Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's Fourth Quarter 2022 Earnings Conference Call. My name is Julian, and I will be your 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 fourth quarter of 2022. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex' website at www.chromadex.com. I would now like to turn the conference call over to Tom Shumaker, LifeSci Advisors, Agency IR Counsel for ChromaDex. Please go ahead Mr. Shumaker.

Thank you. Good afternoon and welcome to ChromaDex Corporation's fourth quarter 2022 results investor call. With us today are ChromaDex's Chief Executive Officer, Rob Fried; Chief Financial Officer, Brianna Gerber; and Senior Vice President of Scientific and Regulatory Affairs, Dr. Andrew Shao, who will join the call for Q&A. 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; business development opportunities; future financial results; cash needs; operating performance; investor interest; and 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 annual report on Form 10-K most recently filed with the SEC, including the effect of the COVID-19 pandemic as well as inflationary and adverse economic conditions 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, presents 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 my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

Thank you, Tom. Good afternoon everyone, and thank you very much for joining us on our investor call today. It's good to be with you again. I'm pleased to report that we delivered our best ever quarterly revenue in the fourth quarter of 2022, $21 million, up 18% year-over-year and 23% sequentially. Furthermore, as promised, we achieved positive adjusted EBITDA, defined as EBITDA without share-based compensation and severance, of approximately $400,000 for the quarter. We believe it is important for enterprises to prioritize profitability as well as growth at all times, but given today's challenging macroeconomic environment, frugality is particularly important. We have a trusted quality brand in Tru Niagen and a portfolio of protected NAD precursors, especially Niagen that can endure turbulent times. The Tru Niagen brand is based on strong science and in truth. It is the safest, most researched, indeed the best product in the fast growing NAD marketplace. On our last earnings call, we briefed the market on major events that occurred in the fourth quarter reporting period, including the signing of an amended long-term supply agreement with Nestle Health Science, which expanded their rights to sell Niagen in multi-ingredient formulations and included a $2 million upfront purchase. We also formed a ChromaDex Asia joint venture, our operating entity in China that is working with Sinopharm Xingsha that broadened the Tru Niagen's penetration in the region. Alongside these two major events, Nestle and our existing strategic investors collectively invested $7.7 million net of fees into ChromaDex and we are very grateful for this vote of confidence. We ended the year with over $20 million in cash and no debt. Brianna will provide detailed financials shortly, but in the second half of the year, which coincided with her promotion to CFO, we have dramatically improved our management…

Thank you, Rob. It's a pleasure to speak to our investors, partners and employees, who have joined us today. ChromaDex delivered on our latest full year 2022 financial outlook to investors across all metrics, and we exceeded our targeted reduction in G&A expense. For the full year we delivered total net sales of $72 million, a 7% year-over-year increase, including 8% growth in E-commerce. Gross margins of 59.4% reflecting the strength of our business model as we navigated significant inflationary pressures across global supply chains. Selling and marketing expense down approximately 270 basis points as a percentage of net sales. An increase in R&D expense of $1 million. And a decrease in general and administrative expense of $8.1 million year-over-year better than our outlook of a $6 million to $8 million decline. The underlying business as measured by adjusted EBITDA, a non-GAAP metric, posted a full year loss of $10 million compared to a loss of $18.9 million for full year 2021. We have provided a reconciliation to the appropriate GAAP measure in our earnings release slide. Going forward, we have decided to discontinue providing adjusted EBITDA, excluding total legal expense as we believe adjusted EBITDA is the more suitable metric to assess our current underlying performance. To underscore this, we delivered positive adjusted EBITDA of $0.4 million in the fourth quarter, a significant milestone for the company. Balanced growth remains an important objective, and our results stand as a testament to our amazing ChromaDex team who have committed to looking at our business differently. Moving forward, we have initiatives underway to continue to optimize the business, which will have a larger lasting impact in 2024 and beyond. With that, let's turn to the fourth quarter of 2022 financials. ChromaDex delivered a solid quarter with total net sales of $21…

[Operator Instructions] Thank you. Our first question comes from Mitch Pinheiro from Sturdivant. Please go ahead. Your line is open.

Hey good afternoon.

Hi, Mitch.

Hey, so I just want to your e-commerce business was flat year-over-year, and I just, you talked about it in your remarks, Rob and I was just curious if you could dive a little deeper into what was going on in e-commerce in the fourth quarter, and how it’s looked so far in the beginning of this year?

Well, first we were affected by that cancer press release, so we did notice an impact in conversions and in subscribers, but it seems to have recovered, it only lasted about six weeks. But I would say that overall there for the – at least the website business during the last year, maybe year and a half, there’s been an inefficiency in our conversion rate and in our marketing spend. So, we’ve pulled back. We’re seeing a much greater efficiency now, but we’re not really hitting the gas pedal yet until we see a meaningful and stable improvement on return on ad spend, like we’ve seen in other parts of the business. We don’t – it’s definitely not an indication of demand. It’s just basic blocking and tackling. And yes, it looks a little better already.

