Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's Third Quarter 2020 Earnings Conference Call. My name is Jody, and I will be the conference operator today. At this time, all participants are in a listen-only mode. And as a reminder, this conference call is being recorded. This afternoon, ChromaDex issued a news release announcing the company's financial results for the third quarter 2020. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's website at www.chromadex.com. I would now like to turn the conference call over to Brianna Gerber, Vice President of FP&A and Investor Relations. Please go ahead, Mrs. Gerber.

Thank you. Good afternoon, and welcome to ChromaDex Corporation's third quarter 2020 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 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 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, and future investor interest 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 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 quarterly report on Form 10-Q most recently filed with the SEC, including the effect of COVID-19 pandemic on our business, results of operations, financial condition and cash flows. 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 Relations 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 2020 investor call. I'm pleased to say that ChromaDex had another strong quarter financially and strategically. E-commerce sales grew by 7% sequentially and 21% year-over-year. Sales to Watsons grew 93% sequentially and 10% year-over-year. Tru Niagen overall net sales were up 22% year-over-year. In addition, we delivered an adjusted EBITDA loss, which we define as EBITDA excluding legal expense of only $125,000 in the third quarter and break-even year-to-date, an important achievement for this company. The signs on Niagen has been very strong since our last update. We announced completed clinical and preclinical research in areas such as autism, cardiovascular and immune health, [indiscernible] and most recently on coronavirus. Frank will go through this research in more detail shortly, as well as some additional preclinical research showing that Niagen may have an impact on several of the nine hallmarks of aging, which are gaining the attention of the scientific and investment communities of late. Earlier this year, we committed to advancing collaborative COVID-19 research on Niagen and sharing the findings when appropriate. I’m very proud to say that we have delivered on this commitment and have more studies in the pipeline. This includes our collaboration with the National Institute of Allergy and Infectious Diseases or NIAID, a division of the NIH to assess the therapeutic potential of Niagen in COVID-19 animal models. And last month, we announced results of a controlled clinical study in Turkey, showing that a nutritional protocol, which included nicotinamide riboside in combination with the therapeutic standard of care, reduced recovery time in COVID-19 patients by nearly 30% from 9.3 days to 6.6 days. This study included 100 patients with mild-to-moderate COVID-19. And researchers are now enrolling for a Phase 3 clinical trial…

Thank you, Rob. Since our last update, peer-reviewed publication of research on NR and NAD has continued to accelerate. In addition, there were two newly registered clinical studies on NR, and ChromaDex signed nine new research collaborations as part of our CERP program. There are now 43 ongoing completed or published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and health benefits of NR. In addition, 11 clinical trials are registered to test NR in combination with other ingredients for a total of 54. Earlier this year, we committed to advancing research on NR related to COVID-19 and are encouraged that our ingredient is being studied as a potential nutritional solution. As Rob noted, we recently announced initial results of an open-label, randomized, placebo-controlled Phase 2 study, which included 100 COVID-19 positive patients with mild-to-moderate symptoms and were published in medRxiv, a preprint server for health sciences. This clinical study was registered in October by ScandiBio Therapeutics and conducted at the University of Health Sciences, Istanbul Training and Research Hospital in Turkey. The objective was to assess the clinical efficacy, tolerability and safety of the combination of a nutritional protocol, including nicotinamide riboside and the local standard of care that includes hydroxychloroquine compared to a placebo and the local standard of care. The key findings were the combination treatment reduced average recovery time by 29% compared to the placebo group. There was an improvement in markers of liver function for a combination of treatment on day 14, compared to day zero as measured by plasma ALT, AST and LDH and adverse events were uncommon, benign and self-limiting. According to the investigators conducted the study, the Phase 3 trial will be double-blinded and include 300 patients at eight clinical sites in Turkey. We are currently exploring other research opportunities…

