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Edited Transcript of CDXC earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Chromadex Corp Earnings Call

Irvine Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Chromadex Corp earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brianna Gerber

ChromaDex Corporation - Senior Director of FP&A and IR

* Frank Louis Jaksch

ChromaDex Corporation - Co-Founder & Executive Chairman

* Kevin M. Farr

ChromaDex Corporation - CFO

* Robert N. Fried

ChromaDex Corporation - CEO & Director

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Conference Call Participants

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* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Edward Dean Marks

H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate

* Jeffrey Scott Cohen

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

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Mitchell Brad Pinheiro

Sturdivant & Co., Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the ChromaDex Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Brianna Gerber, Vice President of FP&A and Investor Relations. Please go ahead.

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Brianna Gerber, ChromaDex Corporation - Senior Director of FP&A and IR [2]

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Thank you. Good afternoon, and welcome to ChromaDex Corporation's Third 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 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 operation. 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 a ChromaDex's annual report on Form 10-K and quarterly report 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 markets. The company's earnings presentation and earnings press release, which were issued this afternoon and are available on the company's website, present reconciliations to the appropriate GAAP measures.

Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com.

With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [3]

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Thank you, Brianna. Good afternoon, everyone, and thank you for joining our third quarter 2019 investor call. We had another strong quarter with total net sales of $12.1 million. Overall sales increased sequentially by 9% and 48% year-over-year. We again improved the gross margin and again improved our marketing efficiency, and we expanded our global footprint. The science of TRU NIAGEN and NAD continue to support the thesis that this is a very special molecule. We remain focused on the three pillars of our business strategy: one, to build a global brand; two, to own the science; and three, to focus on the fundamentals. Let's start with the brand.

TRU NIAGEN net sales were $9.7 million, an 11% increase sequentially and an 86% increase year-over-year, representing 81% of the $12.1 million net sales in the quarter. E-commerce net sales were $7.1 million, a 9% increase sequentially and a 61% increase year-over-year.

Our TRU NIAGEN business is becoming increasingly global with approximately 30% of net sales from international markets in the third quarter. International growth was driven by strong sales from Watsons in Hong Kong and by cross-border sales in China and Japan and by sales with our partners in New Zealand and in Canada.

Sales to Watsons were $2.3 million in the third quarter, representing an 18% increase over the previous quarter. To date, we have not seen a material impact on point of sale due to the ongoing protests in Hong Kong, but overall tourism is down and the situation remains fluid.

In Singapore, we're excited about continuing to educate these very sophisticated consumers about the health benefits of TRU NIAGEN. We still have not unlocked the full potential of this market, but we are confident that we will.

As you know, we currently sell cross-border in China on Tmall and on Amazon and in the U.K. and Canada and Japan. This quarter, we began early seeding of the TRU NIAGEN brand with preliminary marketing in PR efforts in those territories. In China, Frank Jaksch and one of our external retail partners, Dr. Lili Yang, educated media and other influencers about the science behind TRU NIAGEN and published nicotinamide riboside research. The event generated over 2 million impressions through influencer posts on Weibo, which, for those of you that do not know, is a Twitter-like social media platform; as well as millions of impressions from healthcare and lifestyle media, including InStyle, [Baiyun] and Xinmin Evening News. We have plans to continue to amplify our PR efforts in the fourth quarter.

In the U.K., Frank also spoke at two sessions at a Biohacker conference in London, where he delivered a presentation entitled, The Future of Cellular Health & NAD+: Recharge Your Body from Within. He discussed the rapidly aging world population and the hallmarks of aging, as well as the superiority of nicotinamide riboside versus other NAD precursors as well as future research in the field.

In Canada, we are steadily growing the business across multiple channels and partnerships with retailers like WELL Health and Whole Foods Canada, who share our focus on innovative quality health and wellness products. Our Chief Science Officer, Dr. Matthew Roberts, spoke at a media and influencer event in Toronto when we continue our PR efforts throughout the Canadian market.

Moving to our domestic e-commerce business. Sales grew by 9% sequentially to $7.1 million this quarter. And for the third consecutive quarter, we delivered this growth against the backdrop of improved marketing efficiency.

Last quarter, we continue to launch and test new ads within our true believer campaign, featuring respected influencers, athletes and celebrities, who believe TRU NIAGEN has positively impacted their health. You may have seen some of the new ads with Brook Burke or our latest addition, Gabby Reece. We had great articles run about Gabby and TRU NIAGEN in Parade Magazine and People Magazine.

