50%, which is very consistent with if you take out the 290 basis points and add it back, it's above 50% this quarter substantially, obviously.

Okay, yes. Okay. So a bit better than we thought. And then, Rob or Kevin, can you walk through kind of the general process as far as the G&A? And you did go through the ramifications of what it was this quarter as far as your stock compensation expense, legal expense, and maybe give us a little bit of color on how that looks for the back half, if it's coming off in a pronounced fashion or not, or it's going to be level and give us a little more color on at least currently what you're expecting on the legal expense and stock-based compensation for Q3 and Q4, if you could.

Okay. Well, I’m going to comment on the quarter with regard to what occurred in the quarter. It was $1.8 million of equity based compensation. Total legal costs were about $2.1 million and if you exclude legal cost and incentive comp related to equity from both years that we tightly managed G&A, that was up by about $1.5 million, which is very similar to what it was in the first quarter. It's hard to predict the legal expenses, so I can't really give you direction there. Although we’re trying to tightly manage that, proactively. And second, I think for the full-year, you can expect the equity compensation to be $6 million to $7 million and that will occur through the balance of the year and it shouldn’t be too much different than the $1.8 million that we’ve expense this quarter.

Okay. That seems clear. And Rob, your commentary is probably, call it, six quarters away approximately at which point you believe that the firm will be throwing off cash, cash flow process and let's say end of '19.

I believe so. We’re shortly thereafter.

Okay. And in a general sense as far as how you’re thinking about that and as it relates to the top line, is it kind of safe to say that’s approximately a top line on a quarterly basis of about 50% to 55% higher than [indiscernible] they’re?

We are not going to get into projections, but I think what’s going to drive us to cash flow positive is continued strong growth of TRU NIAGEN, more efficient marketing expenditures that we get more efficiency from it. We will benefit from the fact that our fixed costs, we’re going to tightly manage those fixed costs and actually try to reduce it, so we will get more scale. And then we continue to look at cost savings programs, I talked a little about that in my prepared remarks. We are going through our cost structure and looking for opportunities to reduce spending overall. We are also looking to reallocate expenses to drive sales of NIAGEN. And finally we talk a little bit about this phase, more focused spending in R&D are areas that we are looking at. We have identified specific cost savings programs for the balance of 2018 and those initiatives have been implemented or in the process of being implemented. And then there is an ongoing effort for the balance of 2018 to look for more cost savings as well as continuing to look near-term for 2019 and beyond for additional savings. So I think those are going to be the key drivers to get to cash flow positive by the fourth quarter of 2019 or shortly thereafter.

Okay, got it. And then lastly, what should we expect in the public domain to hear about on the legal front as far as what you are -- you may believe may happen or occur in the coming six months or anything in particular that we should look for as far as dates or any specific documentation?

There's a decision scheduled to come out of New York, but we don't -- we’ve been waiting for that for months. It could come at any time. There's motions that we’re awaiting from there, but we don't have anything right now that we're certain is going to come out in the next few months.

Okay, perfect. Okay, guys. Thanks for taking the questions.

Thank you.

Our next question comes from Ram Selvaraju with H.C. Wainwright.

Hi. Thank you for taking the questions. So when might TRU NIAGEN be rolled out across the entire range of Watsons stores in Asia? By the way, this is Karthik on for Ram.

The issue there has to do with regulatory approvals in each individual country. So we are working very hard to get approval of nicotinamide riboside to be sold as a supplement in many countries presently and we are also working to get approval of marketing materials, health claims that could be made in those countries. And until you get both, you can't sell directly into the country, certainly not in stores. In some cases, you can sell cross-border, Internet sales into those countries and we are exploring those opportunities as we speak.

Great. And regarding Watsons what specific promotional activities are being conducted to spur uptake of the product?

Well, Watsons as you know has done an excellent job of promoting TRU NIAGEN in Hong Kong and their sales have been extremely successful. Their campaign has been a combination of promotional campaigns, there's has been a lot of outdoor advertising, there's has been press, there's has been a fair amount of online campaigns and a lot of in-store promotional campaigns. They also did a tie-in with one local celebrity endorser. And we are aware of many plans that they are developing over the next month to continue to promote the sales of TRU NIAGEN.

Okay. Thanks. And I know, Frank, spoke about the studies revolving around liver health earlier in the call, but could you provide more color on some more probable initiatives in the near-term that will study nicotinamide riboside in the context of liver health?

Well, there are additional studies that are looking at liver health. Liver health is definitely one of the areas of interest right now, fatty liver, in particular. And you'll see that if you check out the postings that are listed on clinical trials.gov, kidney health is another one that you'll start to notice an area of interest, just two studies now that are focused on kidney. So liver and kidney right now are two of those, but there's quite a few other areas. Heart health has been one of their earliest ones where you are starting to see issues, I mean, or studies that were posting and a lot of those studies were kind of further along. And fatty liver, I think is definitely one of the areas that is of interest and the read that we’ve got out of the Copenhagen study I think is going to provide more fuel for additional studies that are going to focus or look at that target as well.

