ChromaDex Corporation
Q2 2015 Earnings Call Transcript

Published: 19 Aug 2015

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the ChromaDex Corporation's second quarter 2015 earnings conference call. My name is Abigail 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. On Thursday, ChromaDex issuing new release and obtain the company's financial results for the second quarter of 2015 and filed the Form 10Q. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's website at chromadex.com, and the Form 10Q is also available on the SEC's website. I would now like to turn the conference call over to Andrew Johnson, Director of Investor Relations. Please go ahead.

[Andrew Johnson:]

Thank you, Abigail, and good morning and welcome to ChromaDex Corporation 2015 second quarter results conference call. With us today are ChromaDex's Founder and Chief Executive Officer, Frank Jaksch and Chief Financial Officer Tom Varvaro. Today's conference call may include forward-looking statements that are subject to risk and uncertainties relating to ChromaDex's future business prospect and opportunities as well as anticipated results of operations. Forward-looking statements represents only the company's estimates on the day 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 risk 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. Our annual report on Form10-K filed with the SEC on March 19, 2015, recent and fourth coming quarterly reports on Form 10Q, recent current reports on Form 8-K and 8-K amended and other SEC filings discussed some of the potential risk factors that may affect our business, results of operation and financial condition. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company's earnings release which was issued Thursday afternoon and is available on the company's website presents reconciliation for the appropriate GAAP measures and explanation of why the company believes such non-GAAP financial measures are useful to investors. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com. With that, it is now my pleasure to turn the call over to Frank Jaksch and Tom Varvaro.

[Frank Jaksch:]

Thank you, Andrew. Over the last five quarters we are pleased to have shown truly impressive growth from our proprietary ingredient business. The turn we expect to continue as we establish new distribution channels and penetrate additional markets. Now before I get into the highlights of the second quarter, I'd like to turn the call over to Tom so he can provide you the details of our second quarter 2015 financial results. Tom?

[Tom Varvaro:]

Thank you Frank, and good morning everyone. I want to paraphrase by saying that the following numbers are all approximates. For the three months ended July 4, 2015 our Q2 2015, ChromaDex recorded net sales of $6,101,000, increase of 58% as compared to $3,856,000 for the quarter ended June 28, 2014 or Q2, 2014. And a 16% sequential increase over Q1 2015. The ingredient segment generated net sales of $3,412,000 for Q2 2015, an increase of 98% compared to $1,722,000 for Q2 2014 and a 27% sequential increase over Q1 2015. The core standards and services segment also proceeded a 28% growth as it generated net sales of $2,371,000 for Q2 2015 compared to $1,857,000 for Q2 2014 at a 3% sequential growth over Q1 2015. Regulatory consulting segment net sales increased 15% from $277,000 for Q2 2014 to $318,000 for Q2 2015 at 13% sequentially over Q1 2015. Gross margins for the quarter were $2471,000 versus $1,399,000 for Q2 2014, a 77% growth and a 28% sequential growth over Q1 2015. Net loss for the quarter was negative $315,000 versus negative $1,653,000 in Q2 2014 and negative $1,260,000 in Q1 2015. Net income for the quarter after adjusting for noncash charges associated with share based compensation which is a non-GAAP measure was $192,000 compared to a net loss of negative $616,000 for Q2 2014 and a net loss of $310,000 for Q1 2015. Cash on hand at the end of the quarter was $5,699,000 versus $3,216,000 at end of Q1 2015. This will provide us sufficient cash on hand to fund our operations as well as anticipated expenses associated with increased R&D activities at least through Q4 2016. This increase was attributable to company's June draw down of the $2.5 million tranche object from Hercules growth technology. With that, I will now turn the call back over to Frank, so he can provide our Q2 2015 highlights.

[Frank Jaksch:]