We also expanded our television campaigns featuring Hall of Fame football player Shannon Sharpe this quarter. Following initial tests on sports channels, we began to expand this to a wider audience, and we're seeing quite encouraging results. Our 32nd Shannon Sharpe's spot has performed well and has been airing on a variety of channels ranging from sports to news to lifestyle.

Beyond direct-to-consumer marketing, we've also begun to increase our focus on selling TRU NIAGEN to 2 key influencer groups: professional athletes and health care practitioners. We now have recurring sales from four major NFL, NHL and MLB teams and are seeding the brand with several others.

Finally, we are building our brand through strong global partnerships. We continue to gain additional insight into Nestlé health sciences launch plans for TRU NIAGEN. Marketing efforts will begin in mid-2020, with commercialization expected in the second half of the year. The initial test launch will be in loose powder format. We're proud to be in business with Nestlé. We are excited about their plans, and we look forward to delivering the cellular health benefits of TRU NIAGEN to their consumers.

Our second core objective is to own the science. We continue to invest in quality research and partner with the world's leading scientists to uncover the full potential of this extraordinary molecule as well as build upon and protect our intellectual property. There is great momentum behind the science of nicotinamide riboside with four new studies published since our last update, including a preclinical study conducted by Dr. Cantó and our partners at Nestlé that was published in Nature Communications in September. This is the first study published suggesting a functional uniqueness of nicotinamide riboside that cannot be mimicked by other NAD precursors and furthers our understanding of its possible role in liver health.

In addition, our chief scientific adviser, Dr. Charles Brenner, was awarded a humanitarian research grant by the Bill & Melinda Gates Foundation. Through Dr. Brenner's research on NR, we can potentially improve the well-being of mothers and their children in vulnerable populations. This is an exciting opportunity to support the humanitarian and scientific efforts of the foundation.

By continuing to attract excellent scientific partners and being a thought leader in the space, we are keeping our focus on the science and discovering the full potential of this amazing molecule. And lastly, we continue to focus on the fundamentals.

ChromaDex has become a global consumer brand leader in nicotinamide riboside and NAD. We accomplished this by being committed to safety, science, research and partnering with world-class global consumer product companies and retail business leaders. We do not cut corners.

With more than $35 million invested in patents, safe science and safety, we have secured regulatory approval from governments around the world, including the U.S. FDA and Health Canada and a positive opinion from the European Food Safety Authority, EFSA. EFSA is reputed to be most stringent safety regulatory body in the world. Their positive opinion on NIAGEN was a critical first step in EU approval. We expect to launch in the EU in mid-2020 and are actively pursuing partnerships.

Finally, I'll briefly touch on the ongoing litigation. In California, the judge delayed the trial. It was scheduled to take place on October 22, and he asked for more information about how ChromaDex was damaged by Elysium's theft of trade secrets and confidential information. We were very eager to get the facts in front of the jury and have prepared substantive evidence in case law to address his questions, and we look forward to having our day in court.

In New York, the judge is eager to get the case to trial, and we are active in the discovery process.

And in the Delaware patent infringement case, we recently filed a motion to get this case to trial, and we look forward to enforcing our patents before a jury. As I've said repeatedly, we will continue to aggressively enforce our intellectual property rights from anyone who infringes on our patents.

In the meantime, we continue to beat Elysium in the marketplace. We believe NAD has hit a tipping point with interest spreading throughout the globe, and we are the recognized global leader in NAD. We lead the industry, we own the patents, and we drive the science. Most importantly, we remain committed to doing it the right way with a focus on safety and consumer health. By comparison, Elysium's actions demonstrate their blatant disregard for consumer safety as well as their unethical business conduct. These facts are now part of the public record and stand in stark contrast to the image they attempt to convey. We encourage you to read the detailed accounts of their misdeeds in the legal filings, including the recently-filed Delaware brief.

ChromaDex remains focused on our core objectives. Our mission is clear, and we are accomplishing success one step at a time. We are more confident than ever, and we are grateful to those investors who are traveling alongside us on this important journey.

Now I will pass the call over to our Chairman and Founder, Frank Jaksch, for an update on scientific research. Frank?

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder & Executive Chairman [4]

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Thank you, Rob. And 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 36 ongoing, completed and published clinical trials currently registered on ClinicalTrials.gov to investigate the pharmacokinetics and therapeutic effects of NR. This is 4 more than our last update. An additional 7 several clinical trials are registered to test NR in combination with other ingredients with a total of 43.

