ChromaDex Corporation
Q1 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

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

[Brianna Gerber:]

Thank you, Crystal. Good afternoon, and welcome to ChromaDex Corporation's first 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, plans to add to the management team, future financial results, business development opportunities, future cash needs, ChromaDex's operating performance in the future, future investor interest and clinical trial studies that are subject to risks and uncertainties relating to ChromaDex's future business prospects and opportunities as well as anticipated results of operations. Forward-looking statements represent only the Company's estimates on the date of this conference call and are not intended to give any assurance 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 included those contained in ChromaDex's annual report on Form 10-K most recently filed with the SEC. Please note that the Company assumes no obligation to update any forward-looking statements after the date of this conference call to conform with the forward-looking statements actual results or to 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, which was issued this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com. With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

[Rob Fried:]

Thank you, Brianna. Good afternoon, everyone and thank you for joining our first quarter 2019 investor call. Today we will be sharing first quarter milestones against our core objectives; to build TRU NIAGEN into a global brand; to own our science; and to be a principal, fundamentally sound business operation, focused on the long-term. I would characterize this quarter as consistent with our expectations and I'm very pleased with how the entire organization executed. As expected, we delivered strong top line growth. We drove improvements in gross margins and marketing efficiency and we enhanced brand awareness of TRU NIAGEN and NAD worldwide. While not reflected in our first quarter financial results, yesterday we announced a $10 million capital raise, led by international strategic investors. This new funding provides additional resources to continue to invest in science, to grow our brand globally and to further strengthen the fundamentals of our business as we scale for growth. 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 in scientific research. Frank.

[Frank Jaksch:]

Thank you, Rob. The science of aging continues to gain momentum, which reinforces our global opportunity with TRU NIAGEN. As we build awareness of TRU NIAGEN globally, our strategic advantage is our multiyear investment to develop the science around nicotinamide riboside and NAD. One of our core objectives is to own the science in this area and continue to partner with the world's leading universities to advance the field of research. There are 29 ongoing, completed, and published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and therapeutic effects of NR. This is one more than our last quarterly update. And additional five clinical trials are registered to test NR in combination with other ingredients for a total of 34 and there was a new trial recently registered with the World Health Organization. Over 60% of the 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 sign research collaborations up slightly versus last quarter. Our Company and the Scientific Advisory Board continue to lead the discussion on nicotinamide riboside and NAD with published scientific research and with key influencers. Dr. Brenner led a preclinical study on NR supplementation in the context of lactation in the postpartum period that was published in January and which I discussed on our last call. He also hosted a breakout session at Upgrade XPs 6th Annual Biohacking Conference in April where he explained cellular metabolism and the role of NAD as a key coenzyme in electron transport, as well as how metabolic stressors can compromise NAD. Beyond our own research and thought leadership on NR and NAD, we are excited about the tremendous interest we are seeing in the science of aging, as well as the quality of science that has been published on healthy aging broadly. Six years ago, a group of researchers published a landmark article called the Hallmarks of Aging. He and his colleagues identified nine cellular and molecular hallmarks of aging that contribute to the aging process and together determine aging. Many listening to the call today may be familiar with some of these such as cellular senescence, telomere attrition, stem cell exhaustion, and of course, mitochondrial dysfunction, our strategic focus. There already many peer reviewed preclinical studies linking NR and the NAD story to each of the nine hallmarks of aging and we expect more published studies to further demonstrate NAD playing a key role in all nine hallmarks of aging. Within this aging research landscape, we intend to remain focused on NR and other NAD precursors. And there were several preclinical studies published on the effects of NR supplementation this quarter. A particular interest in article entitled The NAD-Booster Nicotinamide Riboside Potently Stimulates Hematopoiesis through Increased Mitochondrial Clearance was published in Stem Cell in March. It investigated the effects of oral supplementation on blood stem cells in mice finding that it promoted growth of new blood cells through increased mitochondrial clearance. This is consistent with previously - previous preclinical findings on bioenergetics and the stimulation of cellular repair pathways. Most recently, in April, the Journal of American College of Cardiology published a study showing the supplementation with NR helps maintain mitochondrial and cardiac function in an animal model by stimulating a specific cellular pair pathway called the mitochondrial unfolded protein response. The study also presents preliminary human data to support future testing of NR in humans in connection with cardiovascular health. Here are two important highlights related to the new clinical studies since we last spoke off in April. First, John Hopkins University registered a new study to evaluate the effects of NR in preventing small fiber nerve degeneration that is experimentally induced by applying capsaicin, an active component of chili peppers to the skin and otherwise healthy study participants. The effects of nerve regeneration will also be evaluated. This is a placebo controlled double blind trial. Although diabetes and pre-diabetes are some of the most common causes of small fiber neuropathy, up to 50% of all cases are spontaneous with unknown triggering mechanisms. Furthermore, there's a currently no effective treatment that prevents or reverses it, through regeneration of nerve fibers. The researchers indicate, if successful, this trial can lead to the development of a nutritional intervention for a variety of peripheral neuropathy. Outside the U.S. researchers affiliated with the Department of Ophthalmology and Visual Sciences at the Chinese University of Hong Kong, registered a new clinical trial with the World Health Organization entitled Nicotinamide riboside is a neuroprotective therapy for glaucoma - A randomized controlled trial. According to the WHO website, the study will randomize 160 patients with primary open angled glaucoma to receive an oral supplement of nicotinamide riboside at 200 milligrams a day or a placebo. The objective is to compare the rates of retinal nerve fiber, layer thinning, measured with a non-invasive diagnostic technique that renders in an in-vivo cross sectional view of the retina over 24 months. In summary, we are excited about the depth and the consistency of science supporting NR as well as the momentum behind the science of aging. Company is focused on one or more of the nine hallmarks of aging or attracting venture capital funding and the attention of popular press reinforcing the market opportunity ahead of ChromaDex as the leader in NAD and cellular health space. With that, I'll pass the call back to Rob Fried. Rob?

