Ladies and gentlemen, thank you for standing by. Welcome to ChromaDex Corporation's Second Quarter 2019 Earnings Conference Call. My name is Cheryl, 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 second quarter 2019. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's Web site at www.chromadex.com. I would now like to turn the conference call over to Brianna Gerber, Senior Director of FP&A and Investor Relations. Please go ahead, Mrs. Gerber.

Thank you. Good afternoon, and welcome to ChromaDex Corporation's second 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 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, 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 of the 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 actually 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 quarter reports 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 Web site, 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 Web site 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 second quarter 2019 investor call. It was another successful quarter for the company. We continue to advance our three core objectives; build TRU NIAGEN into a global brand, to own the science and to focus on the fundamentals. We again delivered strong sales growth with 42% year-over-year and 10% sequentially with TRU NIAGEN representing 79% of net sales in the quarter. U.S. e-Commerce retention rates improved compared to the first quarter. We drove continued global expansion with initial cross-border sales into China and Japan. We added new specialty retail partners in the U.S. and in Canada. Continue to build a solid foundation positioning us for more diversified growth in the TRU NIAGEN business. This quarter, we took a public position on industry safety compliance and efficacy and I would like to thank those of you who reached out in support of my Op-ed on this topic that ran a nutritional outlook in June. Science and regulatory compliance are imperative for consumer safety and the integrity of the dietary supplement industry in general. Yet, companies are not complying with the FDA’s NDIN and GRAS status processes set forth by DSHEA in 1994. Due to limited resources at the FDA, these rules are not being enforced consistently. Three out of every four Americans take a dietary supplement and that number is growing. By 2023, the U.S. dietary supplements market will surpass $18 billion according to Euromonitor. People deserve to know that what they are ingesting is safe, that the health claims are validated by science and that what is written on the label is truly what is in the product. This is an important mission for ChromaDex and for me personally. We will continue to champion the necessary regulatory changes required to protect consumer health and ensure that reputable companies have a level and fair playing field. Before reviewing the quarterly results in more detail, I will now turn the call over to our Executive Chairman, Frank Jaksch, for an update on recent developments and scientific research. Frank?

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 32 ongoing completed and published clinical trials currently registered on Clinicaltrials.gov to investigate the pharmacokinetics and therapeutic effects of NR. This is three more than our last update. An additional five clinical trials are registered to test NR in combination with other ingredients for a total of 37. Over 70% of U.S. studies that are in progress or being planned focus on neurological and cardiovascular areas with other key areas being obesity and aging. We finished the quarter with more than 170 signed research collaborations, roughly the same as last quarter. In June, we celebrated the success of our external science partners, educated the research community about NIAGEN and generated new interest in our collaborative research projects at the FASEB NAD Metabolism and Signaling Conference. Rob will share more about this conference later, but I wanted to say what an honor it was to be surrounded by so many experts in their respective fields who are advancing this important area of research. One notable theme was the importance of NAD to key cellular repair and signs which has been getting a lot of attention. Among those presenting the research in this area was Dr. Carlos Cantó with a presentation entitled Exploring the Physiological Roles and Limitations of NAD Precursors. His preclinical research demonstrated that the key enzymes and pathways which utilize NR to produce NAD become especially critical when cells are faced with metabolic stress, which we believe will translate more broadly into conditions of aging. This builds…

Thank you, Frank. As I mentioned upfront, we made progress across each of our core objectives in the second quarter. First, we continued to build TRU NIAGEN into a global brand. The company delivered 11.1 million in total net sales, a 10% increase sequentially and a 42% increase year-over-year. TRU NIAGEN net sales were 8.7 million, a 17% increase sequentially and 134% increase year-over-year. E-Commerce net sales were 6.5 million, a 10% increase sequentially and an 88% year-over-year. For the third consecutive quarter we delivered this growth against the backdrop of improved marketing efficiency, as higher sales from returning customers represented the primary driver of growth. We’re very encouraged by the loyalty of our returning TRU NIAGEN customers but have not yet reached the tipping point of awareness for our brand and NAD in general. This continues to be an important priority for us. Each quarter, we continue to refine our marketing messaging as well as test new campaigns, all grounded in a solid foundation of science. This quarter we launched our True Believer campaign featuring respective influencers and celebrities. These individuals have been following the science of NAD and are among the early adopters of TRU NIAGEN. Our first True Believer was Strauss Zelnick, CEO of Take-Two Communications and Zelnick Media. We have since expanded this to include Dr. Roger Kornberg, a Noble Prize winner on our SAB and Dr. Alyssa Dweck, a practicing gynecologist who was voted Top Doctor in New York Magazine and in Westchester County. Also Gabrielle Reece, a former professional beach volleyball player, a health and fitness expert and Nike’s first female spokesperson. Of course, Adam Vinatieri, a 46-year-old placekicker for the Indianapolis Colts with five Super Bowl appearances and Hall of Famer football star, Shannon Sharpe. Like many of you listening today, they are…