We finished the quarter with more than 175 signed research collaborations, up slightly compared to last quarter. I previously discussed the 9 hallmarks of aging, which are generating a tremendous interest among the scientific as well as investment community.

Steve Horvath of UCLA developed a method to measure a person's metabolic age based on methylation, which changes how genes are expressed without altering DNA. In the year-long study, Horvath and a group of researchers treated 9 healthy volunteers with a cocktail of growth hormone, metformin and a steroid. They found that the participants on average shed 2.5 years off their biological ages, which is measured by analyzing the methyl marks on their genomes. While it was a very small study, it is getting a lot of attention, given that the potential implications in the science of aging.

While we continue to follow the science around aging closely, we remain focused on NR and other NAD precursors. I'll highlight 4 recently published preclinical studies on NR and one on another NAD precursor, NRH.

First, as Rob highlighted, a new clinical study by Nestlé researcher led by Dr. Carles Cantó was published in Nature Communications in September. Instead of testing the effects of NR supplementation, the study investigated what happens when cells lose their ability to use NR. The investigators concluded that the body's natural ability to utilize NR is important for resilience during periods of metabolic stress, such as high fat diet. It is also the first study to show the physiological consequences that arise when cells lose the ability to use NR. We believe Dr. Cantó's work is significant in that it demonstrates the uniqueness of NR relative to other NAD precursors.

Second, a 3-week clinical trial was published in Cell Reports confirming that NR has a positive effect on the NAD metabolome in blood, which was previously shown in 4 clinical trials. It was the first study to show that NR supplementation also impacts the NAD metabolome in muscle tissue. Another key finding was that NR depressed levels of circulating inflammatory markers suggesting it may have anti-inflammatory properties pending further research.

In addition, there was a new preclinical study published measuring the effects of NR in combination with exercise. The study was published in the European Journal of Nutrition in September. This mouse study examined the effects of NR on aerobic performance with or without exercise training. NR alone did not affect aerobic performance in sedentary mice. However, NR in combination with exercise training increased aerobic performance compared to a trained control group. NR supplementation during aerobic training increased the amount of specific type of muscle fiber, which is high in mitochondria and good for endurance. We are excited about these findings on NR in the context of exercise and are watching future developments closely as we continue to develop our business with professional sports teams and athletes.

Lastly, another preclinical study by Dr. Carles Cantó at Nestlé entitled, A reduced form of nicotinamide riboside defines a new path for NAD biosynthesis and acts as an orally bioavailable NAD precursor, was published in the journal of Molecular Metabolism. This is the second published preclinical study which tested the NAD boosting properties of the reduced form of NR or NRH. It demonstrated that NRH is a potent NAD precursor that uses a different pathway than NR. We have a strong patent portfolio protecting our interest in NRH as well as other NAD precursors beyond NR.

Finally, I'll briefly touch on the newly-registered clinical studies since we last spoke.

First, in August, an international study entitled, Metabolic Cofactor Supplementation in Alzheimer's Disease and Parkinson's Disease Patients, was registered. The hypothesis is that a metabolic cofactor supplement that includes N-acetylcysteine, L-carnitine, serine and NR will enhance liver fat metabolism, resulting in increased mitochondrial activity in human brain cells.

In September, a study was registered by Harvard's Mass General Hospital to determine the potential for NIAGEN to improve cognitive function, mood and daily activity in people with subjective cognitive decline or mild cognitive impairment in aging.

Just last month, Oslo University Hospital in Norway registered a trial to investigate whether NR can shorten the recovery phase for hospitalized patients and approve their outcomes after an acute illness.

Also in October, the University of Iowa registered a study to evaluate whether NIAGEN could alleviate persistent chemotherapeutic-induced peripheral neuropathies in patients undergoing treatment for cancer.

Lastly, a study was registered to test whether NR enhances the effects of exercise therapy in hypertensive older adults.

In summary, ChromaDex remains the leader in NAD and cellular health space. We continue to watch the building pipeline of registered clinical trials and published human studies on NR closely since it is an indication of the growing interest in the scientific community.

In addition, we are increasingly spreading the word on NR, NAD and cellular health beyond the scientific community. As Rob mentioned, I attended media and influencer events in U.K. and China last quarter. It was exciting to introduce the compelling science behind the NR and its importance to an aging global population outside of the U.S. The message of healthy aging is universal, and we're stepping up our efforts with our recent cross-border launches in pending EU regulatory approval. I look forward to sharing more in future updates.