[Rob Fried:]

Thank you, Frank. As most of you already know, our plan is to build TRU NIAGEN into a global brand. And it was another solid quarter for us reflecting top-line momentum. The Company delivered over $10 million in total net sales an 11% increase sequentially and 53% increase year-over-year. Importantly TRU NIAGEN net sales were $7.5 million, a 15% increase sequentially and a 146% increase year-over-year. E-commerce sales were $5.9 million a 13% increase sequentially and a 220% increase year-over-year. Importantly total selling and marketing spending was lower in absolute dollars and down almost 10% as a percentage of net sales compared to the fourth quarter of 2018. Our growing understanding of our customers has helped us reduce customer acquisition costs. And we are receiving more earned media attention raising awareness of TRU NIAGEN and NAD. And we are expanding our marketing channels with tests in radio and in television. We're testing new target audiences and emerging topic for us is younger audience focused on fitness adding to the initial anti-ageing market for TRU NIAGEN itself a $250 billion category globally according to Orbis Research. An increasing number of professional athletes and teams are interested in TRU NIAGEN and the benefits of cellular repair. In the first quarter we released a number of ads featuring Hall of Fame football player Shannon Sharpe who had been taking TRU NIAGEN and was excited about the impact on his health. We expect to develop relationships with other fitness experts in the future. These initiatives are contributing to our marketing efficiency this quarter. Now there could be quarter to quarter fluctuations on marketing efficiency depending on the timing of specific marketing campaigns. But we expect to generally continue this improvement trend. Our global expansion continued with a roll out in Canada this quarter. Following regulatory approval in October we've been selling TRU NIAGEN on e-commerce platforms and to full swift Canada. In the first quarter we laid the foundation for initial retail launch subsequently announcing partnerships with Showcase and Well Health. Showcase is a specialty retailer in Canada that prides itself on being a home for the world's most innovative products and featuring emerging brands. TRU NIAGEN is now available in 36 Showcase stores in the Greater Toronto area as well as Showcase's online store. We're also excited to partner with Well Health Technologies whose mission is to positively impact health outcomes by leveraging technology to empower patients and doctors. We believe that an informed consumer is our best customer and through their network of 19 clinics TRU NIAGEN can reach around 180 doctors who collectively see 600,000 patients per year. They are embracing our science and invited our key scientific advisors Dr. Brenner to educate Well's network of physicians about the science and our product in April. The event was a success and provided a valuable introduction to a key influencer group in this important North American market. As expected, we experienced more consistent shipments to Watsons in the quarter aligned with their higher purchase commitments through 2021. And as most of you know we announced a global supply and license agreement for TRU NIAGEN with Nestlé Health Science last December. The agreement commenced in the first quarter and it's clear to us that TRU NIAGEN is an important initiative for Nestlé as it is for ChromaDex. As a reminder there's a technical feasibility requirement which relates to stability in a ready to drink format that must be met in 2019. But overall the opportunity with Nestlé is right on track. The teams are executing well and the relationship is positive. We continue to believe that Nestlé Health Science's portfolio with TRU NIAGEN will substantially advance their already strong market position and give consumers the opportunity to improve their health through the power of nutrition and will raise awareness of TRU NIAGEN and NAD. We are very proud to be in business with Watsons and Nestlé, in additional to Showcase, Well Health and Matakana in New Zealand five great global partners. We are pursuing regulatory approval in priority international markets, including Europe, Brazil, Japan and Australia, among others, so that our efforts are aligned with this great global opportunity. As we have said, one of ChromaDex's core objectives is to own the science. But what do we mean by own the science? We mean first to build upon and protect our intellectual property portfolio. Like most of you, we know what we have with this molecule nicotinamide riboside and we will continue to vigorously protect it. As you are aware Elysium unlawfully took our product, took our proprietary information and took our pedigree and infringed on our patents. We now have patent infringement, breach of contract and unfair competition, among other claims filed against them in multiple jurisdictions, California, New York and Delaware. We encourage you to review the public filings to see why we are so confident in all three of these cases. Second, we will continue to invest in quality research and partner with the world's leading scientists to better understand the full potential of this extraordinary molecule. And third, we will leverage the science to help consumers better understand the impact on their lives. Nutritional interventions that support cellular health, including boosting NAD levels with TRU NIAGEN are some of the most actionable steps consumers can take today to enhance their quality of life as they age. And just like exercise and a healthy diet, elevating NAD through TRU NIAGEN is something you can do today. And now I will pass the call over to our CFO, Kevin Farr, who will provide more detail about our financial results which demonstrate our continued focus on the fundamentals. Kevin.

[Kevin Farr:]