And so it just on the conversion side, what led to the inefficient conversions? What type of things either weren’t happening for you? Or is it just marketing messages were off?

Nope, I don’t think it was about marketing messaging. I think we made the decision to outsource some of the basic functionality in that business and the enterprise to whom we had outsourced didn’t have sufficient resources to do it. So the basic blocking and tackling of running an efficient basic e-commerce site dipped. There’s landing pages, there’s creative, there’s AB testing, there’s optimization, there’s retention, there’s the process that we’ve generally been pretty good at, but we have not been very good at for the last, I would say year, maybe year and a half, although we’ve made some changes and I see improvements already, and my expectation is that we’ll see dramatic improvements this year.

Okay. And then sort of just a follow-up just the with 10% revenue growth as the sort of the bottom end of the range, are you – and I did hear your comments regarding your adjusted EBITDA being positive in the, I guess the final three quarters. Are you going to be able – at a 10% revenue level, can you get to adjusted EBITDA breakeven or better for the full year? Or do you need a little bit of help from the potential upside?

The answer to that is it depends on certain costs that are unknown right now for example. We have prepared for litigation costs for during this year that may be unnecessary, are likely to be unnecessary, and in the event that we do not invest in those litigation costs or royalty expenditures on certain patents, then yes, we get to EBITDA positive even at a 10% growth rate. There are other potential savings that we could see that would get us there, but you’re probably right. If we fully load all the costs, we probably have to do a little bit better than 10%.

All right. Well thanks for the questions. I’ll get back in the queue.

Sure.

Our next question comes from Jeff Van Sinderen from B. Riley. Please call ahead. Your line is open.

Hi everyone. So Rob, I’m wondering if you can speak a little bit more about the new patents who’ve been awarded, the significance of those, and how that IP can be incorporated into your products? Maybe give us a sense of the new product pipeline and timeframe.

The new patents, which were awarded approximately a year ago, they’re actually, some of them are extensions of existing patents, are really exciting for us, because it’s a combination of processed patents as well as composition of matter patents. And in combination with those also other patents that we have and, of course, the grace patent. We don’t believe anybody can make nicotinamide riboside chloride without us. That Dartmouth patent in some sense did its job for 17 years. There’s really only three, three and a half years left on that patent. So, we properly anticipated that and we built up a very, very strong moat around nicotinamide riboside in the interim period. That’s not to say that we are necessarily going to go full blown in suing people who are infringing. We’re going to take it one step at a time and see how it goes. But we are very, very protected. Outside of nicotinamide riboside chloride, however, there are a number of analogs, not just those intermediate analogs, but other analogs like NAR and NRH that we have been researching and working on that are also very protected from a patent standpoint at ChromaDex. And there are indications that some of these analogs could be even superior to nicotinamide riboside chloride.

Okay. And I’m sorry, as far as those new things like NARH, are those in test mode at this point? Or when can we think about those being productized? Kind of perhaps starting to generate some revenue?

We hope that another analog will generate revenue at ChromaDex within a year.

Okay.

The process is fairly complicated though, Jeff, because ChromaDex does not cut corners. As frustrating as that may be to some investors, we do it the right way, if needed, we will get an NDI. There is another company that infringed on the Dartmouth patent that’s releasing a version of nicotinamide riboside. This company applied for an NDI or was rejected by the FDA for the NDI. So they are selling an illegal product on the marketplace right now. To our knowledge, they haven’t disclosed that. I guess they’re assuming that the FDA may not enforce it. That’s not something ChromaDex would do. We get the proper regulatory approvals. We apply for the patents. We manufacture it in a very, very safe approved way. What we release in the market is first rate, first quality, and safe. We advertise it in a way that’s consistent with the research that’s done. We know that that’s inconsistent in the dietary supplement space. We know that it’s more time, it takes more time and it takes more expense, but it’s the way we do it. There’s a real foundation here. So in the case of these other analogs, in the event that we decide to commercialize them as a food or a dietary supplement, remember there is always the chance that we would develop them as a pharmaceutical product, but in the event that we commercialize it as a food or a dietary supplement, we are going through the proper toxicology processes, the proper regulatory processes, the proper scalable manufacturing processes before we release it as a product. But it is my hope that we will see another analog in the market within a year.

Okay, good to hear. And then if we can switch gears a little bit, just wanted to I guess get your thoughts on what you’re anticipating with Nestlé, Sinopharm, Watson, sounds like Watson is starting to turn around for 2023. What’s baked into your guidance from those for revenues greater than 10% growth, and then maybe what catalyst could potentially drive revenue to exceed that 10% level or substantially exceed, I think is how you put it?

