Thank you for standing by, and welcome to ChromaDex Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Brianna Gerber, Vice President of FP&A and Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to ChromaDex Corporation's third quarter 2019 results investor call. With us today are ChromaDex's Chief Executive Officer, Rob Fried; Founder and Executive Chairman, Frank Jaksch; and Chief Financial Officer, Kevin Farr. Today's conference 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 trials, the timing of future regulatory filings, the expansion of the sale of TRU NIAGEN in new markets, 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 operation. Forward-looking statements represent only the company's estimates on the date of this conference call, and are not intended to give any assurance 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 quarterly report on 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 conform with the forward-looking statements, actual results or to changes in its expectations. In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company's earnings presentation and earnings press release, which were issued this afternoon and are available on the company's website, present reconciliations to the appropriate GAAP measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relation section of our website at www.chromadex.com. With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

Thank you, Brianna. Good afternoon everyone and thank you for joining our third quarter 2019 investor call. We had another strong quarter with total net sales of $12.1 million. Overall sales increased sequentially by 9% and 48% year-over-year. We again improved the gross margin and again improved our marketing efficiency and we expanded our global footprint. The science of TRU NIAGEN and NAD continued to support the thesis that this is a very special molecule. We remain focused on the three pillars of our business strategy: one to build the global brand, two to own the science and three to focus on the fundamentals. Let's start with the brand. TRU NIAGEN net sales were $9.7 million, an 11% increase sequentially and an 86% increase year-over-year, representing 81% of the $12.1 million net sales in the quarter. E-commerce net sales were $7.1 million, a 9% increase sequentially and a 61% increase year-over-year. Our TRU NIAGEN business is becoming increasingly global with approximately 30% of net sales from international markets in the third quarter. International growth was driven by strong sales from Watsons in Hong Kong and by cross-border sales in China and Japan and by sales with our partners in New Zealand and in Canada. Sales to Watsons were $2.3 million in the third quarter, representing an 18% increase over the previous quarter. To date we have not seen a material impact on point of sale due to the ongoing protests in Hong Kong, but overall tourism is down and the situation remains fluid. In Singapore, we're excited about continuing to educate these very sophisticated consumers about the health benefits of TRU NIAGEN. We still have not unlocked the full potential of this market, but we are confident that we will. As you know, we currently sell cross-border in China on…

Thank you, Rob. As Rob stated, one of our core objectives is to own the science and we are committed to remaining a leader in NR and NAD research. We continue to build upon and protect our intellectual property and invest in quality research partnering with the world's leading scientists. There are 36 ongoing, completed and published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and therapeutic effects of NR. This is four more than our last update. An additional seven clinical trials are registered to test NR in combination with other ingredients for a total of 43. We finished the quarter with more than 175 signed research collaborations, up slightly compared to last quarter. I've previously discussed the nine hallmarks of aging, which are generating a tremendous interest among the scientific as well as investment community. Steve Horvath of UCLA developed a method to measure a person's metabolic age based on methylation which changes how genes are expressed without altering DNA. In a year long study, Horvath and a group of researchers treated nine healthy volunteers with a cocktail of growth hormone, metformin and a steroid. They found that the participants on average shed 2.5 years off their biological ages, which is a measurement measured by analyzing the methyl marks on their genomes, while it was a very small study, it is getting a lot of attention given that the potential implications in the science of aging. While we continue to follow the science around aging closely, we remain focused on NR and other NAD Precursors. A highlight, four recently published preclinical studies on NR and one on another NAD Precursors NRH. First, as Rob highlighted a new preclinical study by Nestlé researcher led by Dr. Carlos Cantó was published in Nature Communications in September. Instead of…