With that, I'll pass the call to Kevin Farr. Kevin?

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

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Thank you. Let's look at our financial results for the third quarter of 2019, which reflect continued progress against our key financial objectives on both a sequential and year-over-year basis.

During the quarter, we continue to deliver strong top line growth in gross margins, significant improvements in advertising efficiency year-over-year and controlled growth in G&A. Overall, our underlying business performance as measured by adjusted EBITDA, excluding legal expenses, was in line with our expectations and reflected substantial progress year-over-year. During the quarter, we strengthened our balance sheet with a $7 million capital raise. In November, we also execute $7 million committed line of credit to help manage working capital investments.

For the three months ended September 30, 2019, ChromaDex reported net sales of $12.1 million, up 9% compared to $11.1 million in the second quarter of 2019. Year-over-year sales were up 48% compared to the third quarter of 2018.

TRU NIAGEN net sales were up 11% and grew by 86% year-over-year with diversified growth across U.S. e-commerce, Watsons and international cross-border launches.

Turning to the rest of P&L. Our gross margin was down 30 basis points from 56.3% in the second quarter of 2019 to 56% in the third quarter of 2019. We sold ingredient to Nestlé in the second quarter, which resulted in the recognition of revenue related to the $4 million upfront payment. In the third quarter, we did not have any sales to Nestlé. Excluding the impact to Nestlé's revenue recognition, gross margin would have been up slightly from the second quarter to the third quarter of 2019.

Year-over-year gross margins increased by 230 basis points to 56% compared to 53.7% in the third quarter of 2018. Increased TRU NIAGEN consumer product sales drove the improvement in gross margins, a trend which we believe will continue.

Our total operating expense in the third quarter of 2019 was $13.6 million, up $0.2 million compared to the second quarter of 2019. Our selling and marketing expenses were up $0.3 million to $4.6 million in the third quarter of 2019 compared to $4.3 million in the second quarter of 2019. As a percentage of net sales, this expenditure was down by 40 basis points from the second quarter of 2019.

We made continued progress in improving marketing efficiency in our TRU NIAGEN business while investing in initiatives to drive new customer growth, both in the U.S. and internationally.

In the third quarter of 2019, G&A expenses were roughly flat at $8 million versus $7.9 million in the second quarter of 2019. Excluding legal fees of $2.9 million and equity compensation expense, G&A was higher by $0.2 million versus the second quarter of 2019. The higher G&A expense included higher royalties resulting from sequential growth in our TRU NIAGEN business.

For the third quarter of 2019, our operating loss improved slightly to $6.9 million versus $7.2 million in the second quarter of 2019.

The net loss attributable to common shareholders for the third quarter of 2019 was $7.2 million or a loss of $0.12 per share as compared to a net loss of $7.8 million or a loss of $0.14 per share for the second quarter of 2019. The net loss in the third quarter of 2019 includes $0.3 million of debt discount cost related to the $10 million May convertible notes offering as a result of the conversion price being lower from $4.59 to $4.47 per share. The lower conversion price was due to the $7 million financing in August for a total offering of $17 million at $4.47 per share. The incremental of $0.3 million debt discount was fully amortized as interest expense in the third quarter. As we've said, we believe it's important to focus on sequential trends in our business to demonstrate progress towards cash flow breakeven.

To help investors better gauge the underlying financial performance of our business, in the second quarter of 2019, we introduced a new non-GAAP measure adjusted EBITDA excluding total legal expense. ChromaDex defines adjusted EBITDA, excluding total legal expense as net income or loss, which is adjusted for income tax, interest, depreciation, amortization, noncash stock compensation costs and total legal expenses.

Litigation expenses represent the majority of our legal spend today. We're excluding total legal spending from adjusted EBITDA since we expect it to decline significantly after the trials are completed. Adjusted EBITDA excluding total legal expense improved for the fourth consecutive quarter to a loss of $1.9 million in the third quarter of 2019. This improved by approximately $200,000 versus the second quarter of 2019, which was a loss of $2.1 million. And we delivered a $2.4 million improvement year-over-year versus the loss of $4.3 million in the third quarter of 2018. The improvement in the third quarter of 2019 was primarily driven by higher gross margins and higher sales.

