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Edited Transcript of CDXC earnings conference call or presentation 10-May-18 8:30pm GMT

Q1 2018 Chromadex Corp Earnings Call

Irvine Jun 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Chromadex Corp earnings conference call or presentation Thursday, May 10, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Johnson

ChromaDex Corporation - Director of IR

* Frank Louis Jaksch

ChromaDex Corporation - Co-Founder, CEO & Director

* Kevin M. Farr

ChromaDex Corporation - CFO

* Robert N. Fried

ChromaDex Corporation - President, COO & Director

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Conference Call Participants

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* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's First Quarter 2018 Earnings Conference Call. My name is Daniel, 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 first 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 over to Andrew Johnson, Director of Investor Relations. Please go ahead, sir.

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Andrew Johnson, ChromaDex Corporation - Director of IR [2]

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Thank you, Daniel. Good afternoon, and welcome to ChromaDex Corporation's First Quarter 2018 Results Investor Call. With us today are ChromaDex's Founder and Chief Executive Officer, Frank Jaksch; President and Chief Operating Officer, Rob Fried; 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, 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 this date -- on the date of this conference call and are not intended to give any assurances to -- as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause ChromaDex's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These risk factors include those contained in ChromaDex's annual report on Form 10-K and 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 changes 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 and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

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 is now my pleasure to turn over the call to Frank Jaksch.

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder, CEO & Director [3]

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Thank you, Andrew. Good afternoon, everyone, and thank you for joining our first quarter 2018 investor call.

We are pleased to report today that the science surrounding NIAGEN and the importance of NAD to aging in human health continues to expand, and our sales of NIAGEN-related products continues to surge.

Rob and Kevin will take you through the details of this strong growth. But first, I'll provide an update on the continued broadening of scientific research into the benefits of NIAGEN.

This year, the number of human studies on NIAGEN posted on ClinicalTrials.gov has grown from 14 to 18. The additional 4 human studies are investigating NIAGEN's role in some very exciting new areas of human health: the University of Cambridge is looking at mitochondria and mitochondrial biogenesis. Researchers at the University of Washington are looking at NR for specific areas of heart health. Iowa State University researchers are evaluating the effective NR on metabolism and vascular function.

And Dr. Martens, the author of the recent University of Colorado Boulder Blood Pressure Vascular Stiffness Nature publication is continuing his work on NIAGEN at the University of Delaware, where his team is looking at NR for decreasing mild cognitive impairment and age-related memory loss.

With these 4 new clinical studies, there are currently 11 clinical trials underway that are looking at specific efficacy endpoints.

To date, the total number of signed research collaborations has grown from 140 to over 150. We estimate that these studies represent more than $50 million of independent research on NIAGEN that is fully funded by unrelated parties. We look forward to learning more from these valuable independent collaborative studies as they progress. As the foundation of science continues to build, the pipeline of peer-reviewed publications will provide a significant source for ongoing media engagement and consumer awareness.

I'd also like to take the time to highlight a few important published studies on NIAGEN that happened during Q1.

In February, we announced the study published by the National Institute of Aging at NIH, where NIAGEN was shown to prevent neurological damage and improve both cognitive and physical function in Alzheimer's disease mouse model study.

On March 29, the University of Colorado Boulder published a study in Nature Communications. This landmark study was the first to focus on specific therapeutic endpoints, whereas previous NIAGEN human studies have demonstrated that NIAGEN is both safe and effective at raising NAD and ATP levels.

Findings showed that in 13 participants with elevated blood pressure or stage 1 hypertension, systolic blood pressure indicated improvement with further studies focused on vascular health being planned.

In the UC Boulder press release, the author stated, if this magnitude of systolic blood pressure reduction with NR supplementation is confirmed in a larger clinical trial, such an effect could have a broad biomedical implication.

We're in the process of publishing the results from our second human study. That was the 8-week 140-person study establishing an effective dose range for NIAGEN, showed elevated NAD levels throughout the study and supported safety for daily use.