Thank you, Rob. Let's take a look at our financial results for the first quarter of 2019 which reflect continued progress against our key objectives on both the sequential and year-over-year basis. We continue to deliver strong top line momentum, gross margin expansion and significant improvements in advertising efficiency and controlled growth in operating expenses. For the three months ended March 31, 2019 ChromaDex reported net sales of $10 million, up 11% compared to $9.1 million in the fourth quarter of 2018. Compared to the first quarter of 2018, net sales were up 53%. Our TRU NIAGEN business was up 15% sequentially with less selling and marketing spend, both in absolute dollars and as a percentage of net sales. Year-over-year net sales in TRU NIAGEN grew by 146%. This strong growth is partially offset by expected declines in our ingredients and other legacy businesses. Our NIAGEN ingredient sales were up 15% compared to the fourth quarter of 2018 as we continue to sell to few customers. We're capturing sales to Nestle in this category. It was a small ingredient sale of the Nestle in the quarter which also results in recognition of $38,000 of $4 million upfront payment. Turning the rest of the P&L our gross margin was up 80 basis points from 52% in the fourth quarter of 2018 to 52.8% in the first quarter of '19. In the first quarter, gross margin was negatively impacted by 250 basis points primarily due to our decision in the fourth quarter of 2018 to wind down sales of purple corn. Excluding this write down, gross margin was 55.3% in the first quarter of 2019. Year-over-year gross margin increased by 500 basis points compared to 47.8% in the first quarter of 2018. We experience better gross margins due to the positive impact of TRU NIAGEN consumer products sales, which we anticipate will continue. Our total operating expense for the first quarter of 2019 was $13.7 million up $0.7 million compared to the fourth quarter of 2018. Notably our selling and marketing spending was down $0.5 million to $4.2 million in the first quarter compared to $4.7 million in the fourth quarter of 2018. As a percentage of net sales, this is down 980 basis points from the fourth quarter of 2018, as we made significant progress on improving our market efficiency in our ecommerce business. In the first quarter of 2019, G&A expenses were higher by $1.4 million to $8.3 million versus the fourth quarter of 2018. Excluding legal fees and equity compensation expense, G&A expense was higher by $0.2 million versus the fourth quarter of 2018. As planned, our litigation related expense began to ramp in the first quarter ahead of the California trial, which is currently scheduled for July. For the first quarter of 2019, our operating loss was $8.4 million versus $8.2 million in the fourth quarter of 2018, due primarily the higher legal spending. The net loss attributable to common shareholders for the first quarter of 2019 was $8.3 million or a loss of $0.15 per share, as compared to a net loss of $8.2 million, or a loss of $0.15 per share for the fourth quarter of 2018. Compared to the prior year period, total operating expense was up by $2.2 million versus $11.5 million in the first quarter of 2018. The primary drivers of year-over-year comparisons include a $1.5 million of increased G&A expenses, $0.9 million of investments in advertising marketing expenditures to build the TRU NIAGEN brand, which were down 820 basis points as a percentage of net sales, slightly lower R&D expenses as we focused our investments and key strategic priorities. G&A was higher mainly due to additional non-cash compensation of $0.7 million incremental royalties of $0.3 million due to higher revenues and incremental legal costs of $0.2 million. Excluding legal spend and equity compensation. G&A expenses were up by $0.6 million. Our operating loss was roughly flat year-over-year primarily due to higher volume, improved gross margins and lower R&D largely offset by higher SG&A and higher selling and marketing expense. Net loss attributable to common shareholders was also roughly flat versus the prior year net loss of $8.4 million or a loss of $0.15 per share. Adjusted EBITDA, a non-GAAP measure was a negative $6 million for the first quarter of 2019, due primarily to higher legal expenses, compared to adjusted EBITDA of negative $6 million for the fourth quarter of 2018. Adjusted EBITDA was a negative $7 million in the first quarter of 2018. ChromaDex defines adjusted EBITDA as a net loss or income, which is adjusted for income tax, interest, depreciation, amortization and non-cash