Thank you. Let's look at our financial results for the third quarter of 2019, which reflect continued progress against our key financial objectives on both the sequential and year-over-year basis. During the quarter, we continue to deliver strong top-line growth and gross margins, significant improvements in advertising efficiency year-over-year and controlled growth in G&A. Overall, our underlying business performance is measured by adjusted EBITDA excluding legal expenses was in-line with our expectations and reflected substantial progress year-over-year. During the quarter, we strengthen our balance sheet with a $7 million capital raise. In November we also executed $7 million committed line of credit to help manage working capital investments. For the three months ended September 30, 2019 ChromaDex reported net sales of $12.1 million, up 9% compared to $11.1 million in the second quarter of 2019. Year-over-year sales were up 48% compared to the third quarter of 2018. TRU NIAGEN net sales were up 11% and grew by 86% year-over-year with diversified growth across U.S. e-commerce, Watsons and international cross-border launches. Turning to the rest of the P&L, our gross margin was down 30 basis points to 56.3% in the second quarter of 2019 to 56% in the third quarter of 2019. We sold ingredient to Nestlé in the second quarter, which resulted in the recognition of revenue really to the $4 million upfront payments. In the third quarter we did not have any sales to Nestlé. Excluding the impact to Nestlé’s revenue recognition gross margin would have been up slightly from the second quarter to the third quarter of 2019. Year-over-year gross margins increased by 230 basis points to 56% compared to the 53.7% in the third quarter of 2018. Increased TRU NIAGEN’s consumer product sales drove the improvement in gross margins, a trend which we will believe will continue.…

Thank you. [Operator Instructions] Your first question comes from Brian Nagel with Oppenheimer. Your line is open.

Hi, good afternoon. Congrats on your continued progress.

Thank you.

So a couple of questions I want to ask. First off, we mentioned again the EFSA issue. What's the – how should we think about the next steps in that process, now that you have that?

Well, the EFSA opinion is a recommendation for the EU commission. So the EU commission now has to enacted into legislation and we expect that to happen in the coming months. Every indication is that the vote will go through and it will be approved. In certain countries after that there needs to a registration of the product. In certain countries there does not need to be a registration of the product. So we're going to focus on those where there does not need to be a registration. And finally we need a partner in each country to work with. We're not going to be launching our own initiatives in these countries. We are going to look for partners in those countries. These are separate from the health claims as you saw in Hong Kong and Singapore, if you can make a strong health claim, you can help your marketing efforts. And we were not able to secure great health claims initially from Singapore. It's better now, but initially it wasn't strong and that impacted our marketing efforts. Same is the case in certain EU countries. So you have to go country-by-country to decide to figure out if you need a health claim approvals, if you need product registration and you find a partner. That's why there's work to be done even after the EU commission votes in favor of the ingredients.

Got it. Thank you. It’s very helpful. And then the second question I wanted to ask is there is more on the numbers. If we look here in the quarter, so year-on-year sales of TRU NIAGEN we're up 86%, which is obviously a very strong growth rate. So if you go back to Q1 that was a 146% and then Q2, 134%. The question I have is if you think about that trajectory, recognized 86% is still very healthy. What's changing from early this year to currently? Is that really a moderation or is it more just in – moderation to growth ratio, which should advantage more noise in the numbers?

Well, I think it’s a combination of things. I think one thing is just the law of smaller numbers and the numbers are getting bigger. The second thing is that we're improving our marketing efficiency. So we probably could easily achieve 146% year-over-year growth, but we're moderating our marketing expenditure. So we're keeping close track of customer acquisition cost and retention numbers to make sure we're not “buying the revenue”. So right now what we're seeing is very efficient marketing operation that the word is spreading, there's a greater level of interest in TRU NIAGEN and the conversion rates are improving quarter-to-quarter. So this is what we carefully monitor really on a daily basis.

Yes. There is a follow-up to that question, and I'll turn it over to someone else. But how should we think about, you mentioned that now or several times, the efficiency of this marketing is improving. Will there be a point at which then with more efficient marketing that you could actually increase the dollars in marketing spending and overall drive a more efficient sales growth at a higher level?

That's the idea.

Okay.

Your next question comes from Jeffrey Cohen with Ladenburg. Cohen, your line is open.

