Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's Fourth Quarter 2018 Earnings Conference Call. My name is Sonia, and I will be the conference operator today. [Operator Instructions] 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 2018. 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, Senior Director of FP&A and Investor Relations. Please go ahead, Ms. Gerber.

Thank you, Soniya. Good afternoon, and welcome to ChromaDex Corporation's Fourth Quarter 2018 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 plan 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; 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 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 the forward-looking statements. These risk factors include those contained in ChromaDex's annual report on Form 10-K 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 change in 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 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 now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Thank you, Brianna. Good afternoon everyone. And thank you for joining our fourth quarter 2018 investor call. Recently the FDA announced that it's taking a new look at the dietary supplement space. We think this is potentially great news for customers and for ChromaDex, means the FDA is going to support enterprises that do it the right way, that are truly committed to science and to improving health. We have 21 employees in our Longmont, Colorado lab. The majority of whom are scientists and who are committed to safety, efficacy and developing new science. Our ingredient NIAGEN has twice been successfully reviewed under FDA's new dietary ingredient NDI notification program and has been successfully notified to the FDA as generally recognized as safe. ChromaDex is well-positioned if the FDA updates its enforcement of the dietary supplement space. We hope they do. Before reviewing 2018 and fourth quarter results, I will turn the call over to our Executive Chairman, Frank Jaksch for an update on recent developments in scientific research. Frank?

Thank you, Rob. Since our last update, the science surrounding NIAGEN and the importance of NAD on human health continues to expand. There are 28 ongoing completed and published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and the therapeutic effects of NR. This is two more than our last quarterly update. An additional five clinical trials are registered to test NR in combination with other ingredients for a total of 33. We finished the quarter worth about 170 signed research collaborations, approximately 10 more than last quarter. Over 60% of the studies that are in progress are being planned focus on neurological and cardiovascular areas, with other key areas being obesity and aging. As I've said, not only does the research validate the efficacy of NR, it provides valuable insight that may translate into potential new benefit areas for NR with additional research. Importantly, many blockbuster vitamins and ingredients that have a high level of consumer awareness also have a substantial number of published research in clinical studies validating their safety and health benefits. Here are a few important highlights related to clinical studies since we last spoke. In January 2019 Dr. Doug Seals from the University of Colorado, Boulder registered a new clinical trial that will investigate the use of NR as a fasting mimetic to lower systolic blood pressure. This could be a more practical alternative to caloric restriction, which has been shown to be effective. It has also a follow-up to the Martens 2018 studies showing trends toward lower blood pressure and decreased arterial stiffness in patients taking NR the study. The study will use a larger cohort to look at changes with an estimated enrollment of 118. High blood pressure in arterial stiffness are too promising variables in the Martens 2018 study have…

Thank you, Frank. Kevin Farr will go through the numbers in greater detail in what was another strong quarter for us and a strong year in general. We showed a 12% increase in revenues from the third quarter of 2018 and a 20% increase from the fourth quarter of 2017. As most of you know, our strategy is to build TRU NIAGEN into a global brand. And in 2018 we got a lot done to that end. We opened two new international markets, Canada and New Zealand. We launched in New Zealand with our partner, Matakana SuperFoods in September and received regulatory approval to sell TRU NIAGEN across all platforms in Canada in October. Today, our Canadian businesses primarily a eCommerce strategy through Amazon Canada and our own website truniagen.ca. We're also leveraging our partnership with Fullscript Canada to reach healthcare practitioners and expanding distribution to retail channels in 2019. We also took an important first step toward China in 2018 with the announcement of a memorandum of understanding for the development of a strategic partnership for aging research with the Jiangxi Province. We launched two new products targeted toward important influencers in the U.S., healthcare practitioners and professional athletes. In the third quarter we introduced our TRU NIAGEN PRO line for healthcare practitioners, featuring the highest dose of NR available in a single capsule at 300 milligrams, consistent with our second NDIN. And in the fourth quarter we began selling a customized product for professional sports teams that includes the NSF International's Certified for Sport certification, which means it's been tested for over 272 athletic banned substances. We're early in the stages of execution. We believe this is a strategic long-term opportunity that has significant potential. The personnel of the company, perhaps our greatest accomplishment and our most important…