Thank you, Frank. We continue to focus on operational and financial discipline on our path to achieving cash flow breakeven. This discipline is again evident in our third quarter, 2020 financial results, which reflect continued progress against our key financial objectives and strong underlying business performance. The underlying business is measured by adjusted EBITDA, excluding total legal expense was a loss of $125,000 in the third quarter, essentially breakeven and $1.7 million improvement year-over-year, compared to the second quarter of 2020, we delivered slightly lower net sales driven by a tough comparison with the $1.6 million Horizons purchased last quarter. Sequential and year-over-year growth in our core Tru Niagen consumer products sales, higher gross margins, higher advertising expense as a percentage of net sales and lower general and administrative expense. I'll begin my review of the sequential P&L results, and we’ll then discuss the year-over-year trends. For the three months ended September 30, 2020 ChromaDex reported net sales of $14.2 million, down 7% compared to $15.3 million in the second quarter of 2020, which is a set included a $1.6 million purchase from our shareholder Horizon Ventures who donated Tru Niagen bottles to healthcare workers in Hong Kong hospitals during the height of the pandemic. Tru Niagen’s sales were up 2% sequentially or mid-teens excluding the Horizon’s purchase. Importantly, this growth was driven by our e-commerce and Watsons businesses, which were up 7% and 93% respectively compared to the prior quarter. Sales to Watsons were $2.5 million in the third quarter, roughly double the $1.3 million up-sales in the second quarter with sequential growth in both Tru Niagen and Tru Niagen Beauty brands. Conversely, and as expected, we experienced headwinds from our Niagen Ingredient business in the third quarter, and we continue to expect lower Niagen sales in the second…

[Operator Instructions] Our first question comes from the line of Jeffrey Cohen of Ladenburg. Please go ahead, your line is open.

Hi, thank you for taking the questions. I’m just curious, so you've mentioned additional potential partnership opportunities in the past and being in communication with some other partners. So I'm just wondering, have any of those moved a bit closer towards a firmer agreement following, Nestlé’s launch of Celltrient?

Yes. We have been in discussions with several blue chip companies and some have moved forward, but none are imminent. They're ongoing discussions.

Okay. Very good. And I guess my follow-up is more towards marketing. Do you have any insight upon Nestlé’s target consumer? And what kind of overlap is there between your head of marketing, the demographic they're working on and what Nestlé is – and who Nestlé is targeting?

Well, Nestlé’s product as you know is a protein-based product and it's a powder product, and it's a compliment to their suite of products that are targeting the anti-aging market. Obviously Tru Niagen, as well as Celltrient is our anti-aging products, so there is some overlap in the target market. We think that their target audience is a bit older than ours. There is overlap with the Celltrient product with their existing boost product, in fact it’s complimentary to the boost product. But we don't really know yet the details of their target audience or their primary consumer at this point, because it's new. We'll be calibrating with them and sharing information with them as we go along.

Okay. Thank you. I'll take the rest of my questions offline.

Thanks.

Our next question comes from the line of Brian Nagel of Oppenheimer. Please go ahead, your line is open.

Hi, good afternoon.

Thanks, Brian.

Thanks for taking my question. Congratulations on continued nice progress here. So the first question I have just with regard to sales. And Kevin, you spoke a lot about the difficult comparison with last year, which disrupted the sales trend a bit here in the third quarter. But, if I'm doing the math, right, I exclude that it still seemed as though the pace of sales slowed somewhat further from Q2. So I guess the question I have is, hey, am I right? But also probably more important is to what extent – I think we talked about this last quarter too, to what extent is the COVID crisis continuing to raise somewhat upon on sales of the Tru Niagen products in the U.S. and elsewhere? And maybe any commentary on the sequential, so if we think – as COVID is starting to maybe abate some places are you seeing sales rebound?

Yes. I think with regard to the organic growth this quarter, I think it is lower, but it's on a sequential basis because of the one-time purchase that we had in the second quarter. If you take that out from a total company's perspective, we grew at 3%. And if you look at it from a Tru Niagen perspective, it actually grew high teens for us. So there was some good organic growth in the quarter that was masked by the $1.6 million purchase that we’re comparing to in the second quarter. The COVID thing is hard to more or less calculate. We think at retail, it's obviously when you look at Watsons and the rate that we're growing last year and they're up 2% year-to-date this year. But at last year they were growing in much greater rates. So we know it's impacting our retail operations, we also know that it's impacting the new markets that we’ve launched in 2020, but it's – overall it's hard to tell. Looking forward, we expect to continue to grow, but the environment is volatile. On a sequential basis, our e-commerce business remains the core growth engine. And if you look at our year-to-date results, due to legacy B2B businesses that I mentioned, the micro-economic impact of coronavirus and the Horizon Venture purchases, there is been some volatility quarter-to-quarter, but when you look at it year-to-date, you see the company has grown 32% on a total company basis. When you look at Tru Niagen, it has grown 34%, our e-commerce business has grown 28%. And as I mentioned earlier, Watson's has grown 2%. So good growth when you look at it in an aggregate basis over the first nine months, but there has been volatility, Brian.

And Brian, it’s Rob. I would add to that, the core, the nucleus of the operation at this point is your direct-to-consumer Tru Niagen business. And I think if you compare first quarter to second quarter, second quarter to third quarter, you could see that the actual rate of growth is increasing.