stock compensation expenses. Moving to the balance sheet and cash flow, we ended the first quarter of 2019 with a solid balance sheet with cash of $19.3 million, which includes the $4 million upfront payments from Nestle. In the first quarter of 2019, our net cash used in operating activities was $3 million versus $5.1 million in the fourth quarter of 2018. The $4 million upfront cash payment from Nestle was recognized as deferred revenue and is included in cash used in operations. Total cash outflows were $3.3 million in the first quarter of 2019, compared to $5.6 million in the fourth quarter of 2018. The lower cash outflows this quarter was driven by the $4 million cash payment from Nestle partially offset by working capital, which was at $1.1million use of cash in the first quarter of 2019, compared to a $900,000 source of cash in the fourth quarter of 2018. While we do expect to invest in working capital for the full year, this impact will be weighted to the first half. In the first quarter of 2018, cash used in operations was $4 million and total cash outflows were $4.4 million. We ended the first quarter of 2019 with inventory of $8.7 million, which was up $3.6 million versus the prior year, as we invested in inventory to support growth in 2019. Now let's look at our expectations for 2019. Consistent with our outlook last quarter, we continue to expect strong growth in our top-line, primarily driven by TRU NIAGEN and our U.S. ecommerce and Watsons' international business, as well as with other distributors and cross border opportunities in certainly new international markets, partially offset by continued declines in the ingredient business as we focus on fewer NIAGEN resellers and fewer other ingredients that we bring to the market. Gross margin expansion, driven by increased sales in TRU NIAGEN or e-commerce business in cost savings across the supply chain which are supported by better economies of scale in other efficiency initiatives. Selling and marketing expenses are roughly flat in absolute dollars but down significantly as a percentage of net sales as we leveraged 2018 investments in new customer acquisitions and diversify our marketing strategies beyond digital and direct response marketing. Lastly, we now expect general and administrative expenses to be up a few million for the full year in absolute dollars with the primary driver being higher litigation expense. G&A is expected to be down significantly as a percentage of net sales. In summary the key drivers in 2019 are the continued strong growth in sales of TRU NIAGEN, improved gross margin as a percentage of net sales, continued increases in efficiency of our TRU NIAGEN sales and marketing expenses, leveraging fixed overhead spending and managing our legal efforts as efficiently as possible. Based upon these drivers we continue to expect the Company to be cash flow breakeven by the fourth quarter 2019 or early 2020. Now let me briefly touch on the recognition of $4 million upfront payment from Nestlé. The $4 million relates the Nestlé's exclusivity and co-exclusivity rights to include TRU NIAGEN in its branded medical nutrition in certain protein based beverage products respectively. This represents a one-time non-fundable payment to ChromaDex. We recognized revenue relative to forecasted orders as we delivered ingredient to Nestlé over the course of non-cancelable contract term. We determined that this period was slightly over four years based upon the likely launch date and other terms outlined in the agreement. As a reminder in addition to the $4 million for exclusivity and co-exclusivity rights there are certain commercial milestone payments prior to the sale of TRU NIAGEN to Nestlé as they launch in new markets. The agri incremental payments are up to $6 million to ChromaDex which will be realized as the product launch milestones are achieved. Beyond the upfront fee and the milestone payments most revenues were driven by ingredient sales and royalty payments from Nestlé. As it relates to our financial outlook, we do not anticipate meaningful revenues related to the agreement in 2019 and are also taking a conservative view to 2020 which is likely the launch year. There's a wide range of possibilities with the respect to the partnership with Nestlé's and we're committed to maximizing the potential for our shareholders as well as consumers. As Rob said we are very proud of how our teams are executing so far. Operator we're now ready to take questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jeff Van Sinderen from B. Riley FBR. Your line is open.