Thank you, Rob. Let’s take a look at our financial results for the second 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, gross margin expansion and improvements in advertising efficiency. We also continued to tightly control growth in operating expenses. For the three months ending June 30, 2019, ChromaDex reported net sales of 11.1 million, up 10% compared to 10 million in the first quarter of 2019. Year-over-year net sales were up 42% compared to the second quarter of 2018. TRU NIAGEN business net sales were up 17% sequentially despite lower selling and marketing spend as a percentage of net sales. Year-over-year net sales of TRU NIAGEN grew by 134%. This strong growth was partially offset by expected declines in our ingredients and other legacy businesses. Turning to the rest of the P&L, our gross margins were up 360 basis points from 52.8% in the first quarter of 2019 to 56.3% in the second quarter of 2019. Excluding certain charges in the second quarter of 2018, year-over-year gross margins increased by 580 basis points compared to 49.3% in the second quarter of 2018 or by 700 basis points as reported. We have completed the wind down of our purple corn ingredient and as expected the impact was immaterial in the second quarter. Increased TRU NIAGEN consumer product sales drove the improvement in gross margins, a trend which we believe will continue. Our total operating expenses for the second quarter of 2019 was 13.4 million, down 0.3 million compared to the first quarter of 2019. Our selling and marketing spend was up 0.1 million to 4.3 million in the second quarter compared to 4.2 million in the first quarter…

[Operator Instructions]. The first question comes from Jeff Van Sinderen of B. Riley FBR. Please go ahead. Your line is open.

Hi, everyone. Let me say congratulations on the improving quarterly metrics. Can you speak a little bit more about the EFSA positive opinion and how that moves you forward in the EU regulatory approval process? I think you mentioned drafting legislation that has to be associated with that. And then a tougher question, any sense of timeframe around that? And then also can you speak more about the soft launches in China and Japan and what the next steps are there?

Well, we’re not surprised that Jeff this is your first question. Yes, we’re extremely excited about this EFSA opinion. It’s perhaps the most respected – certainly one of the most respected regulatory bodies in the world and that they were able to render a positive opinion in little more than a year is a testament to our excellent staff, the quality of our dossiers, the research and the relationship we have with them. We hope and expect that this influences regulatory bodies worldwide. But as we pointed out, this is only step one in a multiple step process towards by getting full approval to selling in this very, very significant market of the EU. However, it is the most difficult of all of those steps. It is a recommendation from EFSA we now need to get the EU Commission to actually draft an approved legislation. Generally that happens. It takes time though and it’s as you know Jeff from previous conversations we’ve stopped giving estimates of time. It could be a long time, it could be less, we don’t know. But we are happy with how quickly we received this decision and we hope that it bodes well for the subsequent decisions. In addition to getting that EU Commission to draft the legislation, we also have to get the individual member states to approve the product TRU NIAGEN and then we also have to get health plans, although there are vitamin B3 health claims already approved in the EU as we speak. So there is work to be done. But as you know it’s a tremendous market, it’s a tremendous opportunity. We have some great partners who are extremely interested in this decision; Watsons being one, Nestlé being another. So we believe we are poised to well take advantage of this exciting opportunity and we think we will as quickly as one can do. That’s the best I can give you in terms of outlook.

Okay, that’s helpful. And then just to follow up on China and Japan soft launches you mentioned, just wondering what the next steps are there?

Okay, on the cross-border?

Yes.

Okay. So we have done a launch cross border using third party platforms into both Japan and China. It is a soft launch. We are not aggressively marketing in those territories as of yet. However, we are very encouraged by what we have seen thus far. Both of those markets are very sophisticated and sizable, especially in terms of dietary supplements but also the anti-aging space. Both of those markets are important for anti-aging. We acknowledge and recognize that they are both great opportunities. We have put the infrastructure in place. We have applied the experience and knowledge that we’ve learned here in the U.S. and in other cross-border platforms to those and got off to a much quicker start in both of those territories than we did in other previous territories.

Okay, great. And then a question for Kevin. I know you guys provided a little bit different framework this time and I think you did guide to gross margin improvement. Just wondering in terms of kind of the next couple of quarters how we should think about the magnitude of improvement or how we should – or what we should expect for the magnitude of gross margin improvement? Should we expect it to be similar to the level of those experienced in Q2 or how should we think about that for gross margin?