Thank you. That's perfect. And then for my follow-up, I know you talked about this in the prepared comments, but the Phase 2 study in Turkey, it was excited – quite excited, we spent a lot of time talking about that. Just to – I guess the question is, as investors, what should we be thinking about the timing of where this goes, with the Phase 3 and when we'll get some further communication on what this could potentially mean for ChromaDex, Tru Niagen?

Well, the Phase 2 trial actually went relatively quickly and the Phase 3 trial is already moving relatively quickly. So I don't think from a study timing standpoint, I mean, it's a short period where they're dosing patients. So it's really, the question is around enrollment, how fast can they enroll the 300 patients. So it's not like it lingers for months in terms of a dosing, from a dosing perspective. So that's moving relatively quickly. And I think, look, with everything you can see that's going on in the world right now related to coronavirus, it's accelerating the wrong way right now. I think coronavirus is going to be around for awhile and we're going to have – having additional data is going to give us another bite at the Apple here. I mean, having a Phase 3 trial beyond that one confirming hopefully keep our fingers crossed confirming that the result that we got in that first study is going to go a long way.

If I could ask – I'm just going to ask one more on the heels of that. So Kevin, again, I know there is a lot of unknowns here with this problem. If this goes well, how would we think about the financial – the benefit to ChromaDex? How would that flow into the model, so to say?

Well, I think, hopefully it's going to increase sales, the rate of sales growth. And then obviously from a – I think we've proven the model, and as we get more scale, we should be profitable quicker, that's kind of the bottom line.

What we could specifically do with this information, when it gets published is marketed directly to the healthcare practitioner market. The medical community in general, hospitals, pharmacies, physicians, it ought to be part of standard-of-care for people who are symptomatic COVID positive. And this will enable us to communicate that better. That should ladder up to increase sales overall.

Got it. Thank you very much.

Thanks, Brian.

Our next question comes from the line of Jeff Van Sinderen of B. Riley FBR. Please go ahead, your line is open.

Great. Thanks for taking my question. First let me say congratulations on the progress on all fronts.

Thanks.

Can you speak more about how you're thinking about evolving marketing for community versus anti-aging as COVID spikes again, I know there is been some shifting around on that?

Right. It's a very good question. Managing, messaging and marketing as a healthcare company during COVID is sort of like shifting from zone defense to man-to-man, because the market moves around as the news moves around. And as you know, we had positioned ourselves as an anti-aging and fitness product principally, and then we added immunity once we started releasing these COVID studies, and that was effective for us in the second quarter and continued to be effective for us in the third quarter. But what we also observed during the third quarter was a bit of COVID fatigue. And we saw that certain of the messages, especially those that were related to cell defense as it were, were not converting as well. So we have pivoted again, and we've begun to add back some of the anti-aging and fitness messaging that was so successful prior to COVID hitting, and we see that converting as well. So it's challenging, but we are equipped to manage it. And in the meantime, the more studies we released showing the power and the efficacy of Tru Niagen and the wider the market potential as it is.

Okay. Great. And then can we shift to international for a moment? I'm just wondering about your near-term expectations for the UK and Australia Tru Niagen Beauty, you mentioned that with Watson. I guess, anything else you can talk about at this point that's on the Horizon, as we're thinking about international going forward.

As you know, we are in 200 Superdrug stores in the UK, we sell cross-border into EU, we sell cross-border into China, we sell cross-border into Japan, we are selling online in New Zealand and Australia, and starting to appear in certain retail outlets in Australia. We sell in certain retail outlets in Canada, and we sell online in Canada as well. We see opportunity for growth in virtually all of these areas, particularly as the research continues to roll out. But the COVID thing has had an impact on retail, particularly outside the U.S. and the foot traffic in the UK has been very impacted, the timing of our release with Superdrug coincided with COVID, they closed a bunch of stores, and it's still somewhat small. So the online business is looking strong and growing, but the actual retail business seems to be waiting for people to come back. We think that there is an opportunity for growth there, but at this point, as long as COVID is still going to be around, and they're implementing even stricter lockdowns in parts of the EU, including the UK. Our emphasis will be much more on online marketing and online sales. Fortunately, we're equipped to do that.

Okay, great. Thanks for taking my questions and best of luck for the rest of the quarter.

Thanks, Jeff.

And our next question comes from the line of Ram Selvaraju of H.C. Wainwright. Please go ahead, your line is open.

Thanks so much for taking my questions. Firstly, I wanted to ask about how you expect gross margins to trend going forward. And if you think there is likely to be significant sizable improvement potential in the coming quarters. And if so, when could we approach potential steady-state? Is that likely to be in the low-60s, mid-60s, maybe even higher than that? Just give us some background on that.