Sure. Hi, Rob, Frank and Kevin. How are you?

Hey.

Hey, Jeff.

A few questions for you. I think I heard you break-out the TRU NIAGEN for the quarter. Could you talk about the composition by geography or what percent of that maybe coming from outside the U.S. or call it a specific growth rates associated with Ex-U.S.?

Yes. With regard to the U.S. it's about 75% U.S. and the 25% is outside the U.S., which makes it a global brand.

Okay, perfect. Got it. And could you talk about, you mentioned in your documents, the higher royalties to current patent holders. Can you talk about that in a little more detail for us?

Can you ask that one more time, please?

The higher royalties to patent holders, you get that?

What's the question?

The question was with regard to higher royalties to patent holders, could you talk about that a little bit? Is that driven on volumes?

Yes. They got a percentage of sales.

All right.

And that royalty number is in the SG&A and it is a driver of SG&A year-over-year, and there are three drivers is legal, royalties and then some G&A.

Okay. Got it. And then lastly for me, could you talk about the legal expenses, looking forward if you could play out a couple of the trials and the timelines that you're hopeful for during 2020? Do you expect that to taper off in 2020, early 2020, mid 2020 or too early to call at this point?

So just to be clear, are you asking if we expect the legal expenditures to taper off or the trials to taper off?

Both, more importantly the expenditures.

Right. So as of now, we don't have a trial date. We don't have a trial date in LA and in New York or in Delaware. This is why the LA decision was disappointing to us because it impacted the Delaware trial date setting. All we really want to do is get to court – get to trial and have the facts come out. Because we are very confident that once people see all the facts, they will feel very good about the way ChromaDex has behaved as a company and not so good about our opponent in this case. But the good news about the delay on the trial is that we're spending a lot less money now. We did all of our prep, we expected an October 22nd trial date, it didn't happen, but we're locked and loaded. We're ready to go as soon as he gives us a date. We hope that date is soon, but there's really not nearly as much legal expenditure at this point in time, because we're waiting for the judges to give us a date, but when the dates happen, we're ready. We've done the work.

Perfect. Okay, that does it for me. Thank you very much.

Sure. Thank you.

Your next question comes from Mitch Pinheiro with Sturdivant. Your line is open.

Hey, good afternoon.

Hi.

Couple of questions here. First, just looking at the upcoming quarter is the Watson's revenue this quarter, was that a significant assumption in the quarter is that – so can we expect similar – I know it's lumpy, but can we expect similar type of revenue out of Watson's in the upcoming quarter?

Well, I think as Rob said, it's a fluid situation there, but I think if you look at the second and third quarters that's really been generated by consumer takeaway, and when you look at how TRU NIAGEN is doing now, it's still – it's still doing well. The retailer is from an inventory position in good shape. They're actually buying what's selling and I think effectively what the sales are going to be in the fourth quarter are going to be – how well is TRU NIAGEN doing with regards to sell through. And obviously there's big events as you get into the fourth quarter. There's 11/11 which occurred yesterday. There's 12/12 and then obviously they want to be ready for Chinese New Year in January. So I can't give you a projection but it's still going strong with regard to consumer takeaway and our sales in the fourth quarter will reflect with sell through.

Okay, great. Thanks for the color. How about – how about here in the U.S., [indiscernible] you get to the fourth quarter, a lot of the holiday noise, marketing, I know you're not selling necessarily holiday presence. But how do you – are you going to change any plans, any position of your spending? Can you talk a little bit about that?

Well, media costs in – during December and the end of November tend to be much higher. So we are monitoring that, although we see a continuing increased demand for TRU NIAGEN and an increasing percentage of our revenue comes from repeat orders. Our retention rate is strong and continues to be strong. We might adjust our media spend at the second half of the fourth quarter to adjust for the increased cost of media costs. But we won't know that until we get there and we see how the day-to-day costs play out.