All right. Perfect. Thank you so much and best of luck moving forward.

Thank you.

Thanks, Ram.

[Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital.

A couple of questions here and the first one is relative to your marketing efficiency. You mentioned that it improved in the second quarter. I was hoping you could detail why you felt that it happened and what more you can do on that front?

Well the vast majority of the marketing that we have done has been Internet digital-based marketing. And generally speaking, when you do that, you begin a campaign or a series of campaigns by prospecting large swaps reaching out to large groups of people in order to get interest at the very top of the funnel. And then what you do is you work to convert those prospected potential, customers. So we have done that and there is a large number of people who are interested and who are visiting our site and learning more about TRU NIAGEN. And what we have been doing lately is converting them, and we’ve been very successful. All of the underlying metrics have improved, things like conversion rate and acquisition costs etcetera. Now we may launch other campaigns in the future that are brand based or prospecting campaigns that cast an even wider net. And if we do that, we'd expect that our relationship between marketing spend and revenue might go up a bit during that period. But always it is always in an accretive type of investment system. In other words, you set the net and then you expect to convert and what we have seen is over a period of time our conversion metrics have gotten better and better and better and better with each program. At some point, we may contemplate doing offline advertising that you'd see much more of in traditional media, television or radio or magazines. We haven't really done that yet, but we expect to add some point in time. And again, that would be casting a very wide net, but then we would be working shortly thereafter to convert those prospect of customers.

That’s helpful, Rob. Thank you. And then relative to Watsons, what was the sell-through in the quarter?

Yes, I think if you look to the sell-through in the quarter from the perspective of where it was versus the -- our average amount of bottles that we sell, it was up double digits in the quarter, in the second quarter sequentially versus the first quarter.

That’s helpful. Thank you, Kevin. And what was the amount relative to the 200,000 plus of sell-in?

It would be much more than that. So, yes, I mean -- I think we've seen reorders to be slower, but I think overall for the 2018 it is we're seeing really good sell-through.

Great. Congratulations. And then lastly, you had mentioned that Singapore and Taiwan both requiring regulatory approval. What more needs to be done on that front or is it simply a waiting game at this point?

In the case of -- well they’re different in each one of those countries. Singapore, its mostly a marketing materials related and that's more of a waiting game. And Taiwan, its -- regulatory thresholds in Taiwan are slightly unique and we think we're okay and we think we should be getting that approval relatively soon. But it's further away in the process than in Singapore. We still need in Taiwan to get nicotinamide riboside approved as a supplement. In Singapore, we are at the marketing material stage.

Great. Thank you. And do we have time for me to ask a couple more questions or shall I step back into queue now?

No, you can ask a couple more.

Great. Thank you. So relative to Turkey, why was that the next spot that you chose to go with Watsons? What are the dynamics of that market?

There are a number of factors. One is that we believed that Turkey would be easier to get regulatory approvals. So -- and second is that Watsons was -- had stores in Turkey and wanted to expand into Turkey. So even though Turkey itself may not be as larger market as some others, relative ease of entry and Watsons interest in exploiting that territory were the reasons why we went there next. You know there are a number of countries that we are pursuing right now, it's hard to know any -- on any given day which one is going to notify us and say you’re good. We got that phone call from Turkey a little earlier than others.

So you have the regulatory approval now then?

Preliminarily. There are some technical details still to be worked out. But obviously, we got to the point where we were comfortable enough to say it.

Great. That is helpful. And then how did you chose New Zealand and I guess relative to your partner there, what other countries or locations that they have [indiscernible] natural extension for you to continue on [technical difficulty] with them?

No, we’re only interested in them for New Zealand. We thought New Zealand was interesting for a number of reasons. One is, again, like Turkey we were able to get regulatory approval there and be able to sell in. And we happen to have a relationship with this company, which is an excellent company in New Zealand and one that we thought would be good to do business in. But third, we see New Zealand as an excellent opportunity to learn. That is a neighboring country to Australia which is a very, very important country. 90% of the Australian population purchases some sort of a vitamin, consumer vitamin every day. We thought New Zealand would be an interesting place for us to learn and test that market and see how it goes from there.

Great. Thank you all for the time. I appreciate it.

Sure.

Thank you. That concludes the …

Yes, go ahead.

Thank you. That concludes the Q&A session today. I would like to hand the call back over to Andrew Johnson for closing.

Thank you, operator. As a reminder, there will be a replay of this call via webcast. The webcast link can be found on our Investor Relations section of our Web site at www.chromadex.com. Thank you everyone for participating on today's call. Have a great day.

Ladies and gentlemen, that conclude today's presentation. You may now disconnect and have a wonderful day.