I'd also like to provide an update on where we're at with NR for Cockayne Syndrome. With the change in strategy to focus the company on our nutraceutical consumer product, TRU NIAGEN, we are changing our strategy for Cockayne Syndrome. As a result, ChromaDex will not directly pursue the IND for CS. We will continue this very important work as a collaboration with the National Institute of Aging at NIH, who will complete the IND process and fund the clinical studies necessary to make NIAGEN available as a treatment option for kids with CS.

Our collaborative study model has proven to be a very effective way of identifying and funding research like CS. And our interest in CS started as a collaborative study with NIA at NIH in 2013. And we look forward to completing this research with NIH.

Before we hear from Rob about our efforts to maintain and accelerate the growth of TRU NIAGEN, let me address the executive changes we have made as part of our evolution into a consumer-focused integrated nutraceutical company.

Following the 2018 Annual Meeting of Shareholders in June, I will transition to the role of Executive Chairman. There, I will continue an active role as part of the executive management team. Over the last year, the company has made tremendous progress under Rob Fried's leadership. And we look forward to continuing our momentum with Rob as the Chief Executive Officer.

Now I'll pass the call to Rob, where he'll give you an overview on the incredible growth we have seen with TRU NIAGEN. Rob?

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [4]

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Thank you, Frank. As Frank said, he and I will be transitioning to new roles in a few weeks. But we will continue to work together to execute the strategy that we have laid out over the past year. Frank will continue to drive our scientific efforts and product development and will represent the company in the industry as he leads the board as Executive Chairman.

I have spent many years researching the science behind nicotinamide riboside as well as the company that developed it, ChromaDex. We have invested many years and millions of dollars in toxicology, regulatory approvals, clinical studies and patent protection. I believe that the science behind this ingredient is very real. And I believe the science at this company is very strong.

From that foundation, we are building a company designed for sustained long-term growth. We expect to show significant short-term growth. But this is a global opportunity, and we are making choices to best realize that potential long term. Along the way, we expect to show steady, consistent and transparent progress.

Our mission is to be the most science-based trusted nutraceutical company in the world with a focus on the science of NAD and cellular energy. Our strategy is to build TRU NIAGEN into a global brand.

Over the last 3 years, ChromaDex generated around $20 million per year in revenue. Until 2017, that revenue consisted of an ingredients business, a core standards business and a contract services business. There was no TRU NIAGEN business until March of 2017.

The ingredient core standards and contract services businesses are important parts of this enterprise, but the growth is mostly from sales of TRU NIAGEN and NIAGEN ingredient.

TRU NIAGEN sales in the first quarter of 2018 were $3 million as compared to $14,000 in the prior year. TRU NIAGEN direct-to-consumer sales in the U.S. continued to grow at a compounded rate of more than 25% per month. This growth rate may slow as the size of the business gets larger, but we expect to see continued strong growth for some time to come.

Kevin will go into further detail, but the important point is that our strategy is working. And we have a revolutionary product that continues to show dramatic growth.

We're also seeing strong trends in our key metrics, including customer acquisition cost, lifetime value and the percentage of our business coming from repeat customers.

TRU NIAGEN sales to Watsons in the first quarter were $800,000, as we continued to experience strong sell-through in Hong Kong and Macau. We expect to see that growth continue. Watsons launched TRU NIAGEN in Singapore in January, and sales there have been building, as we're working with Watsons to refine the marketing message.

Our current agreement with Watsons includes the right to sell TRU NIAGEN in Taiwan, where we are diligently pursuing the required regulatory approvals. We expect to receive the regulatory approvals in the second quarter of 2019. Watsons operates around 600 brick-and-mortar locations in Taiwan.

Based on the successful launch of TRU NIAGEN in Hong Kong, Watsons is interested in extending the distribution of TRU NIAGEN to other international markets. A.S. Watson Group has over 14,100 stores in 24 markets worldwide. The pace of our expansion into new international markets is partly determined by our ability to obtain regulatory approvals. Prior to receiving regulatory approvals in international markets, certain markets can be accessed through cross-border direct-to-consumer Internet sales, which we are pursuing.

Finally, we're continuing our discussions to establish joint ventures with strategic partners to launch TRU NIAGEN in new target markets in Asia.