Okay. And then when you are looking – speaking of retention rate is there – so it’s growing. How can you – is there any other way to quantify it?

We don't yet provide these numbers and I – we hope that we will soon. Things like retention rate and churn and customer acquisition cost and lifetime value. We haven't yet gotten to a point where we're providing that data to you, but we hope and plan to do so shortly.

Okay. Great. And then I guess, a final question is, you've done a very good job here on your cash burn and explaining how you're going to get to closer to break even. Does the new line of credit, I mean when I start to do the math the line of credit that will help of course on some of the negative cash burn, but are you still – are you looking at other, at potential financing just to take that off the table as far as needing cash – whether it's because of further litigation expense, although it sounds like that's less of a factor. But can you talk a little bit about that around some of the puts and takes from a cash perspective?

Sure, let me first cover that. Yes. So, we don't really have any concrete plans to raise additional capital. We're always opportunistic about that. And if there's a compelling investor that comes and brings some to us, it's good for all shareholders. We may do it. With regard do we have enough cash to get to cash flow breakeven? Yes. Based upon our current projections, we have enough cash to reach cash flow breakeven without accessing our $7 million committed line of credit. But legal spending is a variable in terms of timing and the amount of expense, which could change our cash needs. Our current plan is to drive lower cash burn in the short-term, including continued improvements in profitability of our underlying business, driven by higher sales and gross margins and better marketing efficiency. We also expect to achieve higher gross margins through efficiencies and supply chain with a recent transition in the third quarter to 300 milligram one bottle, 90 day SKU and there is more in the works with regard to improving gross margins. We expect working capital to be a source of cash in the fourth quarter. Our inventories are high and we expect to reduce inventories in 2020. We completed almost all the preparation of the California trial in October as Rob said and we paid these legal bills and we expect lower legal payments in the short term as no trial date has been set in any of the three cases, we were ready to go to trial at any time.

Okay. That was terrific. Thank you for the color there and I'll get back in the queue. Thank you.

Thanks, Mitch.

Your next question comes from Jeff Van Sinderen with B. Riley FBR. Your line is open.

Thanks for taking my questions. Can you speak to what you're seeing in the athletes segment? Maybe you give us a sense also of what you're seeing in the health professional segment?

The healthcare practitioner segment is relatively small, but dramatically growing. These are our healthcare practitioners like physicians, nurse practitioners, chiropractors, nutritionists and we sell into them at wholesale and then they resell to their consumers. We have a partnership with a company called Natural Partners. They sell directly to these healthcare practitioners and we sell as well internally directly to these healthcare practitioners. And this is a fast growing segment for our company. We're also pursuing healthcare practitioner sales in Canada and exploring it in certain other countries as well. In the sports market, what we're seeing is a lot of guys getting back on the playing field after they got hurt quicker. What we're hearing anecdotally is that – are you okay? What we're hearing is that they are healing quicker. What we're hearing is that they are taking it, happy with it and ordering more. We think that there are a great deal of professional athletes in all the major sports in the U.S. and we get frequent phone calls outside of the U.S. from professional athletes wanting to sample it, to try it, to test it and to talk to us. So we expect the sports segment to continue to grow and be an important part of our future. We think that it's helpful to them and we're excited about it.

Okay, great. And then just to follow up on international regulatory approvals, I know you're working hard on those. Are there others outside of the EU that you feel you're making progress on that you can speak about?

There are others that we're making excellent progress on, but none that we can speak about yet.

Okay. And then can you talk a little bit more about the progress with Nestlé? I know you mentioned the first launch would be and I think you said loose powder form. Maybe just speak a little bit more about getting through the technical hurdles toward productization and such?

Well, there are no real technical hurdles for releasing it in powder form. The major technical hurdle is to release it in beverage form and we are still feeling very good about what's happening in that area. It makes a lot of sense. I mean, nicotinamide riboside exists in trace amounts in milk. So nature has already shown that it's stable in liquid and we're working on replicating that with a number of missions. It's really the primary focus of Nestlé at this point is to release the product in 2020 in powder form and they're thinking in future years that it would come out in beverage form.