The 10% guidance is extremely conservative. We bake into its zero revenue from Nestlé, zero additional revenue this year from Nestlé. We are extremely conservative with Sino, and the Watson’s projections are just what’s contractual. Indeed, all of the assumptions around 10% are based on existing partners, based on the contracts that we have in conservative projections on our DTC business. That’s why we think there’s a very realistic chance that we will exceed 10%.

Okay. And then just to follow-up on the e-com business, your direct DTC business, are you – at this point, does that business turn positive? Would you anticipate that to be positive in first quarter? Or how are you thinking about that one?

What do you mean by positive?

I mean up year-over-year.

Oh, revenue overall, yes.

Yes, revenue.

Yes, of course, we expect the DTC business to be quite a bit positive in the first quarter. Just remember the DTC business has several components of it, one of which is Amazon, another, which is Shopify. There are other international components to it. The one where there’s a great opportunity is our – what we call Shopify. It's basically our domestic website that may not grow quarter-to-quarter, but we expect it to grow in the coming quarters.

Okay. So I'm sorry, so just to clarify the – for your own website, I guess you're calling the Shopify website that business you're saying may, right, that business might not grow in the first quarter, but you anticipated that...

No, its 100% will grow. 100% will grow, it might not grow in the first quarter though.

Okay. Okay, fair enough. All right, very good. Thanks for taking my questions. I'll jump back in the queue.

Anytime.

Our next question comes from Ram Selvaraju from H.C. Wainwright. Please go ahead. Your line is open.

Can you hear me?

Yes. Hi Ram.

Hi guys. So if you could just sort of give us a bit more granularity on the changes in customer acquisition strategy that you're looking to make and which ones do you expect to be the most impactful and why? And then the follow up I have is specifically with respect to the decision making process around choosing a pharmaceutical development path versus a supplement or a food path; and if we should expect such a selection process to conclude over the course of 2023. So if indeed you're going to potentially go after an Rx product development approach, with anything you perhaps even with one of these newer analogs. If you're going to reach conclusion of that decision making process and disclosure of the target indication in question before the end of 2022? Thanks.

So I'm going to answer in order that you asked. First of all, I'll answer the customer acquisition question and then I'll answer the pharmaceutical question. The way we approach customer acquisition is largely based on the science. So as studies come out, we begin to understand better and better how nicotinamide, riboside impacts consumers. Initially it was all preclinical studies. Now you're seeing a whole state of clinical studies and we understand fairly well now that it has a very serious and positive impact on a whole host of indications and structure function. You see liver, you see brain, you see cellular energy there's quite a few; they all ladder up to aging if you will. We break that down into individual cohort groups and then we target those cohort groups through customer acquisitions. So you create creative materials that attack – that appeal to cohort groups that are interested in for example, cognition. And then you create a series of ads that appeal to them and you target them and then you create a click path process for optimizing that sale, and we do it fairly well on several platforms and we used to do it better. On our fundamental website, and we will in the coming weeks get back to that again. But over the last year or so, we've adopted a strategy that is not optimized and so that is our process. Once you do that process, it's then just a sense of consistent measurement. Which ones are converting? Do we have to make minor changes to optimize them? Are any of them falling off? If so, do they? And the ones that are converting with a reasonable return on ad spend that's paying off, then you hit the gas pedal hard and you spend more…

Thank you very much.

Thank you.

Our next question comes from Jeff Cohen from Ladenburg Thalmann. Please go ahead. Your line is open.

Hey, thank you. This is actually Destiny on for Jeff. I hope everyone is doing well. Most of my questions have actually been answered, which is great. I am curious to know a bit more about this branding initiative or event that you mentioned. Could you give us a few more details on that please?

Hi, Destiny. If you recall a year ago we endeavored to pursue a television campaign for about six weeks. And we created a television spot, which we tested and launched and it actually did quite well. The reason why we pulled back from that campaign is, it's a number of reasons. One of which is we all know what's happened in the economy in the last year and what's happened in the capital markets and the importance of being cash flow positive and focusing on the bottom line as well as the top line. And it was doing well, but not well enough to pay for itself. So we – it's not that we are not going to pursue that strategy. We decided to pull back from what is a very expensive and aggressive strategy, mass retail plus television at the right time we will get back into it, but it's not now. But we understand that what we're sitting on with Tru Niagen at 20% growth annually, 10%, 20%, 30% growth is pretty good, but not good enough. A company that's doing $20 million a year with a product like this should be doing $200 million a year – a quarter. It's too good a product. It has too good an impact on people's health. So we do need to take some shots and yes, we're conservative, but we need to take our shots carefully and we are going to take another shot in the coming weeks and if that works, we're going to hit the gas pedal again on that. And we have other shots that we're planning later on in the year. We recognize the upside potential. We just want to do it smartly and carefully. There's not much more that we can tell you about that…

Okay, no problem. I’m excited to see it when it launches, so that’ll be great. I’ll keep an eye out for it in the next couple of weeks. I just want to switch over to Watsons for a second. I’ve heard you, mention it in a couple of other people’s questions or answers to their questions. Has the strategy there changed at all in terms of commercial efforts? Or are things staying pretty consistent? Like now that you – some of the restrictions have been lifted, is there more of a marketing push? Is there anything like that, that we should be thinking about going into 2023?