The executive management team continues to build with the addition of Mark Friedman, our General Counsel and Corporate Secretary, who joined us on January 23 from Herbalife, following our appointment of Kevin Farr as CFO from Mattel. Ben Shichman, our new CTO, brings over 25 years of technology leadership experience with an expertise in rapidly growing software and e-commerce companies.

In addition, we have brought on Jordan Gropack, our new VP of People, who is a former employment lawyer turned HR leader, with experience in both large corporate settings and Internet start-ups. We expect to announce more important management additions in the near future.

Our Scientific Advisory Board continues to strengthen with the addition of Nobel Laureate, Professor Sir John Walker. Dr. Walker is the Emeritus Director, MRC Mitochondrial Biology Unit in Cambridge, England. World renowned for his expertise in molecular biology, Sir John Walker was knighted in 1999 for his contributions to molecular biology and was awarded the Nobel Prize in chemistry in 1997.

And with that, I will pass the call over to Kevin Farr.

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Kevin M. Farr, ChromaDex Corporation - CFO [5]

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Thank you, Rob. Let's look at our financial results for the first quarter of 2018.

For the 3 months ended March 31, 2018, ChromaDex reported net sales of $6.6 million, up 95% compared to $3.4 million from continuing operations in the first quarter of 2017. The increase in sales in the first quarter was driven by growth in the sales of TRU NIAGEN.

For the first quarter, NIAGEN-related revenues were $3 million, which represented 65% of first quarter sales. And TRU NIAGEN sales were 71% of NIAGEN-related revenues.

Gross margins remained flat at 48% for both periods, which includes certain charges. Excluding a write-off related to the purchase of private label consumer products inventory from certain NIAGEN resellers which are no longer distributors of our product, adjusted gross profit, a non-GAAP measure as a percentage of net sales was 52.5% for the first quarter of 2018 as compared to 48% for the same period in 2017.

We experienced better margins due to the positive impact of TRU NIAGEN consumer product sales, which we anticipate will continue.

Our operating expenses for the first quarter were up by $8.1 million to $11.5 million as compared to the first quarter of 2017 of $3.4 million from continuing operations, as we made incremental investments in sales and marketing expenditures, research and development and general and administrative expenses to support growth in our business.

The company invested $2.6 million in advertising and marketing to build out the TRU NIAGEN brand, higher R&D expenses of $0.8 million as well as incremental legal costs of $2.4 million and stock-based compensation expense of $0.8 million.

Excluding incremental legal expenses and equity-based compensation expense, general and administrative expenses were $3.6 million, which were up by $1.3 million as compared to the prior year.

The net loss attributable to common shareholders for the first quarter of 2018 was $8.4 million or a negative $0.15 per share as compared to a net loss of $1.9 million or $0.05 per share for the first quarter of 2017. The higher losses in the first quarter were the result of the strategic decisions to invest in marketing expenses, higher legal spending and higher equity-based compensation expense, partially offset by higher sales volume and gross profits.

For the first quarter of 2018, the reported loss was negatively impacted by a noncash charge of $1.3 million related to stock-based compensation.

Adjusted EBITDA, a non-GAAP measure, was a negative $7 million for the quarter compared to adjusted EBITDA of negative $1.4 million for the first quarter of 2017. ChromaDex defines adjusted EBITDA as income or loss adjusted for income tax, interest expense, depreciation, amortization and noncash stock compensation costs.

The basic and dilutive adjusted EBITDA per share for 2018 first quarter was a negative $0.13 versus a negative $0.04 for Q1 2017.

In the first quarter of 2018, our net cash used in operating activities was $4 million versus $51,000 in the prior year. We ended the first quarter of 2018 with a cash balance of $41 million.

Looking forward, the company expects to realize continued growth in sales driven by our U.S. e-commerce business and Watsons' international business as well as the launch of TRU NIAGEN in certain new international markets. The growth is expected to be concentrated in the second half of the year. The company will continue to invest in marketing expenditures to build out the TRU NIAGEN brand, infrastructure and new capabilities to support growth.

We expect our cash burn rate to improve as TRU NIAGEN sales grow. With its high margins and high rate of return of sales growth, TRU NIAGEN is currently on track to have a positive contribution after marketing and advertising expenses to partially offset R&D and G&A expenses on a run rate basis by the fourth quarter of 2018.