Moving to the balance sheet and cash flow. We ended the second quarter of 2019 with a solid balance sheet with cash of $18.9 million, which includes a $7 million capital raise in August, net of issuance costs. In our third quarter of 2019, our net cash used in operating activities was a negative $7.8 million versus a negative $9 million in the second quarter of 2019. The lower cash outflows from operations this quarter were driven by investments in working capital, which was a $2.9 million use of cash in the third quarter of 2019 compared to a $3.9 million use of cash in the second quarter of 2019. The use of cash in the third quarter was related to a decline in accounts payable, largely due to payment of legal fees as well as lower NIAGEN ingredient purposes. We continue to expect working capital be a smaller use of cash in the second half versus the first half. Furthermore, while legal expenses have been a significant use of cash in 2019, we completed almost all the preparation for the California trial in early October and paid these legal bills. As Rob said, the judge requested additional information, and we'll hear his decision in January of 2020.

Now let's look at our P&L expectations for full year 2019 versus full year 2018. Consistent with our outlook last quarter, we expect the continued strong growth in sales of TRU NIAGEN, improved gross margin as a percentage of net sales and continued increases in the efficiency of our TRU NIAGEN sales and marketing expenses with total expense up $1 million to $2 million in absolute dollars.

We expect general administration expenses to be up in absolute dollars by approximately $5 million for full year versus 2018.

There is no change to the cash flow breakeven framework we've provided last quarter. We continue to believe we can achieve cash flow breakeven at $17 million to $19 million of revenues, around 60% gross margins and total operating expenses at our current level of approximately $13 million. This assumes the litigation ends and legal costs decline.

In the meantime, there are cost savings opportunities across the organization. We began important foundational work in 2019 that will help drive operational efficiencies as we scale the business. We have already completed key projects to deliver long-term cost savings. This quarter, we introduced the 300-milligram per capsule direct-to-consumer product that will reduce product, packaging and shipping costs. The key change to the product configuration was switching to one capsule with 300 milligrams as well as using one bottle for a 90-count, 3-month supply. This one-bottle configuration has lower packaging and shipping costs. We also implemented an ERP system, which will reduce manual processes and allow us to scale our business more efficiently.

In addition, at the end of October, we divested our Spherix regulatory consulting business. This divestiture will allow us to focus on our core mission to build TRU NIAGEN as a global brand as well as improve our profitability. We'll continue to work with Spherix on pending regulatory approvals on an independent consulting basis. I want to thank the Spherix team on their important work to date with EFSA, which as Rob said is a milestone for us.

As you can see, we continue to focus on the fundamentals, which include building a sound operation for the long term. ChromaDex has undergone a significant change over the last 2 years. We're a much stronger company today. We're acting with greater urgency to capitalize on the market opportunity in front of us while continuing to look for opportunities to reduce cost. We remain committed to achieving cash flow breakeven as soon as possible and delivering on our mission of building a global brand.

Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brian Nagel with Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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Congrats on the continued progress. So a couple questions I want to ask. First off, we mentioned again the EFSA issue. What's the -- how should we think about the next steps in that process now that you have that?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [3]

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Well, the EFSA opinion is a recommendation for the EU commission. So the EU commission now has to enact it into legislation, and we expect that to happen in the coming months. Every indication is that the vote will go through, and it will be approved.

In certain countries, after that, there needs to be a registration of the product. In certain countries, there does not need to be a registration of the product. So we're going to focus on those where there does not need to be a registration. And finally, we need a partner in each country to work with. We're not going to be launching our own initiative in these countries. We're going to look for partners in those countries.

These are separate from the health claims. As you saw in Hong Kong and Singapore, if you can make a strong health claim, you can help your marketing efforts. And we were not able to secure great health claims initially from Singapore. It's better now. But initially, it wasn't strong, and that impacted our marketing efforts.

Same is the case in certain new EU countries. So you have to go country by country to decide -- to figure out if you need health claim approvals, if you need product registration and you find a partner. That's why there's work to be done even after the EU commission votes in favor of the ingredient.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [4]

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Got it. Looks very helpful. And then the second question I wanted to ask is more on the numbers. If we look here in the quarter, so year-on-year sales of TRU NIAGEN were up 86%, which is obviously a very strong growth rate. Now if you go back to Q1, that was 146%. And then Q2, 134%. The question I have is, if you think about that trajectory and you recognize that 86% is still very healthy, what's changing from early this year to currently? Is that really a moderation? Or is it more just noise -- moderation to growth rate, which should have added more noise in the numbers?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [5]

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Well, I think it's a combination of things. I think one thing is just the law of smaller numbers, and the numbers are getting bigger.