Yes. Well, I think we're just – we continue to work on a supply chain and we're getting better. Mix has been something that's been helping us. I think also our product design changes that we did last year effective in the fourth quarter and going from three bottles for a 90 Cal dosage for three months to one bottle in smaller packaging and lower shipping costs are an opportunity. We have I think secured and implemented things that are going to, or initiatives that are going to deliver $2 million run rate next year. So you should see sequential improvements in our gross margins. I'd say, we think we can get to the low-60s, I can see the line of sight to that, and it's something that you always continue to work on. And obviously, I think scale will help us to, as we continue to grow and get to a higher level that also will be another benefit.

And I mean in the context of that, can you comment on as Nestlé continues to scale with Celltrient, what kind of impact that is likely to have on the gross margin of illusion?

Well, it should help, but I think when we look at it from a 2020, 2021 perspective, we don't see it as being a big number for us. So that's more like 2022 and that will help us scale. And also with regard to that selling of Niagen, we do get a royalty from them, which is somewhere between low single-digits as they launch to high single-digits as the business gets bigger and bigger.

Okay. And then just very quickly on the COVID-19 program. In the context of the Phase 3, Frank, could you comment on what standard of care currently persists in Turkey and what the control is supposed to be in this Phase 3 program? And also when you talk, I think both you and Rob talked about the potential utility of the drug in the context of symptomatic COVID-19, but what specifically do you mean, when you talk about symptomatic COVID-19? How sick the patients to be in order to potentially qualify. And would you consider this potentially being a therapeutic deployed-only in the outpatient setting or specifically within the context of hospitals?

So the first part of your question there, or let me take the last part first, I guess, is the best way. We're only looking at mild so patients that have tested positive, but are only exhibiting mild symptoms. So people that are not going to enter the hospital or require hospitalization, that's the main bulk of the people that we're looking to put into the trial. That was exactly what we did in the first Phase 2 study as well. So…

Yes, that's definitely helpful, when you say mild symptoms, you're not looking specifically at respiratory symptoms though, right?

Well, I wouldn't say that they may be looking at some respiratory, but obviously, they're not going to be looking at people that would, from a pulse oximetry standpoint would be like in a bad way, right. So they're looking for people that are on the fringe of that, but not have to be hospitalized.

Okay. That's very helpful. And then with respect to the standard of care and the controls?

So standard of care, standard of care in Turkey and we've had this conversation with others as well, but standard of care in Turkey is hydroxychloroquine. So we would love to be able to design this study without the standard of care. However, that's not an option we have to follow with the standard of care in Turkey is, and they use hydroxychloroquine. So both arms, both – in this Phase 3 study, it will be a double-blind placebo-controlled. The first study was an open-label if you remember, but both arms do have to have standard of care. So we have to have hydroxychloroquine in both arms. That's just the nature of the beast of dealing with Turkey. But in the first study, that was also – it was the same, but we did see obviously a clear difference between both arms, which had hydroxychloroquine, the arm with the nutrient cocktail plus Niagen showed a significant improvement in recovery. And that was the clear difference between the two. So we don't believe that hydroxychloroquine plays a role. That's what we believe, at least at this point. I would love to be able to do an arm without that, to further show that, but that's kind of where it sits. Does that answer your question?

Yes. So I think further to that when we talk about mild symptoms and the fact that hydroxychloroquine is a standard of care in Turkey, can you comment at all on other medications that are specifically being excluded in this trial, for example, are you permitting use of steroids like dexamethasone?

I don't know if we have any specific exclusions that I can recall in the trial design. So it's possible. I mean, the Phase 3 study is moving into eight – it's an eight site study. So it's possible that other things could be administered as part of the study, depending upon the site location.

What about remdesivir?

I don't think there's a whole lot of remdesivir in Turkey, to be honest with you. I don't think that's going to be a major factor because of the fact that there's not a whole lot of supply there.

Okay. Very helpful. Thank you.

Thanks Ram.

And our next question comes from the line of Mitchell Pinheiro of Sturdivant & Company. Please go ahead. Your line is open.

Hi, good afternoon.

Hey, Mitch.

Just a question on the e-commerce business, can you talk about sort of a breakdown in this quarter whether sequentially or year-over-year, how new customers comprise, what would the new customer growth was of the total recurring revenue, how that performed in the last quarter?