[Jeff Van Sinderen:]

Good afternoon. And let me say congratulations on the strong growth in the quarter. You mentioned launching in new international markets. I know you launched in Canada. But could you give us any more color on maybe which markets you see hitting? I know it's a tough question next at least in the near term and then also kind of which one of those you think have the most potential to contribute to your growth?

[Frank Jaksch:]

At this point the new international launches will be cross border sales, online internet sales. We've already begun testing in Japan and we hope to be testing cross border sales into China.

[Jeff Van Sinderen:]

Okay. Great. And then any update you can give us on progress with Nestlé towards getting to the milestones as you need to get to market, particularly the technical feasibility just wondering you presenting at [indiscernible]?

[Frank Jaksch:]

There's not much specifically I can share other than the fact that the tests that we have performed internally are very promising. So we are highly confident as is Nestlé that we will have a solution to this problem. We did file a provisional patent about a month ago maybe two months ago on our process.

[Jeff Van Sinderen:]

Okay, good. And then on the purple corn wind down, that impacted gross margin. Are there any other anticipated one-time items like that, that we should be aware of relevant to gross margin or do you think gross margin is pretty clean from here on out?

[Rob Fried:]

Yeah. I think it's pretty clean from here out, there may be a little bit more on purple corn but it's immaterial as we wind down the business. But going forward, I don't see any in the future, not near future.

[Jeff Van Sinderen:]

Okay. And then you touched on the sports market, just wondering if there's more you can share there on progress related to sports, maybe what milestones we should anticipate there over the next few quarters?