Thanks, Tom. I'm pleased to report our record revenue and I would now like to update you on our recent developments of the company. First, I'm going to focus on our ingredient segment. Q1 was the first quarter in our ingredient, where our ingredient revenues were higher than our legacy business. In Q2, the growth in the ingredient segment continue to accelerate and represents the majority of the company's revenue, at turn we except to continue. NIAGEN continues to be the primary growth driver within the ingredient business and is the first section within the ingredients base I'm going to talk about here. We continue to build out our distribution channels, the NIAGEN customer count currently stands at about 10 customers that have NIAGEN in their products. A few examples of ones that we've already announced like thorough research, Life Extension Foundation, Healthy Directions, Life Cell Research and five links in the network marketing channel. We've been very successful with the early adopters in the dietary supplement space, and as the NIAGEN story continues to develop, we expect a larger dietary supplement companies to incorporate NIAGEN into their products as well. Although revenue growth has been robust over the past five quarters, we still only in the early stages of expanding into additional distribution channels, not only in the dietary supplement space, but other market such as food, beverage, skin care, cosmetic, medical food and other markets as well. From a regulatory aspect, we're on track to have self affirmation of grass and for those of you who might not know what grass is, grass is generally recognized to safe which is a regulatory distinction that allows for dis-ingredient to be included in food products and we're on track right now to have that completed sometime by the end of the year. When we gain grass, while the opportunity move into additional market such as the food, beverage and medical food markets. In Q2 we announced that Healthy Directions launched a product called NRG Advantage Featuring NIAGEN. The new dietary supplement product from Healthy Directions protects against oxidant distress and promotes healthy aging. Healthy Directions is a direct-to-consumer nutritional supplemental retailer and a wholly owned [indiscernible] of the NASDAQ listed [indiscernible]. Promoting healthy mitochondrial function is just the start of NRG advantage, it also increases NAD and supports healthy cellular metabolism, cellular brain health and muscle endurance. Another business development fronts, we've been in active discussions with numerous Fortune 500 companies for various applications addressing everything from skin care, medical food, food and beverage, and sports nutrition markets. We know that at least three products which will feature NIAGEN as an ingredient being launched over the next three to six months that will be available on retail shells such as GMC, CBC Whole Foods and Sprouts, just to name a few. Does it just the start of NIAGEN appearing in products at retail and we expect there will be numerous other retail offerings over the next 6 to 12 months as well. This is one of the compelling aspects of the ingredient business model as a whole, not just for NIAGEN but as our ingredients are included in new products, it results on a significant reoccurring revenue stream, and that’s one of the valuable or more protected aspects of the ingredient business. So really focusing more now on the continued research about nicotinamide riboside as an NAD precursor, we've been telling everyone now for several years that its mission critical for ChromaDex to collaborate with research institutes as well as conduct our own house clinical research studies. The publication of research on nicotinamide riboside are any of our ingredients for that matter, will continue to be one of the most important catalyst for the company moving forward. These studies are critical not only to confirming the effectiveness of NRs and NAD precursor, but also verifying the effective NAD precursors to a ray of different therapeutic end points. So there has been a lot of different science developments that have published recently about nicotinamide riboside as well as NAD. We recently released further details regarding our first human study at the FASEB NAD metabolism signaling conference. Dr. Brenner, a member of our SAB and an inventor of several ChromaDex NR patterns, presented some of the human study data as well as new animal data about the effectiveness of NR as an NAD precursor. Dr. Brenner also released details regarding an unexpected positive funding from the first human study regarding an NAD biomarker called NAAD which is actually nicotinic acid adenine dinucleotide. These finding led to the filing of an additional pattern. Dr. Ryan Dellinger from ChromaDex also presented a poster summarizing further details about the human study. And that study was largely focused again on showing or showing more data regarding NRs effectiveness as an NAD precursor. ChromaDex was a sponsor of this important conference which is largely focused on NAD biology or NAD metabolism and the conference was well attended by many top researchers along with a quite a few Fortune 500 company executives which we believe is important in highlighting the high degree of interest, not only in this conference but also as NAD as one of the hottest basis in the research community. We are preparing to start our second human study on nicotinamide riboside. The first study was a single dose administration which demonstrated that even a single dose of NIAGEN or NR was enough to show an increase of NAD. The second study will have a larger patient population and will be held over a longer period of time. Again [indiscernible] not only the effects of nicotinamide riboside as an NAD or an effective NAD precursor, but will also be looking at several therapeutic end points that may result from increasing NAD with NR. In Q2 we also announced a collaborative study, human clinical study on NIAGEN with the University of Colorado in Boulder. Dr. Doug Seals will investigate the effects of NIAGEN on physical function of metabolism and healthy adults aged 45 to 79 years old. This placebo controlled double blind randomized crossover study will assess the potential benefits of daily NIAGEN supplementation over a course of six weeks. End points that will be assessed in the study include physical function, cardio respiratory fitness and overall metabolism. ChromaDex providing the NIAGEN supplements for the study along with the match placebo pills or control pills and ChromaDex is awarded a $100,000 research to Dr. Martin's postdoc research at Seals, Dr. Seal's lab, which will fund approximately 25% of the cost of the study. ChromaDex is executed to date over 40 collaborative agreements with the Universities and research institutes regarding nicotinamide riboside, and this is very important to note because these collaborative agreements are almost always results in some form of new published research. We couldn’t possibly fund all those research on our own and having this much interest from independent university is willing to fund these studies validating the effectiveness of NRs and NAD precursors and currently important to the future success of nicotinamide riboside. So why is all this published research important, which is obviously something that we've been really sort of beating the drum on and will continue to beat the drum on hard as that published research is critical and attracting media attention. And media attention is critical in building consumer awareness. The media is always looked to high profile previewed published studies, published research basically to drive important editorial of that up and coming healthy ingredients. We have seen an increased interest from multiple sources of the media regarding NR. We've also seen an increased interest in media attention to high profile published research studies. To highlight a couple of recent examples of that, Scientific American recently published NR go by David Stip who is actually a former Wall Street Journal writer. The article brought attention to the importance of NAD and the importance of both NR and pterostilbene essentially to NAD