And we currently believe the whole company can be cash flow breakeven or better on a run rate basis by the end of 2019.

Operator, we're now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [2]

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So few questions. Frank, firstly, as far as the Cockayne strategy. So when you finish up this IND -- when is it expected to complete the IND? And do you expect that the NIH will carry that forward as far as the enrollment in the centers?

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder, CEO & Director [3]

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Well, right now, we're going to basically -- I would say, we're going to pivot the activity 100% to working on it as a collaboration with NIH, meaning that the IND process is going to be moved over to NIH to essentially file the IND versus ChromaDex filing the IND. It's more -- a much more efficient process to do it through an investigator IND versus ChromaDex doing it as an IND on our own.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [4]

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Okay. So they'll kind of take the reins on the proposed study going forward?

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder, CEO & Director [5]

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Yes. I mean, it started as a collaboration, like I had said on the call, going back to 2013. And I think that reflecting the current position of where we're going as a company as a dietary supplement or nutraceutical company focused on our TRU NIAGEN product, this type of development activity is much better handled as a collaborative study and that's where it's going.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [6]

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Got it. Okay, that's helpful. Any particular geographies to call out as far as growth in any particular areas of note for the quarter?

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Kevin M. Farr, ChromaDex Corporation - CFO [7]

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Jeff, I think, as we look at our operations for the first quarter, the results really were driven by our U.S. e-commerce business, where it grew from $800,000 in the first quarter of -- or from year-end to this year at $1.8 million, as Rob said. Comparing it back to the first quarter of 2017, it was about $14,000, as Rob said.

So that's the big driver. We did see growth or some sales in Watsons in the first quarter of about $800,000 and about $400,000 in another international market.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [8]

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Okay, I got that. And about the comment about the DTC growing 25% per month compounded. So the $1.8 million out of $3 million as far as the TRU NIAGEN is 71% of the online percent. What percent of that was direct through the company's website? And what percent of that was not? Or was it all through the company's website?

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Kevin M. Farr, ChromaDex Corporation - CFO [9]

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We're not going to get into that level of detail, but both of them grew substantially during the period. But we're not going to really give the detail between what's the split between Amazon and truniagen.com.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [10]

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Okay, got it. And can you give us any flavor for other geographies as far as pursuing the Watsons relationship beyond Taiwan? Would you say it's Southeast Asia? Any particular geographies you're going to call out or no?

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [11]

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Watsons has expressed interest in entering all of their territories. And they're prolific throughout Asia and Europe. But this is largely dependent on regulatory approvals. And we also do not yet have a deal in place with Watsons beyond the initial 4 territories. So we don't know yet beyond those 4 where the next one to be released will be.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [12]

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Got it, okay, thanks, Rob. And one more, if I may. Your commentary toward the end, you said that you anticipate positive cash flow in the beginning of 2019, Q1 2019. What was that specifically that you called out, that was going positive by the end of Q4 '18? Was that EBITDA?

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Kevin M. Farr, ChromaDex Corporation - CFO [13]

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No. I think what we said about 2018 fourth quarter is that we expect TRU NIAGEN to make a contribution against other overhead in the fourth quarter of 2018. With respect to the comment on going cash flow breakeven on a run rate or better, we're working on that now as Rob's transition to CEO.

Despite having significant cash and enough cash to operate in 2018 and '19, Rob has set a mandate to try to become cash flow breakeven or better in the fourth quarter of 2019. And we're working on that diligently, and we'll give you update on that as we exit the second quarter.

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Operator [14]

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(Operator Instructions) Our next question comes from Bill Dezellem with Tieton Capital Management.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [15]

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Couple of questions. First of all to start with, the private label inventory that you purchased, would you talk a bit to that? And to what degree are you anticipating additional purchases or repurchases like that in future quarters?

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Kevin M. Farr, ChromaDex Corporation - CFO [16]

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Yes, I'll just talk about it. As we wind down selling to a few of the resellers that are no longer distributing the consumer product, we bought back their inventory, it was about $300,000 and it's private label inventory. So we're really not in a place to really resell that. So we did write it off.