[Rob Fried:]

That's a good question. We haven't yet created milestones for you to look at. But we will do that perhaps for the next quarter. We've begun testing some television and radio and online spots that are targeted towards those cohort groups. That's a younger fitness based cohort group. And so far, the results that we're seeing are very encouraging.

[Jeff Van Sinderen:]

Okay, good. I'll let somebody else jump in. Thanks for taking my questions.

[Frank Jaksch:]

Thank you.

[Rob Fried:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

[Destiny Buch:]

Hi, guys. This is actually Destiny on for Jeff. Thank you for taking the questions. Rob, I heard you say that an informed consumer is the best consumer. And I think in this particular market, you're right. So my question is, how are you expressing and explaining the long clinical history of NR, in some of these other marketing avenues such as I think you said, TV and radio. And then, because I know it can be tough for some customers to meet through, especially in this market, because it's a little bit saturated. So I'm curious how you're being strategic with that?

[Rob Fried:]

Right. That's also a very good question. When you are doing radio or television spots or short videos or short spots online digitally, it's very difficult to communicate the complex science and history of research behind nicotinamide riboside. So for that reason, we also have a fairly well developed at this point health care practitioner initiative, where through conferences and direct outreach programs, we are communicating through materials, through online and through direct interactions with professional healthcare people, who can understand the preclinical and clinical research in the state of the science and also can understand mechanistically, how NR elevates NAD and how the elevation of NAD has numerous therapeutic benefits. Some of those health care practitioners are actually resellers of TRU NIAGEN, most however, are just communication channels. We're also aggressively pursuing podcasts and other channels with informed individuals who can then turn around and influence their constituencies.

[Destiny Buch:]

Okay, got it. And you do you think you can use the same approach going after the health and fitness market, especially with the younger demographic?

[Rob Fried:]

Yes. Our attitude towards sports teams and fitness professionals is very analogous to our approach with healthcare practitioners. There are several professional sports teams that are supplying TRU NIAGEN now to their players. They seem to be performing extremely well, I might point out. There are also numerous athletes in the NBA and other sports that are, we know now taking TRU NIAGEN. They also seem to be remarkably performing extremely well. And we use that not as much as a profit and loss channel but more as an influencer channel to help them in turn communicate to their followers.

[Destiny Buch:]

Okay, I understand better now. Thank you. And then Frank, this might be a question for you. I know you mentioned that, there was a trial registered with WHO. I just want to clarify you said that they would be doing this over 24 months. Is that correct?

[Frank Jaksch:]

Yes, it's a long-term study on glaucoma.

[Destiny Buch:]

Okay. So we would likely - we wouldn't see data until maybe 2022. Is that accurate or maybe later?

[Frank Jaksch:]

Well, it's hard to say, because I haven't been able to review the full study design only what was available, what was posted. So I don't know if the 24 months includes the dose - the full dose - this is a full dosing period or whether or not it's just a review period, a follow-on review period after they complete the dosing.

[Destiny Buch:]

Okay. Got it. Thank you for that clarification. And then, just a quick question. It's been a few months since the agreement with Nestle was announced, do you have any additional companies of similar size in the pipeline at the moment that you can speak of?

[Rob Fried:]

There are none that we can speak of, there are communications that go on with other comparable type companies for other categories. But there are no deals that are imminent or that we can talk about.

[Destiny Buch:]

Okay. Got it. That does it for me. Thank you.

[Frank Jaksch:]

Thank you very much.

[Operator:]

Thank you. And our next question comes from Ram Selvaraju from H.C. Wainwright. Your line is open.

[Ram Selvaraju:]

Good afternoon. Thank you for taking my question. Congratulations also on the strong quarter. What was the specific purpose of raising the $10 million and convertible note and why now regarding timing?

[Rob Fried:]

There's no specific purpose. It was a general purpose. We thought that it was a very strategic investor and we thought that it would be a good time to just strengthen the balance sheet. There is no specific reason why it took place right now. Other than as we have said, that we frequently receive opportunities and interests for financings and this one came in and the terms were right, the partners were right. Therefore the timing was right.