Thank you, Rob. Let's take a look at our financial results for the fourth quarter of 2018 which reflect continued progress against our key financial objectives. I'll focus my remarks in sequential growth in the fourth quarter of 2018 compared with the third quarter of 2018. As well as year over year results for full year 2018 versus full year 2017 results from continuing operations. At this stage of our growth cycle, we believe sequential trends are important to demonstrate progress towards their objective of cash flow break even. In that framework we continue to experience strong, sequential growth in sales, improved advertising efficiency and lower operating expenses, especially when you exclude non-cash equity compensation. For the three months ended December 31, 2018 ChromaDex reported net sales of $9.1 million up 12% compared to $8.1 million in the third quarter of 2018. For the full year 2018 net sales were $31.6 million up 49% compared to $21.2 million for full year 2017. Our TRU NIAGEN business was up 24% sequentially against the backdrop of lower selling and marketing spend, which I'll discuss in a moment. For full year 2018 net sales of TRU NIAGEN grew by 238% versus 2017. The strong growth was partially offset by expected declines in our ingredients and other legacy businesses. Our NIAGEN ingredient sales were down 4% compared to third quarter. As expected our NIAGEN ingredient sales for full year 2018 declined by 33% as we successfully pivoted from an ingredient company in 2017 to a consumer product company in 2018. Turning to the gross margin for the fourth quarter, our gross profit was up sequentially in absolute dollars. However, our gross margin decline from 53.7% in the third quarter to 52% in the fourth quarter of 2018. In the fourth quarter, gross margin was…

Hi, Ron. Can you hear me okay?

Yes we can.

Wonderful. Could you talk a little bit more about the technical feasibility study or studies that you're referencing as far as Nestlé goes? What is the timing required as far as what needs to be done and who will be doing work and if we’ll see any of the data there?

The primary technical feasibility issue is stability in liquid. We are both, Nestlé and ChromaDex, separately working on this issue, but we're very confident that there is a solution to this problem.

Okay, got it. And is it safe to say at this point you would anticipate, and I don't expect me to speak on behalf of Nestlé, but a commercial offering from them in 2020, is the current goal.

Yes, that is the plan middle 2020.

Okay, got it. As far as margins from 52%, you do expect some improvement during 2019 and will that be a seasonal nature or do you expect that to gradually increase where you'll come out the back half of 2019 with better margins in the front half, for example?

Yes, I think, they'll get better as we go through each quarter. As we see TRU NIAGEN drive in the growth in the business. If you look at our 10-K that we filed today and you look at the consumer products segment, it's generating about 61% margins. And when you look at the run rate for 2018 full year, it's about 51%. So we should see continued growth in gross margins because of that tail wind in 2019.

Okay, got it. And then, lastly, if you will, could you walk me through what we should expect as far as you talk about legal expenses, could you give us a range or give us a comparison as opposed to a $4.7 million for 2018? And could you talk more specifically about the trial that begins in July and what we could possibly anticipate as far as timelines go?

You want to answer Frank?

Yes, why don't I give you an answer to the legal fees for 2019? We're going to spend what we need to spend in 2019 to protect our intellectual property and to win these cases. With regard to what I talked about was the timing. We expect to expand more in the first half of the year because we're getting ready for the trial in July and we should see that taper off in the second half of the year. If you look at our 2018 in total our legal spending was about $9.8 million in 2018 with those primarily related to the litigation, as well as some investments in regulatory approvals in new markets.

And do you want to repeat – this is Rob speaking, Jeff, can you repeat the second half of that question?

I think I was looking for a little color as far as how the trial may kind of a read out or what we could expect to hear? And perhaps some guesstimates, I know when we may expect to hear?

From a financial standpoint?

No, from a legal standpoint, right the California trial, which conventions in July I believe.

Right. So, as you know, this conflict is taking place on three fronts. There's a California dispute, a New York dispute and Baltimore Maryland dispute. And the trial in July is the California dispute. There are a great deal of public records available that one can read about how these disputes are progressing and with great consistency the courts have been ruling in our favor. And we would encourage you and anybody to look at those public documents to see the facts as they are being presented and how these cases are materializing. We have a great deal of confidence in the facts, we have a great deal of confidence in the law and we have a great deal of confidence in the results. Assuming that there is not a delay, the trial in California should commence in July. We are very eager for it to begin. We are very eager for more of the facts to come out in the public. And we expect a good outcome.