And as we're down to about 3 resellers at this point in time, and as we work with them, we could buy their private label. But we're mostly working with them to have them sell it through. And then we would basically, after that sell-off period, no longer continue to sell NIAGEN to them.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [17]

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Would it be fair to say this is really just a good faith gesture on ChromaDex's part recognizing that you're no longer selling to them and so that has an impact on their business model and repurchasing product that's maybe not as easy for them to sell that now?

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [18]

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Yes. Part of the consideration is the relationship that we have with these companies. Some of these companies, we've been in business with for years. Some of them also purchase other ingredients from us. And these are companies that we might do business with on other -- in other ways in the future.

I also want to point out that we have not made -- we're down to 2 companies to whom we're supplying NIAGEN. We haven't made a final decision as to the relationship with those 2 particular companies. We may continue to sell to them for a while. We are in conversations with them presently and we haven't made our final decision.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [19]

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That is helpful. And so are there any companies that you are not selling to that you are in negotiations with to repurchase inventory?

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Kevin M. Farr, ChromaDex Corporation - CFO [20]

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Yes, there is one.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [21]

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That's helpful. And if I may segue to the Elysium relationship, would you please give us an update on the litigation? And maybe, tie into that the amount of money that you're spending on legal expenses. And would it just make sense to repurchase some of their inventory back and -- unless they have already sold it? And just talk around those issues if you would, please?

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [22]

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With regard to the litigation, as you know, it's an ongoing litigation. And we can't provide any details beyond what's in the most recent 10-Q, specifically about the litigation. Do you want to answer to that?

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Kevin M. Farr, ChromaDex Corporation - CFO [23]

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Yes. With regard to Elysium and buying back their ingredient our, probably, intelligence indicates that they've sold through the ingredient that we sold to them; however, they have not paid us for that ingredient. So that's part of the litigation.

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [24]

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Yes. We don't believe there is any inventory to buy back from Elysium. We -- our testing shows that what they are selling out on the market is some other source of nicotinamide riboside.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [25]

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That is helpful. And then, I would like to switch to the sell-in into retail. In the first quarter, what was the level of sell-in? And how much was that level of sell-in in the fourth quarter? Just trying to get a comparison there if we could, please?

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Kevin M. Farr, ChromaDex Corporation - CFO [26]

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Yes. In the first quarter, we shipped them about $800,000 worth of bottles. And with regard to the fourth quarter last year, we sold them $1.8 million. Part of that $1.8 million was to sell into Singapore for them to launch the brand.

And as we look at Hong Kong, it's been very strong sales. And I think what we shipped in is what's selling through and helping them to maintain their retail inventory levels at the level that they've been targeting.

And as we look forward, we think again with regard to -- before we enter new markets that we'd be basically shipping in what they need to sell through and maintain their inventory levels. And we are seeing good sell-through, very strong sell-through in Hong Kong, as we look at the results year-to-date and expectations of what they're going to do in the balance of the year as they do more sales and promoting in the balance of the year.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [27]

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That is quite helpful. Relative to Singapore, what would be your -- or your guess as to how much was the sell-in in the fourth quarter? And was there any sell-in to fill initial stock of any shelves into Q1?

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Robert N. Fried, ChromaDex Corporation - President, COO & Director [28]

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The marketing in Singapore is a bit more complex than Hong Kong. There is different levels of approvals required. And so they -- we have not yet begun to aggressively do a marketing push in Singapore. Although last few -- couple of weeks, it has slowly, gradually begun to materialize. So we're not yet sure how Singapore is doing or how they're selling through.

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Kevin M. Farr, ChromaDex Corporation - CFO [29]

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But I'd say the $800,000 that we shipped in, in the first quarter relates to Hong Kong, not to Singapore.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [30]

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And then your guess as to how much was sell-in in the -- of the $1.8 million in Q4?

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Kevin M. Farr, ChromaDex Corporation - CFO [31]

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I think it was -- probably about a quarter of that went to Singapore, so about $400,000.

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Operator [32]

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And ladies and gentlemen, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to the ChromaDex management team for any further remarks.

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Kevin M. Farr, ChromaDex Corporation - CFO [33]

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No. I think that's it. Thank you.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.