[Ram Selvaraju:]

Very good. And are there any updates on regulatory approval to facilitate the launch of TRU NIAGEN in territories outside North America?

[Rob Fried:]

Yes, that's a good question. We stated in the last quarter that we - no longer want to create any kind of expectations about regulatory approvals, because we've learned that it is a process that is largely beyond our control. There have been some communications that have been positive with certain countries. But anything could happen. It could happen quickly, or it could take years. We just don't know. And so we no longer want to speculate as to when we will receive those approvals. But I will say when those receive - those approvals come in, we will be ready.

[Ram Selvaraju:]

Wonderful. Thank you very much.

[Rob Fried:]

Thank you.

[Operator:]

Thank you. Our next question comes from Bill Dezellem from Tieton Capital. Your line is open.

[Bill Dezellem:]

Thank you. I'd actually like to dive into the selling and marketing expenses further. As you noted that they were down versus the fourth quarter, and yet sales were up sequentially. But the Q4 was also down from the Q3, and sales were up sequentially. And so we've now had two quarters in a row, where sales are up sequentially, and the selling and marketing expenses are down commensurately. That's so counter intuitive and counter natural to what we are used to seeing with companies. Can you talk in more detail beyond what you have here about this phenomenon with you all?

[Rob Fried:]

Yes. I have, well, three thoughts about that. Number one, it's very difficult to predict quarter-to-quarter. In any given quarter if we cast a wide net and we experiment with new campaigns, that trend could reverse for an individual quarter. But overtime, we expect that trend to continue. And reasons for that is; number one, we are seeing a very healthy percentage of reorders, the people who are taking TRU NIAGEN especially those that take it for a few months, continue to take it. They are noticing the benefits. And we have a high percentage of existing customers returning. This - and then finally and the third point and the second reason why we expect the trend to continue. Is that like anything we are learning, and we've been added now for a couple of years and we are gaining a much stronger understanding of the consumers and the channels and the messages that work best and we will continue to experiment and I expect that we will continue to learn more about how to market the product and deliver improved performance.

[Bill Dezellem:]

Great, thank you. And then you had mentioned that you had an important strategic buyer of the convert, who is that buyer.

[Rob Fried:]

I think we're, at this point, not the disclosing that.

[Bill Dezellem:]

Okay. Then I will shift after that one. And I think Frank in your opening remarks you made reference to continuing to pursue NR and other NAD precursors and I believe you have used that same phrase in past communication. And I was hoping you would take a little time to discuss what it is you are referring to when you start talking about other NAD precursors?

[Frank Jaksch:]

Well, we have been looking at other NAD precursors beyond NAD for - beyond nicotinamide riboside for quite some time and there are additional patent center now out there that reflect that and we will go into detail about the specific ones. But there are other NAD precursors and if there are going to be other NAD - possible other NAD precursors we want and it's consistent with the statement, we been saying as we want to own that. And we want to own the categories, much as we can the science and the category of NAD or NAD precursors. So making that investment into evaluating other NAD precursors is consistent with that. And it's possible that there may be other precursors that may have very specific benefits that could be potentially differentiated from NR but that is yet to be seen and if that does surface we want to control it.

[Bill Dezellem:]

And Frank are you seeing where there are other precursors that are looking equally as favorable as NR today?

[Frank Jaksch:]

Well I'm not sure if you saw but there have been publications that have alluded to other precursors or data regarding other precursors, but in reality I would say it's too early at this point to really say definitively whether or not there are any other NAD precursors that would in some way be better than nicotinamide riboside, I think nicotinamide riboside will continue to be the preferred NAD precursor to biochemistry and the mechanistically we understand how it works, how it plugs in and how it works to increase NAD and it's going to take quite some time before you are going to start seeing evidence that would support that further precursors.

[Bill Dezellem:]

Great. Thank you. And if I may ask one more question and feel free to defer if you prefer, but I was hoping you would discuss in further detail the cross-border selling opportunity into China when that was going to begin and how that could look?