The second thing is that we're improving our marketing efficiency. So we probably could easily achieve 146% year-over-year growth, but we're moderating our marketing expenditure. So we're keeping close track of customer acquisition cost and retention numbers to make sure we're not "buying the revenue."

So right now what we're seeing is very efficient marketing operation. That the word is spreading. There is a greater level of interest in TRU NIAGEN, and the conversion rates are improving quarter-to-quarter. This is what we carefully monitor really on a daily basis.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [6]

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Is there -- then as a follow-up to that question, and I'll turn it over to someone else. But how should we think about -- you'd mentioned that now several times, the efficiency of this market is improving. Will there be a point at which then with more efficient marketing that you could actually increase the dollars marketing spend and overall drive a more efficient sales growth at a higher level?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [7]

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That's the idea.

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Operator [8]

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Your next question comes from Jeffrey Cohen with Ladenburg Feldman.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [9]

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A few questions for you. I think I heard you break out the TRU NIAGEN for the quarter. Could you talk about the composition by geography? Or what percent of that may be coming from outside the U.S. or quality-specific growth rates associated with ex U.S.?

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Kevin M. Farr, ChromaDex Corporation - CFO [10]

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Yes. With regard to the U.S., it's 75% U.S., and the 25% is outside the U.S., which makes it a global brand.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [11]

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Okay. Perfect. Got it. And could you talk about -- you mentioned in your documents higher royalties to current patent holders. Could you talk about that in a little more detail for us?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [12]

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Can you ask that one more time, please?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [13]

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The higher royalties to patent holders? You get that?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [14]

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What's the question?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [15]

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The question was with regard to higher royalties to patent holders. Could you talk about that a little bit? Is that driven on volumes?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [16]

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Yes. They get a percentage of sales.

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Kevin M. Farr, ChromaDex Corporation - CFO [17]

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That royalty number is in SG&A, and it is a driver of SG&A year-over-year, and then there's three drivers. It's legal, royalties and then some G&A.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [18]

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Okay. Got it. And lastly for me, could you talk about the legal expenses looking forward, if you could play out a couple of the trials and the time lines that you're hopeful for during 2020? Do you expect that to taper off in 2020 or early 2020, mid-2020 or too early to call at this point?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [19]

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So just to be clear, are you asking if we expect the legal expenditures to taper off or the trials to taper off?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [20]

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Both. More importantly, the expenditures.

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Robert N. Fried, ChromaDex Corporation - CEO & Director [21]

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Right. So as of now, we don't have a trial date. We don't have a trial date in L.A. and in New York or in Delaware. This is why the L.A. decision was disappointing to us because it impacted the Delaware trial date setting.

All we really want to do is get to court -- get to trial and have the facts come out because we are very confident that once people see all the facts, they will feel very good about the way ChromaDex has behaved as a company and not so good about our opponent in this case.

But the good news about the delay on the trial is that we're spending a lot less money now. We did all of our prep. We expected an October 22nd trial date. It didn't happen. But we're locked and loaded. We're ready to go as soon as he gives us a date. We hope that date is soon, but there's really not nearly as much legal expenditure at this point in time because we're waiting for the judges to give us a date. But when the dates happen, we're ready, we've done the work.

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Operator [22]

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Your next question comes from Mitch Pinheiro with Sturdivant.

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Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [23]

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Couple of questions for you. First, just looking at the upcoming quarter. Have -- is the Watsons revenue this quarter, was that like a significant assumption in the quarter? Is that -- so can we expect similar -- I know it's lumpy, but can we expect similar type of revenue out of Watsons in the upcoming quarter?

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Kevin M. Farr, ChromaDex Corporation - CFO [24]

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I think as Rob said, it's a fluid situation there. But I think if you look at the second and third quarters, that's really been generated by consumer takeaway. And when you look at how TRU NIAGEN is doing now, it's still doing well. The retailer is from an inventory position in good shape. They're actually buying what's selling. And I think effectively, what the sales are going to be in the fourth quarter are going to be how well is TRU NIAGEN doing with regard to sell-through. And obviously, there's big events as you get into the fourth quarter. There's is 11/11, which occurred yesterday. There's 12/12. And then obviously they want to be ready for Chinese New Year in January. So I can't give you a projection, but it's still going strong with regard to consumer takeaway, and our sales in the fourth quarter will reflect what sales through.