metabolism. NAD is a lynch pin of energy metabolism among other roles and it's - as it diminishing level with age is been implicated in mitochondrial deterioration. Supplements containing nicotinamide riboside, a precursor to NAD might be able to boost NAD levels and the article highlighted that point which is important for us. The article also reasserted ChromaDex's first comer status in the NAD game by announcing that it conducted a clinical trial demonstrating a single dose of NR resulted in statistically significant increases of NAD. And it was also sorted by would say a sidebar important piece but the article also highlighted pterostilbene which is our first ingredient. David Stip has a fairly extensive background writing on science, medicine and aging since 1982 for Scientific American, the Wall Street Journal, Fortune, New York Times and many other publications as well. In 2014, he won an award for American Aging Associations Excellence in Journalism award. So having an article, a high profile article come out not only in Scientific American but from such a high profile author that had a previous history in writing about aging was important for ChromaDex. And we expect that type of pick up in the future as well. And there was also some recent news at least from a television standpoint, a nutrition expect Johnny Bodine told [indiscernible] and living viewers, you can boost your energy by taking NIAGEN, the pattern ingredient increases NAD levels in cells and tissues, enabling our bodies to transform the food that we eat into energy. So, and another sort of comment on the media that I need to highlight is related to that you probably noticed that Rob Fried joined our board of directors. I mean I need to first tell you that Rob's skills and background make him a perfect fit for our board. Rob's background as an academy award winning motion picture producer as well as his extensive experience as a Hollywood Executive, not to mention his success as an entrepreneur brings a wealth for media experience and contacts to the ChromaDex team. As I mentioned before, media attention is critical in driving consumer awareness and as we continue increase our distribution channels, we plan on utilizing Rob and his expertise to drive media attention to the benefits of our proprietary ingredients, including NIAGEN. Shifting gears a little bit here, we previously - we mentioned previously during our last quarterly call, investor call, ChromaDex has been working on progressing the use of nicotinamide riboside or NIAGEN for treating Cockayne syndrome. Results of a mouse study performed by NIH in collaboration with ChromaDex indicated that NR was effective restoring NAD levels in mitochondria and rescuing certain phenotypes associated with a devastating accelerated aging disease known as Cockayne syndrome. Cockayne syndrome for those of you know may not know what it is, it's a rare pediatric orphan disease, these kids suffer from a genetic abnormality that causes this accelerated aging condition. The researchers concluded that NR promise it's potential therapy for the disease as well as for other age related nerve generative conditions. We believe there is an immediate opportunity for pursue NR as a pharmaceutical therapy for treating Cockayne syndrome. We are currently preparing to file applications for both IND any orphan designation with the FDA. Shifting to PURENERGY, one of other portfolio ingredients. We continue to gain new customers for PURENERGY. There is a longer sales cycle for PURENERGY and the PURENERGY customer base is slightly different than the typical NIAGEN customer, so it takes a little longer to go through the customer acquisition and product formulation phase, but nonetheless we continue to develop the brand and revenue continues to grow for PURENERGY as well. We recently announced the launch of [indiscernible] product features PURENERGY to provide sustained energy boost and mental alertness without the jolt of the typical energy drink. Also energy is a branded lifestyle energy product which is designed to be different from the traditional energy product or products that are already in the market. Also energy is a single dose powder pack designed to be dissolved in water, so it's not a regulatory drink product, it's something that would be added in the sachet pack to water. And we look forward to also ruling that product down and being successful with it. As you may recall, pTeroPure pterostilbene is our first ingredient that we brought to market in 2010. There are more than 40 consumer products containing pTeroPure in the marketplace today, and we continue to build the pTeroPure brand as we expand it to new potential markets. We've been talking about the potential of use of pterostilbene in the skin care market which we believe is the largest opportunity in the skin care and sun block market. University of California Irvine, completed a pterostilbene study for prevention of skin damage from UV exposure. The study demonstrated that topical application of pterostilbene on today. Animals prior to UV exposure prevented several types of UV mediated damage. ChromaDex is currently in discussion with several large Fortune 500 companies regarding the inclusion of pterostilbene and skin care and sun care protection products. We've also been working on strengthening our pattern portfolio for pterostilbene, we've expanded our pattern rights for pterostilbene by adding a list of exclusive pattern rights related to pterostilbene from the University of Mississippi related to the potential anti-obesity effects of pterostilbene, and now that we've expanded the pattern rights, we're also targeting customers who use existing weight-loss products to start to include pterostilbene in the weight-loss product category. On top of our existing portfolio, we continue to expand our portfolio of ingredient products as well. Recently we announced ChromaDex licensed and also signed a supply agreement for Anthocyanin and Rich Suntava Purple Corn. ChromaDex will use proprietary Suntava Purple Corn to produce a highly concentrated Anthocyanin abstract. For those of you who might not know what Anthocyanins are, they're pigments or colorings that are contained in most highly pigmented fruits such as Blueberry, Strawberry, Red Grapes, also Cranberries. These berry bio mass sources are generally too expensive to produce cost effective concentrated anthocyanin ingredients. We planted our first crop this spring, we're expecting to harvest the crop the late August and we should be in process of extraction sometime around September or October. Suntava Purple Corn is derived from a proprietary non-GMO Purple Corn hybrid which contains an extraordinarily high level of anthocyanins. It is grown in the U.S. and is handled, harvested and processed using the same modern efficient methods and equipment as traditional corn crops. ChromaDex pleas there is huge untapped ready market for cost effective concentrated anthocyanins, the proprietary Suntava Purple Corn should be a game changer and providing a cost effective price point to enable mass market distribution of anthocyanins which currently really don’t exist in the market place. Regarding our new pipeline of intellectual property, our unique ChromaDex business model for acquiring intellectual property continues to work very well. We are working on at least five new licensing deals regarding new technologies and we also have a robust pipeline of new compounds that we have not started licensing as well that have come through that same business model. The core standard services consulting and verification businesses continue to grow a steady pace and should continue to perform well as quality pressure continues from the New York Attorney Journal Action earlier this year. There is also pressure now from that same action that’s really starting to drive even at the congressional of the senate level that we believe is going to further push ice towards quality or quality control which is something that should further benefit the company moving forward as well. With that, I conclude our discussion and I'm prepared to take a few questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Michael Kay with Kay Associates. Your line is open.