Okay. And no dates or information regarding New York or Maryland at this point in time as far as the court progress on timing?

I meant Delaware. I'm sorry. No, no, we have no dates yet set in either Delaware or New York.

Okay, got it. And then lastly, if you can walk me through the OpEx, Kevin. It sounded like what I was hearing, generally speaking, was that the total OpEx for 2019 should be at approximately, similar levels to 2018 as you continue to leverage the top line?

Yes, that's correct. I think when you look at sales and marketing expense, we expect that to be roughly the same as 2018, although we expect to see scale, in that particular line item, like we saw a good scale in it in the fourth quarter of 2018 were to improve by 820 basis points to 51% for the total company. What drove that, I think, was again advertising efficiency related to tightly managing digital marketing by focusing on certain consumer groups that had higher conversion rates, as well as we had higher reorders. And then when you look at SG&A, I think, we've also said, look, it's going to be roughly the same as 2018. Again I think we've talked about the run rates probably more like the fourth quarter rate as we built up the infrastructure for the company. And we again would expect that too as we grow through strong sales to TRU NIAGEN to leverage that as a percentage of net sales.

Okay, Perfect. That’s it from me. Thank you very much.

Thank you. And our next question comes from Jeff Van Sinderen of B. Riley FBR. Your line is open.

Hi, everyone. Maybe you can speak a little bit about how you are thinking on the Watsons businesses this year, maybe what you see the drivers being as far as store count, or increased volumes at existing stores. Just any more color on what you are expecting with Watsons would be helpful.

Well, of course it's very strong in Hong Kong. We have had issues getting good health claims cleared and strong marketing in place for Singapore, but we expect that to resolve itself during the year as well. So we're hoping and expecting for stronger growth in Singapore, as well. We've had some complications getting regulatory approvals in Taiwan where we also have a deal in place with Watsons. It's a complicated process. You're talking not about getting an approval for an existing ingredients and a new product, in these cases we're actually having to get the ingredient approved in these countries. So many of these countries are unfamiliar with nicotinamide riboside. So this is why it is a long, complex process. It's more than just safety and in many cases there is no existing data available to them about the ingredient. They know about the approvals in the other countries and that's often helpful, but it's still is a time-consuming process. We recognize that this is a high priority for the company. And we are putting much more time and attention into this area. But until we receive regulatory approval in Taiwan, we will not be able to sell it in Watsons stores in Taiwan, or frankly other territories. We're expecting strong – continued, strong growth obviously in Hong Kong. Stronger growth in Singapore and Watsons is as well.

Okay. And I know you're focused on getting approvals internationally and you've added to your team there. Can you touch on what you expect in contribution from Canada this year? And maybe which countries you think are the most promising for approvals in 2019, do you think it's Taiwan, or are there others that might happen before that? Maybe you could just talk a little bit more about that.

We've decided that we're going to stop giving guesses as to when we will receive regulatory approvals in these countries. They're just too many factors beyond our control. These are government bodies that have their own processes in place and there are individuals and we just don't know. We know that we are putting a lot of energy into five or six countries. We believe that receiving EU approval is important for our business. We think Japan is important. We think Australia is important. We continue to believe that Taiwan is important and of course China is important. Our deal with Nestlé also includes Latin America, so we are also putting some energy there. With the partnerships with Watsons and Nestlé there's very, very clear path towards significant business growth. So our efforts are aligned with where we think there is the largest opportunity.

Okay. And then just to follow up on Canada, maybe you can just touch on the contribution or how you see that business ramping in 2019 now that you do have approval?

Well of course, the Canadian population is very sophisticated actually in the supplement world, but the population is about 10% of that the U.S. and we have a head start here in the U.S.

Okay. And then just one follow-up, I wanted to ask on marketing, I know that you've built your marketing team out bit. Maybe you can just talk us or walk us through some of your key marketing initiatives that you have planned this year?