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Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [25]

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Okay. Great. How about here in the U.S? Just as you get to the fourth quarter, a lot of the holiday noise, marketing. I know you're not selling necessarily holiday presence. But how do you -- do you -- are you going to change any plans, any position of your spending? Can you talk a little bit about that?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [26]

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Well, media costs in the -- during December and the end of November are -- tend to be much higher. So we are monitoring that. Although we see a continuing increased demand for TRU NIAGEN, and an increasing percentage of our revenue comes from repeat orders. Our retention rate is strong and continues to be strong. We might adjust our media spend at the second half of the fourth quarter to adjust for the increase cost of media -- media cost, but we won't know that until we get there and we see how the day-to-day costs play out.

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Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [27]

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Okay. And then when you're looking -- speaking of retention rate, is there -- so it's growing. Can you -- is there any other way to quantify it?

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

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We don't yet provide these numbers, and I -- we hope that we will soon, things like retention rate and churn and customer acquisition costs and lifetime value. We haven't yet gotten to a point of where we're providing that data to you, but we hope and plan to do so shortly.

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Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [29]

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Okay. Great. And then I guess, final question is, you've done a very good job here on your cash burn and explaining how you're going to get to closer to breakeven. Does the new line of credit -- I mean when I start to do the math, the line of credit, that will help, of course, fund some of the negative cash burn. But are you still -- are you looking at other -- at potential financing just to take that off the table as far as leading cash, whether it's because of further litigation expense, although it sounds like that's less of a factor? But can you talk a little bit about that around some of the puts and takes from a cash perspective?

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Kevin M. Farr, ChromaDex Corporation - CFO [30]

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Yes. So we don't really have any concrete plans to raise additional capital. We're always opportunistic about that. And if there's a compelling investor that comes and bring something to us that's good for our shareholders, we may they do it.

With regard to, do we have enough cash to get to cash flow breakeven, yes, based upon our current projections, we have enough cash to reach cash flow breakeven without accessing our $7 million committed line of credit. The legal spending is a variable in terms of timing and the amount of the expense, which should -- or could change our cash needs.

Our current plan is to drive lower cash burn in the short-term, including continued improvements and profitability of our underlying business driven by higher sales and gross margins and better marketing efficiency. We also expect to achieve higher gross margins through efficiencies in the supply chain with our recent transition in the third quarter to a 300-milligram one-bottle 90-day SKU, and there is more in the works with regard to improving gross margins. We expect working capital to be a source of cash in the fourth quarter. Our inventories are high, and we expect to reduce inventories in 2020. We completed almost all the preparation of the California trial in October, as Rob said, when we paid these legal bills, and we expect lower legal payments in the short term as no trial date has been set in any of the three cases. We are ready to go to trial at any time.

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Operator [31]

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Your next question comes from Jeff Van Sinderen with B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [32]

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Can you speak to what you're seeing in the athlete segment, maybe give us a sense also of what you're seeing in the health professional segment?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [33]

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The health care practitioner segment is relatively small but dramatically growing. These are health care practitioners like physicians, nurse practitioners, chiropractors, nutritionists. And we sell into them at wholesale, and then they resell to their consumers. We have a partnership with a company called Natural Partners. They sell as directly to the health care practitioners, and we sell as well internally directly to these health care practitioners, and this is a fast-growing segment for our company. We're also pursuing health care practitioner sales in Canada and exploring it in certain other countries as well.

In the sports market, what we're seeing is a lot of guys getting back on the playing field after they got hurt quicker. What we're hearing anecdotally is that -- what we're hearing is that they are healing quicker. What we're hearing is that they are taking it, happy with it and ordering more. We think that they're a great deal of professional athletes in all the major sports in the U.S. And we get frequent phone calls outside of the U.S. from professional athletes wanting to sample it, to try it, to test it and to talk to us. So we expect the sports segment to continue to grow and be an important part of our future. We think that it's helpful to them, and we're excited about it.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [34]

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Okay. Great. And then just to follow up in international regulatory approvals. I know you're working hard on those. Are there others outside of the EU that you feel that you're making progress on that you can speak about?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [35]

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There are others that we're making excellent progress on, but none that we can speak about yet.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [36]

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Okay. And then can you talk about a little bit more about the progress with Nestlé? I know you mentioned the first launch would be in, I think you said, loose powder form. Maybe just speak a little bit more about getting to the technical hurdles toward productization and such?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [37]

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Well, there are no real technical hurdles for releasing it in powder form. The major technical hurdle is to release it in beverage form, and we are still feeling very good about what's happening in that area. It makes a lot of sense. So I mean nicotinamide riboside exists in trace amounts in milk, so nature has already shown that it's stable in liquid, and we're working on replicating that with a number of missions. It's really the primary focus of Nestlé at this point, is to release the product in 2020 in powder form, and they're thinking in future years that it would come out in beverage form.