[Michael Kay:]

Thank you very much. Would you please - well congratulations on a very good progress and a great quarter. Could you please clarify for me the trajectory by which the company gets revenues, in other words like say pterostilbene or a NIAGEN or life expansion [indiscernible] or Healthy Directions has it in some of their products. Then does the company get royalties for each bottle sold or used or is it a one-shot type payment, you know I appreciate some clarification on it.

[Tom Varvaro:]

So, it's a little bit of both. I mean most of the revenue that we generate as a result of supply agreements that we have. So we - they purchase the material from us and then or buy it as essentially powder to put into their formulations and we're largely covering most of our revenue under that. But some of the licensing arrangements or some of supply agreements that we have depending upon whether they have exclusivity or some other special terms do include royalties, not all of ours, all the customers that we sell to under any of the ingredients we have in the portfolio will include royalties but some of them do include royalties, and we have been generating some royalty revenue and that’s been increasing as well.

[Michael Kay:]

And the contracts, they're non-exclusive, so that means you could deal with a variety of companies for the same substance right?

[Tom Varvaro:]

That’s correct, I mean but we do have some exclusive arrangements as well just to be clear. So there are some but majority of them are actually non-exclusive relationships.

[Michael Kay:]

Have there been studies that showed that NR has anti-inflammatory effects?

[Tom Varvaro:]

Well, we haven't focused on the anti-inflammatory side of things, there is some evidence that shows that there is some impact potentially on inflammation but that’s not a primary focus for us.

[Michael Kay:]

Okay, and the last question, am I right in saying that pterostilbene applied externally to the skin could have a protective effects against harmful rays?

[Tom Varvaro:]

Well I wouldn't - pterostilbene yes has - it is a natural sun block. So there is a natural sun block effective, but more importantly it's a natural sun block that actually prevents a lot of the effects associated with the UVA or UVA exposure, meaning DNA damage as a some protective abilities in terms of vary your functions. So it's a compound that not only protects you from the sun but it also protects you from the damage potentially that could come from exposure to the sun.

[Michael Kay:]

That’s crucial because that one study is recently have shown that actually many of the products on the market sun block products actually could declass in [indiscernible] or they don’t do the job so this could be a great market for the product.