Okay, good. I think that that’s it for me. Thanks for taking my questions and best of luck.

Thank you. Thanks, Jeff.

Your next question comes from Raghuram Selvaraju with H.C. Wainwright. Your line is open.

Good afternoon. This is Edward Marks on for Ram. I appreciate you taking the questions. In regards to…

Hi, Edwards.

Hi. In regards to selling around the world, I'm just wondering if you're providing TRU NIAGEN on Amazon or in the Watsons stores in Europe. And if not, why have you chosen not to?

It's only available on Amazon in the UK, presently. It has to do with EFSA approvals, EU approvals as well as Amazon's rules. The UK is one country that allows you to sell cross-border via Amazon. So that's why we have begun selling on Amazon into the UK only. Once we receive this EU approval, we will most likely expand our reach on Amazon to other countries.

And does that also apply to the Watsons stores that are in Europe and Asia?

Well, the problem with the Watsons stores in other countries in Asia and in Europe is that that directly requires regulatory approval in those local countries. And we have this understanding with Watsons that if and when we receive that regulatory approval, we will endeavor to make a deal with the local Watsons’ business. And if we can do so, we will partner with Watsons in those territories.

I see. And then in regards to some of the regulatory hurdles that that you're currently seeing, I noticed on a previous call that you had mentioned that you are working on regulatory hurdles with Nestlé. So I was just wondering if you could talk about those regulatory hurdles from Nestlé's perspective.

Well, the regulatory approval that you receive to sell a dietary supplement is often different than the regulatory approval you receive as a food. And in Nestlé's case, the right that they have is as a food, they have medical food and they also have a protein based meal replacement food. So it will be a quicker process once we receive dietary supplement approval to then receive food approval, but it is a process that we have to go through in order for Nestlé to sell locally.

Okay. And kind of moving on with Nestlé that sounds like a great advancement that you'll be able to sell that powder formulation starting next year, but I know you had mentioned previously that you had a deadline to produce a ready to drink formulation of TRU NIAGEN. I was wondering if the powder formulation has covered this necessary milestone or if they have to extend your current contract past the end of 2019?

There is a technical requirement in order to – for them to sell it as a protein based meal replacement beverage. For us to overcome we're confident that great progress is being made in that – to that end, but in order – but Nestlé would have to either extend that or we'd have to satisfy that requirement. But at this point in time neither party seems terribly concerned about whether or not we're going to be able to solve that problem. Their immediate plans are to sell it as a powder form and in subsequent years they plan to sell it as a beverage.

Okay. Thank you for clarifying. I just wanted to make sure that that everything was squared away in that regard. And then just my final question, following up on a previous point, I know from recent calls and recent releases that you plan to release some clinical data in 2020 on top of all the data that you presented today and last quarter. I'm just wondering how much do you expect usage in clinical context to rise following the release of this clinical data and via what regulatory framework might TRU NIAGEN be used?

Hi, this is Frank. I'm not sure there – specifically what clinical data that we talked about before that was going to release in 2020. We have reported the last clinical trial that we did with the CRO was reported in July. There are other studies that are out there that are listed on clinicaltrials.gov that that will in fact publish, but those are collaborative studies under our research programs. Are you referring to those rather than a ChromaDex study?

Yes, exactly.

Okay. Yes. I mean there's like the Washington heart study is one of the studies that that I think could be publishing in 2020. There are probably going to be other ones that we’ll report out in 2020 as well. It's just hard for us to know exactly what the timing of how those would report.

I see. Okay. Thank you.

Thank you.

Thanks, Edward.

And that's all the time that we have questions for today. I turn the call back to Brianna Gerber for closing remarks.

Thank you, Jesse. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1-800-585-8367 and the conference ID is 9475087. Thank you everyone for joining us today and for your continued support of ChromaDex.

This concludes this conference call. You may now disconnect.