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Operator [38]

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Your next question comes from Raghuram Selvaraju with H.C. Wainwright.

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [39]

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This is Edward Marks on for Ram. In regards to selling around the world, I'm just wondering if you're providing TRU NIAGEN on Amazon or in the Watsons stores in Europe. And if not, why have you chosen not to?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [40]

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It's only available on Amazon in the U.K. presently. It has to do with EFSA approvals, EU approvals as well as Amazon's rules. The U.K. is one country that allows you to sell cross-border via Amazon, so that's why we have begun selling on Amazon into the U.K. only. Once we receive this is EU approval, we will most likely expand our reach on Amazon to other countries.

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [41]

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And does that also apply to the Watsons stores that are in Europe and Asia?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [42]

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Well, the problem with the Watsons stores in other countries in Asia and in Europe is that directly requires regulatory approval in those local countries. And we have this understanding with Watsons that if and when we receive that regulatory approval, we will endeavor to make a deal with the local Watsons business. And if we can do so, we will partner with Watsons in those territories.

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [43]

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I see. And then in regards to some of the regulatory hurdles that you're currently seeing, I know it's on the previous call that you had mentioned that you are working on regulatory holders with Nestlé. So just wondering if you could talk about those regulatory hurdles from Nestlé's perspective.

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Robert N. Fried, ChromaDex Corporation - CEO & Director [44]

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Well, the regulatory approval that you received to sell a dietary supplement is often different than the regulatory approval you receive as a food. And in Nestlé's case, the rights that they have is as a food. They have medical food, and they also have protein-based meal replacement food. So it will be a quicker process once we receive a dietary supplement approval to then receive food approval. But it is a process that we have to go through in order for Nestlé to sell locally.

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [45]

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Okay. And kind of moving on with Nestlé. That sounds like a great advancement that you'll be able to sell that powder formulation starting next year. But I know you had mentioned previously that you had a deadline to produce a ready-to-drink formulation of TRU NIAGEN. I was wondering if the powder formulation has covered this necessary milestone? Or if they have to extend your current contract past the end of 2019?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [46]

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There is a technical requirement in order for them to sell it as a protein-based meal replacement beverage for us to overcome. We're confident that great progress is being made to that end. But in order -- but Nestlé would have to either extend that or we'd have to satisfy that requirement.

But at this point in time, neither party seems terribly concerned about whether or not we're going to be able to solve that problem. Their immediate plans are to sell it as a powder form. And in subsequent years, they plan to sell it as a beverage.

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [47]

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I just wanted to make sure that everything was put away in that regard. And just my final question, following up on a previous point, I know from recent calls and recent releases that you plan to release some clinical data in 2020 on top of all the data that you presented today and last quarter. I'm just wondering, how much do you expect usage in clinical context to rise following the release of this clinical data? And what regulatory framework might TRU NIAGEN be used?

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder & Executive Chairman [48]

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This is Frank. I'm not sure specifically what clinical data that we talked about before that was going to release in 2020. We have reported -- the last clinical trial that we did with the CRO was reported in July. There are other studies that are out there as -- that are listed on ClinicalTrials.gov that will, in fact, publish. But those are collaborative studies under our research programs. Are you referring to those rather than a ChromaDex study?

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Edward Dean Marks, H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate [49]

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Yes, exactly.

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder & Executive Chairman [50]

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Okay. I mean there's -- like the Washington Heart Study is one of the studies that I think could be publishing in 2020. There are probably going to be other ones that we'll report out in 2020 as well. It's just hard for us to know exactly what the timing of how those will report.

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Operator [51]

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That's all the time that we have questions for today. I turn the call back to Brianna Gerber for closing remarks.

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Brianna Gerber, ChromaDex Corporation - Senior Director of FP&A and IR [52]

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Thank you, Jessie. There will be a replay of this call beginning at 4:30 p.m. Pacific time today. The replay number is 1 (800) 585-8367, and the conference ID is 947-5087. Thank you, everyone, for joining us today and for your continued support of ChromaDex.

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Operator [53]

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This concludes this conference call. You may now disconnect.