[Frank Jaksch:]

There is no doubt, and as I mentioned during the call, I mean that’s a big piece of focus for us in terms of pterostilbene. We've been working on the development of the skin care side of pterostilbene now for several years, the science is really starting to prove itself out more struggling to get interest from the larger Fortune 500 companies that are aware of the science that’s starting to prove out there.

[Michael Kay:]

Thank you very much for your responses.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Anthony [indiscernible], Private Investor. Please go ahead.

[Unidentified Analyst:]

Hi Frank, about five years ago at least I had the pleasure meeting you in New York City with some analysts and you discussed the prospects of the company. And indeed they were very exciting and in this interim you've gained a lot of intellectual property and personnel. I have a couple of questions. As a investor I've kind of been disappointed and that we still at this point in time have not come into the black, I noticed that the retained earnings now we have a deposit in excess of $40 million. I look at the last statement that was made and I see a $507,000 that was [indiscernible] "noncash expenditures" and I have a question with respect to that entry, how does that relate to our number of shares outstanding, because it seems to be dilutive and it represents an excess of 8% of our top line. So, I would appreciate if you could address some of those issues and thank you so much.

[Frank Jaksch:]

So the majority of that was related to noncash based stock compensation, basically related to the employee option pool. So we maintain a pool - an option pool that is basically a fixed ratio and Tom, if you want to jump in and maybe cover a little bit more about that. Tom is on mute.

[Tom Varvaro:]

Sorry, I was on mute. The $507,000 on you are referring to is based around share based compensation. That’s again as Frank mentioned the annual employee grants and we grant those across the entire breathe of the company. We feel that’s critical for the company to maintain the high quality employees that we built and giving stock options as everyone is very well aware is a very good rate of retain these people and keep them loyal to the company. That is where the majority of that $507,000 came from in Q2.

[Unidentified Analyst:]

How dilutive is it to the shareholders?

[Tom Varvaro:]

Well, I mean the stock options are issued at market price. So, it's not really dilutive in the sense that they were issued below market.

[Unidentified Analyst:]

Frank, did you address some of the issues in terms of profitability, when can we look and see and enjoy some profitability here? It's been at least five years since I'm acquired with the company.

[Frank Jaksch:]

Right. Well, I mean most of the - over the past five years, five years ago we launched our first ingredient, so we've been spending money and developing out the ingredient portfolio that we have including NIAGEN and that costs money. And at the same time we've been having the revenue ramp up and if you notice in Q2 that we started - we did generate positive cash in Q2 and the - you'll notice that the financials gotten a lot stronger over the past three or four quarters in particular and we expect that trend to continue. So we're not that far off of getting to profitability, we still need to make R&D related spend or spend some money on R&D related development to the ingredients and on a quarter-by-quarter basis that could still impact the profitability of the company as we continue to grow other revenue, but if the revenue keeps growing at the pace that it is we should finally get to a point where it'll turn the other way.

[Unidentified Analyst:]

In the short-term do you see the need for any funding of this research?

[Frank Jaksch:]

We have enough cash on hand right now to fund the budget that we have. So, at this point our stance is that we don’t need to raise additional capital unless something were to change over the next 12 months.

[Unidentified Analyst:]

Thank you so much, I appreciate it. Good luck, take care.

[Operator:]

Thank you. Our next question comes from the line of [indiscernible], Private Investor. Your line is open.

[Unidentified Analyst:]

Thank you. Question is, are you going to implement the reverse split and lift yourself at the company on [indiscernible] investor for many, many years and it was strongest long term ago and as they promised you [indiscernible] if you will list the company on the MX? And my second question is Dr. Frost exiting the company?

[Frank Jaksch:]

So the first question is, and we've been talking about this publicly but we have started a few months ago a strategy basically to move in the direction of up listing the company to a national exchange. So we have been for the first time in several years been aggressively pursuing that and I can't talk anymore specifically about that but that is something that we are actively working on. The second question about Dr. Frost, Dr. Frost is still actively involved in the company is still the largest shareholder in the company next to myself the shareholder of the company. And he still does - he is available when I need him, last year he was the one who made the introduction to Roger Kornberg for us, that helps or build the framework for scientific advisory board and he continues to be an asset for the company when we needed.

[Unidentified Analyst:]

All right, thank you.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks.

[Frank Jaksch:]

Thank you gentlemen for - or everybody for joining the call today. We are pretty excited by the results out of Q2 and our expectations is that if you look over the past five quarters that the growth has been continuing in the near term. We expect that trend to continue and we look forward to discussing our results and updates regarding the progress of the company on future calls.

[Operator:]

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