Well, I think sequentially we should see more improvement in the third and fourth quarters as TRU NIAGEN basically becomes a bigger part of our business. And I think the other thing that could provide an incremental benefit to us is some cost savings programs that we’ve been working on. And as we look at those cost saving programs, they relate to really looking at our supply chain and optimizing our supply chain and getting scale from our supply chain. We also did some product design changes that you’ll be seeing later on this year and we think that incremental value will be coming late in the fourth quarter with most of the sales benefits or cost benefits showing up in 2020. So I think you’ll see some steady progress, but I don’t think you’ll see the kind of incremental growth that we had in the second quarter. And so these cost savings come online in late fourth quarter and the first quarter of next year.

Okay, that’s helpful. Then one more if I can squeeze it in. I know you spoke a little bit about Nestlé, obviously a terrific and important partner for you. Anything else you can say about the progress in getting to technical feasibility? What form you think the product will hit the market in 2020? Just anything around that would be helpful.

So our expectation is in 2020 the product but that Nestlé offers in the marketplace would be in powder form not in beverage form. The work that we’re doing on creating stability in liquid is ongoing. We have excellent scientists working on it. We know we’re doing the proper procedures. We are highly confident that we are doing it the right way and we are confident that we will solve the problem. We don’t know if it will be solved by the end of 2019, but we are confident that it will be solved. Remember, nicotinamide riboside is already found in trace amounts in milk. It’s already found in liquid. So the process is a multi-varied [ph] process partly binding to the protein found in milk. Also there’s a beating process. It’s going to ultimately be a combination of various chemistry processes to create stability that last long enough on the shelves, but we have confidence that we will get there.

Yes, just to follow up on our expectations I think I said in my prepared remarks is that look, we’re not expecting much in 2019. And in 2020, they’re doing a limited launch. So I think the real benefits that you’ll be seeing will be in 2021 as they do a larger scale launch in 2021 of loose powder and hopefully ready-to-drink, but still a lot of work to do there.

Got it. Okay, that’s helpful. Thanks for taking my questions and best of luck.

Thank you.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead. You line is open.

Hi. This is actually Destiny on for Jeff. Congratulations again on a great quarter. I just had a couple quick questions around the marketing. I’m curious to know firstly if you would be able to give maybe a rough estimate of the breakdown of repeat customers to newly acquired customers. Would you say maybe a two-thirds repeat, one-third newly acquired? And then would you also be able to speak a little bit more about acquisition cost and conversion rate for your e-Commerce platform?

We appreciate those questions and in the future we expect to get more detailed with some of that information. But right now we’re really not providing customer acquisition cost information but to say that is has declined. The customer acquisition cost has gone down over time. And the percentage of revenue attributed to repeat buyers has gone up over time. But we’re not yet providing detailed information on customer acquisition cost and the breakdown of repeat versus new.

Okay, fair enough. Thank you. And then also curious, one other marketing question. As you have these publications, do you ever get feedback from channels such as your healthcare practitioners requesting some kind of flyer or something in that format to help give them to their customers if that makes sense? Do you get any request like that?

We do get request like that, but you bring up an interesting point which is healthcare practitioners in general. It is not a large segment of our business but it is a fast growing segment of our business. And we have been increasing dramatically weekly the number of healthcare practitioners that are purchasing and reselling TRU NIAGEN to their patients. We view that as a very important part of the business as well as the sports segment of our business. Because not only does it build a groundswell of awareness of our product but also it is a business onto itself. So we have been investing and creating marketing materials. Many of those marketing materials are requested by the healthcare practitioners themselves. But in educating them, informing them, meeting with them and we are excited about that. It’s a future prospect in the way it’s performed thus far.

Right. Okay, got it. And then one on Canada in general. Do you have any other distributors kind of in your pipeline that you’re working with to expand that network?

Can you ask that one more time? One of the words you said digitized out.

Okay. In Canada, do you have --

In Canada.

Yes. Do you currently have any other distributors that you’re in conversations with to expand your network?

We have no distributors or retailers that we’ve announced. We do get inquires frequently. But at this point in time it is the ones that we’ve announced which is Whole Foods, Showcase and WELL Health.

Okay. Perfect. I think that does it for me. Thank you.

Thank you.

Thank you.

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

Thanks very much for taking my questions. Firstly on the clinical front, I was wondering if you could give us perhaps a little bit more color on how long do you expect it to take for the new studies that you mentioned, specifically in CKD and AT to potentially mature and perhaps to your data? Is it likely that we would see some results from these studies over the course of next year? If so, do you have any further visibility on timing?