The tactics are the same. It’s a, they promote it aggressively in store and they do some marketing out of store. The only – and the market is very, it’s very popular. There continues to be very popular there. The only strategic shift is that there is interest in Watsons in expanding the product offering from the Tru Niagen brand. So there is the possibility that we’ll see more than just Tru Niagen and sold in store in Hong Kong.

Got it. Okay, very interesting. Thank you so much for taking my question.

Sure.

Our next question comes from Sean McGowan from Roth MKM. Please go ahead. Your line is open.

Thank you. Can you talk a little bit more about the impact of the mix shift that you referenced? Is that due to the strength in Watsons? Is that what’s causing that?

Gross margin, Sean, gross margin and business mix?

Yes.

Thanks, Brianna. Yes, look that is the reason.

Okay. And now in – when you talked about R&D spend being up, are you talking about it being up as a percentage sales or in dollar or both?

$1000, Sean.

Okay. And the brand awareness is all of that, this event that you’ve referenced, and I appreciate you not wanting to give the detail, but is all of that expense going to be shown in sales and marketing?

Yes.

Okay. And I have a question about other brand awareness stuff, but I appreciate you wanting to keep that close to the vest. That’s it. Thanks a lot. Appreciate it.

Thank you, Sean.

Thank you, Sean.

Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead. Your line is open.

Thank you. I appreciate it. Would you please give us a more detailed update relative to Sinopharm and where they are at in their cross border strategy and the other strategy initiatives that they have?

Sinopharm is very methodical. We’re very impressed with the quality of their work and the thoroughness of their work. We’re not that impressed with the speed of their work. They’ve launched on two platforms. I think they’ve plan to launch on two more platforms. They’ve been now at two conferences, presented at two conferences. There was one last week. I can’t really, there’s really not that much more to say about it. The market is fairly large there, and NMN sales in China are still very significant cross-border. Sinopharm is also assisting us in obtaining Blue Hat approval, so we can do in-country sales. But, it’s a conservative estimate that we’re giving them this year. We like them as partners. They’re trusted partners, they’re quality partners, but they’re very methodical in their pursuits.

Rob, would you please highlight what’s happening with NMN in China? I had the impression that the authorities there, were pushing back on some of the marketing practices for NMN. And I’m wondering what, if any window of opportunity is that creating for Sino?

It’s not just Sino that’s selling, by the way, cross-border into China. H&H is a deal we made that is also selling cross-border in China. And H&H is actually doing quite well with Niagen into China. It’s actually doing better than Sino already. Watsons is also begun selling a little bit of cross-border into China of Tru Niagen. So, we’re seeing overall growth NMN in general? Yes. The most of, there are literally hundreds of sellers in China selling cross-border into China. And the government has cracked down on claims. Initially, they were making a lot of claims that were basically Tru Niagen claims, including, companies advertising that Li Ka-shing was taking NMN, which is obviously not true. He takes Tru Niagen and they have pulled back. However, the thing to understand is that NMN works. NMN is a precursor to NAD. It’s just very inferior to Niagen. In fact, NMN is Niagen plus a phosphate group attached to the perimeter. So some companies, in order to make NMN, they start with NR or Niagen, and they literally add the phosphate on top of it. The problem with that phosphate is that it blocks transport into the cell. So once it’s in the blood, once you consume NMN and its circulating through the body, it doesn’t have a way to enter cell. So within the body, the phosphate is pulled apart, and what is left is Niagen is nicotinamide riboside, which then gets upregulated into the cell and elevates NAD. So it’s basically inefficient NR, but it does work. We believe that it works. We don’t know, if it’s as safe as NR, there’s some questions about that, but we do believe that it works. So it just doesn’t work as well. So for that reason, with the passage of…

It does. Thank you for the perspective, Rob.

Sure.

We have no further questions in queue. I would like to turn the call back over to Brianna Gerber for closing remarks.

Thank you, Julianne. There will be a replay of this call beginning at 4:30 P.M Pacific time today. The replay number is 1-800-770-2030, and the conference ID is 4126168. Thank you everyone for joining us today and for your continued support of ChromaDex.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.