[Rob Fried:]

We would be using third-party platforms in China. There are a few and we would market on that platform. There would be limited marketing outside of that platform. But as I said if and when we do that we would take it slowly.

[Bill Dezellem:]

Thank you, both.

[Rob Fried:]

Sure. Thank you.

[Operator:]

Thank you. Our next question comes from Brian Nagel from Oppenheimer. Your line is open.

[Brian Nagel:]

Hi, good afternoon, thank you for taking my questions. So a couple questions if I could. First off you mentioned in the commentary, prepared commentary just to understand your customer better are you able to gauge yet as sales are ramping here TRU NIAGEN, what share of that's coming from repeat customers and to a certain extent how long now people are using the product?

[Frank Jaksch:]

We do understand how the percentage of customers those are repeat customers, we haven't disclosed that yet. I think several quarters ago, we said it was 30% and that number has increased.

[Brian Nagel:]

Okay. Then my second question. Also as we look at the sales now ramping faster on line, how should we think about the spreading profitability between a sale online versus a sale through one of your partners.

[Rob Fried:]

Yeah. I will answer that, Brian. I think with regard to if you look at our consumer product company or consumer product segment disclosure in our 10-K and 10-Q, when we sell it overall to both retailers and to consumers directly that that rate is about 60%. And with regard to it's more like ingredient sales when we sell it retailer to business-to-business and that's more around 50% as you look at our segment reporting.

[Brian Nagel:]

Got it. Thank you.

[Rob Fried:]

Thank you, Brian.

[Operator:]

Thank you. And we do have time for one more question. Our final question will come from Barry Kitt with Pinnacle Fund. Your line is open.

[Barry Kitt:]

Hello, Rob, Frank, Kevin, Brianna, thanks for taking my call and congratulations on your first $10 million quarter.

[Rob Fried:]

Thank you, Barry.

[Barry Kitt:]

I was wondering, now that you're doing business with Nestle hopefully, once upon a time omega 3s were not in baby formula but they're naturally occurring in mother's milk and at some point, they got added to baby formula at which point, DSM bought Martek, the manufacturer and owner the owner of the omega 3 patents, for $1.1 billion. Switching over to nicotinamide riboside. Nicotinamide riboside is in mother's milk but it's not in baby formula. And at some point if it makes sense, since the job of baby formula is to as closely as proximate mother's milk as possible, it makes sense to add it to baby formula. The largest manufacturer of baby formula in the world is Nestle. So now you're doing business with Nestle. And presumably Nestle thinks highly of nicotinamide riboside and the importance of it. Just wondering if you could talk about, is there a plan to talk to them about adding nicotinamide riboside to baby formula at some point?

[Rob Fried:]

We have discussed that with Nestle and all the major players in this space, and I can tell you that all the major players in this space are interested. However, it is a long process because there are significant safety concerns. And there are limited tests available. There are preclinical studies, but there are no clinical studies or safety studies yet, but we have been in conversations with several companies about that particular area.

[Barry Kitt:]

Okay, thanks. Thanks, everybody. Again, congratulations. Thanks a lot.

[Frank Jaksch:]

Thanks Barry.

[Rob Fried:]

Thanks Barry.

[Brianna Gerber:]

Thanks.

[Operator:]

Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the conference back over to management for any closing remarks.

[Rob Fried:]

Well, thank you. I did want to make one closing comment, which many of you, who I have had the pleasure to get to know over the last couple of years would perhaps may sound familiar, but I would like to reiterate something philosophically about the way we are approaching the business. And that is that we recognize the magnitude of the opportunity with nicotinamide riboside. And we are making what we believe to be smart decisions to capitalize on that opportunity. Rather than focusing on enthusiasm, we are focusing on delivering results. And at times, we may exceed expectations, at times we may not. But we are quite confident that we are on an excellent path, a path to building long-term shareholder value and a plan to make the world a healthier place. I'd like to thank everyone for participating in this call and for your interest in our endeavor. And we look forward to speaking with you again next quarter.

[Operator:]

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