No. I wouldn’t say we have any real visibility on timing. Most of those studies on these collaborative studies have taken longer than we thought and it’s largely a function of enrollment. How long do they take to enroll the population and then how long it’s going to take them after enrollment to analyze the data and then report it and publish it? So I wouldn’t expect based on where we sit right now in where those studies are that they would be something you would see in 2020, but you never know. Some of them are smaller and they may report them. But it’s hard for us to give any real – give any real visibility on that.

Okay, fair enough. With respect to the way the e-Commerce business is evolving, do you have a sense of what could approach steady state in terms of the overall percentage contribution by e-Commerce to the overall revenue base? And if so, do you have a sense of at what sort of point in the future that steady state might be reached?

I think it’s difficult. It’s already a significant percentage of the business. I expect it to continue to grow because we have these legacy businesses that are not growing, as you know. However, what’s difficult to project at this point in time is how the retail business and these other wholesale businesses, the healthcare practitioner business and the sports business will grow. We expect them to grow as well. So it’s difficult to project a steady state because we don’t know which of those segments, the B2B segment or the direct-to-consumer segment will grow more rapidly.

Okay. As a follow on to that, I think this is kind of the underlying thrust of my query. If you think about what is preferable, those segments you just mentioned that are not e-Commerce related that are indeed growing versus further growth in e-Commerce, with respect to improvement in sales efficiency and kind of what would be preferable in terms of the growth trends that you expect to see as the revenue mix evolves? In other words, what’s the most efficient way to grow sales such as that you’re not necessarily expending more effort than is absolutely necessary in an optimized manner on the sales front?

So there are three types of costs in terms of efficiency. There’s the cost of the good, there’s the overhead and then there’s the marketing cost. And these different segments have different costs associated with them. Obviously, the margins are best in the direct-to-consumer business. But the marketing expense is highest in the direct-to-consumer business. The lowest hanging fruit as I think pretty much what you’re asking I would think is in the retail business because as we get regulatory approvals in these various countries, we seek out partners like Watsons. And indeed, we already have this wonderful relationship with Watsons who’s already expressed interest in expanding that relationship into other territories. So in those cases, assuming the deal we make with Watsons is somewhat comparable to the one we have in place, the path to incremental revenue is really a deal away.

All right. Got it. Okay, that’s helpful. On the litigation front, I would wondering if you could point to any recent indications that there might be a speedier resolution to the overall situation with Elysium? If there’s been any indication on their side that they might not necessarily be willing to pursue, shall we say, a Kamikaze course and possibly agree to some kind of settlement or if there’s been no change in their overall demeanor so far?

Well, let me say that if there were communications like that it would be something we wouldn’t disclose. So I’m not saying one way or another if there were conversations. But I will say that the trial is scheduled two months from now. So one way or another – at least one aspect of the conflict is going to come to a resolution within the next couple of months. We’re excited about it. We’re very excited for the facts to come out and for the general public and the investors to see what – to learn what they will learn once these facts become disclosed. We are very proud of the way we conduct ourselves as a company and the way we have in the past. And we’re confident that once these facts are disclosed that will confirm that we have conducted ourselves well throughout. If there’s an opportunity to create shareholder value, we are certainly interested in doing just that. But right now we are eager to get this thing to trial and tell our story.

And given your understanding of the scope and nature of the trial proceedings, do you have a handle at this juncture on kind of how far into 2020 the trial itself could stretch if you expect it to conclude within the course of 2020 and if so in what sort of timeframe? The first half of 2020, early 2020 or could indeed be trial proceeding themselves be largely wrapped up before we get to the end of 2019. Just wanted to get a handle on the timeline.

So remember there are three separate disputes there. There’s the California commercial dispute, there’s the patent dispute and then there’s the New York dispute and the trial is for the California dispute which is scheduled for --

Right. That’s what I’m asking about specifically, the California --?

Fair enough. The California trial we’re estimating it would be a two-week trial.

Got it. And then last question on the R&D front, I was just wondering relative to what you were saying earlier about the feasibility and product engineering assessments that you’re doing relative to the Nestlé collaboration on the liquid formulation side of things. Can you give us a sense of what kind of contribution that is making to your R&D spend, how much of the R&D spend is associated with that? And then if there’s any other kind of additional breakdown you can give on what specific activities are going on contributing to the R&D line item, that would be helpful?

Yes. I think with regard to the R&D line item, we haven’t really given guidance on it for prospective of all 2019. But we have said we’re more focused. And as we look at 2019, it’s probably going to be similar to what it was in the prior year and we are within that budget we are funding the technical feasibility as well as other important efforts with regard to our IP.

Great. Thank you very much.

This has concluded the allotted time for questions. I will now turn the call over to Brianna Gerber for closing remarks.

Thank you, Cheryl. 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 3774159. Thank you everyone for joining us today and for your continued support of ChromaDex.

This concludes today’s conference call. You may now disconnect.