Well, the bulk of our revenue is from returning customers. The retention rate, which we haven't yet provided is very, very strong. And so we are confident in the base when people start to take Tru Niagen, particularly after they take it for a month or two. A very few stopped taking it. The growth of new customers though has slowed. And we have noticed that the number of new customers that we've added for versus a year ago has declined. And so that's an opportunity for us to grow further.

And when you look at sort of, I guess your customer acquisition costs, as they focused more on new customer or do you – is there any element in the recurring revenue customer that you're spending on that?

I'm sorry. Mitch, could you try that one more time? I'm not sure, I understood the question.

So, well, let me just ask it differently. I mean, just can you talk about customer acquisition costs and how they compared in – I guess, internal data to a year ago or to the sequentially and whether you're – I know you talked about, you spent some money on branded awareness more than sort of a call it action marketing. Can you talk about that in the context of your customer acquisition costs?

When we did invest more in non-performance marketing in the third quarter. Satellite media tours, there was much more PR attempts. There were more interviews, more what you might call overall brand marketing, which is not conversion related, directly related. So therefore our customer acquisition costs were higher in the third quarter. Additionally, we did some experimenting in some new messaging. As I said, it's a fluid situation with COVID and we're noticing from month to month, some dramatic changes in audience response. At the beginning of the year, we appointed a new Head of Marketing and that new Head of Marketing then put a team together to work with her. We also implemented some very strong fundamental, long-term marketing initiatives. For example, we have a much more robust cohort data analytical system in place. So we have a deeper understanding of who the customers are and how they behave, how they interact with us. We also have a much deeper understanding of website customers versus Amazon customers and who they are and what their interests are. Additionally, we recoded the entire website and relaunched the entire website, which also now enables us to track behavior from visitors to the website. So we have a much stronger and deeper understanding of our relationship with our consumers. But right in the middle of that process, we got hit with this the pandemic and it sort of forced us to put some of these fundamental initiatives aside and actually, be more reactive. Right now, we are restoring some of those fundamental policies and programs in place. So my expectation is that the e-commerce business is going to become much more efficient and grow in a much more dramatic way in the coming quarters.

Okay. And then – that's helpful. And then as you look at your various other sub-segments, healthcare practitioners, sports, fitness, any comments with regard to how they did in the quarter?

I'm not sure if we disclosed how they did versus previous quarters versus last year. I'm sorry, go ahead.

What do you think in terms of color, I mean, are you seeing increases in healthcare practitioner, have sports teams continued to grow, any color would be helpful?

Yes, there are many more athletes and sports teams that are regularly purchasing Tru Niagen from ChromaDex. We also have a much larger base of healthcare practitioners that regularly purchase from us. One complication is some of them shut down their offices during the COVID period. So they're not carrying the inventory in the same way. So that was a headwind on COVID, but there's a much, much higher level of interest and interaction from the healthcare community and the sports community in general, for Tru Niagen. We are investing in a stronger infrastructure internally in both of those specific areas. And we are adding that experienced high grade personnel to specifically focus on both of those things. So we do see high growth potential in both sports and healthcare practitioner, and we're going to do increase our focus in both of those areas in the coming quarters.

Okay. Helpful, thank you for your time.

Thanks Mitch.

Thanks Mitch.

And our last question comes from the line of JP Mark of Farmhouse Equity. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for taking my call.

Sure.

So a couple of very quick questions here about marketing and redesigning the website. First of all, I think it's a good redesign. I think it definitely is an improvement. And I'm wondered whether you are doing different versions for different countries, or is it just one for every country?

We intend to do different versions for different countries, but we haven't yet.

Okay. And when do you think you might roll that out, any idea next year sometime?

Yes. Next year – definitely next year, not this quarter.

Yes. And second question, Rob. It says on the website that it has a list of the podcasts that you've done, it had a complete list, or are there other ones that you've done that are not listed here in the news – on the News tab there?

Lately I've been doing quite a few, so I'm not sure if it's a complete list. I don't know. But perhaps if you e-mail, Brianna, she can update you.

Yes. It only has four, I think.

Okay.

Okay, well, I'll tell you that the more podcasts you do, in my opinion, the better, I think it speaks what you speak well for the company. I think it's fantastic marketing for the company. So if there's any way to continue that I would highly encourage it. So anyway, just my comment. Again, thank you for taking my questions. I wish you continued success.

Anytime. Thank you for the questions.

At this time, we do not have any further time for questions. I'll turn the call back over to Brianna Gerber for closing remarks.

Thank you, Jody. There will be a replay of this call beginning at 4:30 PM Pacific Time today. The replay number is 1(800) 585-8367. And the conference ID is 4699759. Thank you everyone for joining us today and for your continued support of ChromaDex.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.