Well, we realized that the market for TRU NIAGEN is much larger than just anti-aging. We understand mechanistically what elevating NAD levels in cells through TRU NIAGEN does for health. Now I want to say we understand how it impacts the health of the people that take it and we believe that everybody listening to this call should be taking TRU NIAGEN and recommending it to those that they care about. But understanding what it does versus making health claims based on published clinical studies is a different story and we are working aggressively to be able to make those health claims. But having said that, we understand that it is an important factor in general cell repair. So we see the fitness market as a very strong growing market. The sports market in general, we now believe that there are dozens of professional NBA players taking TRU NIAGEN. We know professional football teams that are taking TRU NIAGEN. We know athletes in many categories that are taking TRU NIAGEN and contacting us frequently and telling us about dramatic results that they've experienced. These aren't people that are necessarily worried about aging in the traditional sense. They're more worried about healing. So we understand that it's important for us to create marketing campaigns that target this demographic and this market. And we intend to roll out campaigns that features that. In fact, recently we released a number of ads featuring a Hall of Fame football player, Shannon Sharpe, who contacted us because he had been taking the TRU NIAGEN for five or six months and was extremely excited about the impact on his health. I expect that we will see more ads with him and people like him. Broader speaking, we're going to aggressively work on our earned media and overall awareness of NAD. We're putting much more resources into PR in general. It is frustrating to us at times when we know that we have developed the science behind nicotinamide riboside in NIAGEN. We have invested years and millions of dollars in developing it and building a strong patent portfolio, when a journalist who chooses not to do their work, will write an article about NAD or NR and actually not even mention the company that developed it or controls the intellectual property. So we intend to put more energy into this area of earned media and PR and also we are seeing very, very good numbers in general in terms of retention of people who do become customers of TRU NIAGEN. Our customer do tend to be a satisfied, particularly those that take it for more than a month or two. It takes your body a long time to age. It doesn't take a day or two for it to un-age, there is a little bit of patience people tend to be happy, but we will continue to work on that experience and on the retention of plans for our existing consumers.

Okay. Good to hear. Thanks for taking my questions. I'll take the rest offline.

Okay.

Thank you. [Operator Instructions] Our next question comes from Bill Dezellem of Tieton Capital management your line is now open.

Alright, thank you. I have a group of questions and first of all following up on your last point, Rob, about more attention to PR, it has been my impression in the past that you have been a little bit cautious to push too hard on the PR front for fear that you could see a big influx of business that you were not ready for. If you were to see that big influx, are you now ready for it and so therefore you're going to be less shy?

I think there is some truth to what you're saying. I think we wanted to make sure that we had the platform and the infrastructure in place. Online customer service, internal management response responding to questions, yes. I feel that this company is ready to scale.

Thank you. And then one of the things that I had presumed was that your sales, marketing and advertising expense would increase in 2019, but not at the rate of sales growth. So you would have some leverage off of that and yet you're talking about holding those dollars flat or even down in 2019, would you please discuss how I guess how you are doing that and with still being able to grow sales in 2019?

Yes. Again, I think there's opportunities with regard to our reorder rates as well as, , you're doing broader marketing. We've talked about PR platforms, earned media as well as other platforms that to basically mark it on. And I think we're going to see efficiencies from that. We're going to get more from what we spent this year as well as we're going to be able to as a percentage of sales to make it be much more efficient based upon those platforms as well as getting all the metrics with regard to our eCommerce business to continue to trend in the right direction.

And then lastly, the past two march corridors, you have had a lower sales. Do I understand correctly that you are expecting sequential sales growth in Q1 of 2019 from the fourth quarter of this year?

Yes, we should see sequentially continued growth in any quarters. So that's like if you look at our growth over last a couple of years that we've actually, every quarter we've been growing since the beginning of 2017 second quarter. So we've been sequentially growing for quite a while now.

Thank you both.

Thank you.

And Ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Brianna Gerber for closing remarks.

Thank you, Soniya, and thank you all for joining us today. There will be a replay of this call available beginning at 7:30 p.m. Eastern Time tonight. The number to call for the replay is (855) 859-2056 and the passcode is 5675308. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.