ChromaDex Corporation
Q4 2015 Earnings Call Transcript

Published: 21 Mar 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the ChromaDex Corporation’s Year-End 2015 Earnings Conference Call. My name is Latoya and I will be the operator today. [Operator Instructions] As a reminder, this call is being recorded. On Thursday, ChromaDex issued a news release announcing the company’s financial results for the year-end 2015 and filed their Form 10-K. If you have not reviewed this information, both are available within the Investor Relations section of the ChromaDex website at chromadex.com and the Form 10-K 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, Latoya, and good morning and welcome to ChromaDex Corporation’s year-end 2015 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 risks and uncertainties relating to ChromaDex’s future business prospects and opportunities as well as the 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 as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause ChromaDex’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These risk factors include those contained in ChromaDex’s annual report on Form 10-K 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 release, which was issued Thursday afternoon is available on the company’s website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believe such non-GAAP financial measures are useful to investors. Finally, this conference call is being recorded via webcast. The webcast will be available on 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. 2015 was a breakout year for ChromaDex as all significant business units posted record revenue. I’m also pleased to announce that we are on track to report record revenue for Q1 2016. Now before I get into the highlights of 2015, I would like to turn the call over to Tom so he can provide you details on our year-end 2015 financial results. Tom?

[Tom Varvaro:]

Thank you, Frank, and good morning, everyone. For the year ended January 02, 2016, ChromaDex reported record net sales of $22 million, an increase of 44% as compared to $15.3 million for the year ended January 03, 2015. Our ingredient segment generated record net sales of $12.5 million for 2015, an increase of 83% compared to $6.9 million for 2014. The core standard and service segment also posted a 12% growth, as it generated record net sales of $8.4 million for 2015 as compared to $7.5 million for 2014. The scientific and regulatory consulting segment net sales increased 9% from $1 million in 2014 to a record $1.1 million for 2015. Gross margins for 2015 were 39% versus 35% for 2014, an 11% increase over 2014. Net loss for 2015 was minus $2.8 million versus minus $5.4 million in 2014, which shows a 48% reduction over 2014. EBITDA adjusted for non-cash charges associated with share-based compensation, which is a non-GAAP measure, for the year was minus $789,000 compared to minus $2.471 million for 2014, a 68% reduction. Cash on hand at the end of 2015 was $5.549 million versus $3.964 million at the end of 2014. Our operating infrastructure expenses are largely fixed with the exception of research and development. The company expects that further increases in sales and gross margin dollars will improve operating results, depending on the amount of R&D spend going forward. With that, I will now turn the call back to Frank so he can provide our 2015 highlights.

[Frank Jaksch:]

Thanks, Tom. We accomplished a number of important milestones in 2015. 2015 is the first year that the ingredients segment has accounted for the majority of the company’s revenue. The $20 million revenue mark is also a significant milestone for any growth company, not just our industry, but companies in just about any industry and we are now comfortably above that annual revenue run rate. Two years ago, our entire business was $10 million and this year the ingredient business alone was over $12 million led by our lead ingredient, NIAGEN. We reported our first human clinical trial deal in 2015 for NIAGEN, which demonstrated that even a single dose of NIAGEN can raise NAD substantially. We received NDI status for NIAGEN in November, which is a very important regulatory milestone for the company. We also reported our first significant licensing agreement for NIAGEN with the joint development agreement we signed with P&G. Activity in the new business development area remains robust and we expect strong revenue growth in 2016. As I mentioned earlier, Q1 2016 revenue is tracking towards another record quarter. On the business development front, activity for NIAGEN up to now has been largely – or the customer base has been largely focused on a narrow group of what I will call direct-to-consumer supplement companies. And importantly, with our recently announced deal with BPI Sports, we expect in 2016 nutritional supplement products featuring NIAGEN will for the first time populate the shelves of tens of thousands of major branded retail locations throughout the U.S. BPI has plans to introduce dietary supplement products featuring NIAGEN in a large number of retail outlets, including Costco, Wal-Mart, Walgreens, Target, Meijer, and a host of others as well. As we signed in our deal with BPI in January, we expect to see BPI-related revenues starting in earnest in Q2 as they begin preparing for initial stocking orders from these retailers. Also on the retail front, in January we announced that Specialty Nutrition Group had launched NIAGEN in GNC stores nationwide. It is worth noting that Greg Horn, CEO of SNG, is a former CEO of GNC and he selected NIAGEN as one of the first products SNG would market through GNC. Also, in the second half of 2015, both Jarrow Formulas and CVS Health launched retail products featuring NIAGEN. In November, ChromaDex announced that we received NDI status or new dietary ingredient status from the FDA. NDI status is very important regulatory milestone for the company and for several different reasons, and one of the primary reasons is that getting this status from the FDA allows for – it is basically a sign-off for the FDA that this ingredient is safe, which is very important for us for a lot of different reasons, especially in light of some activity that happened last year with the New York Attorney General targeting several large big-box retailers like Walgreens, Wal-Mart, GNC. And a lot of those companies now are – not only them, but also the brand stakeholders that put products on those shelves are being held to a higher standard and it is important for us to have this status because, one, it is very difficult to get NDI status from the FDA. As a matter of fact, it is like an 88% -- somewhere in the region of about an 88% failure rate for applications in that space. So, actually, getting this status is important for us because it derisks an ingredient going into that channel, so it makes it a lot easier to have a discussion regarding bringing a new and innovative ingredient into that space. We also received or announced self-affirmation of GRAS, and GRAS is generally recognized as safe. And that status allows us for – to include this ingredient or ingredients into food products. Why that is important is because we currently don't have NIAGEN in food products, and obviously this is a very new development that we have achieved GRAS status. We still are going to be pushing forward as well with the FDA to get a formal GRAS recognition from the FDA, but self-affirmation is the first step in moving in that direction and it allows us, at least at this point, to move forward with business development activities in the food and beverage space for NIAGEN, which previously we really couldn't pursue. In November 2015, we announced a joint development agreement with Procter & Gamble. That was a very big deal for us. ChromaDex will provide P&G exclusivity to NIAGEN for use in P&G-branded products, and P&G is one of a number of discussions we have ongoing with multiple Fortune 500 companies. And it is worth noting that it took us about two years before we were able to even secure this joint development agreement with P&G, so it took a while just to get to that point and I'm just using that as a point to highlight that although we are working with other Fortune 500 companies, it does take time to get to structured relationships like we have already announced with this P&G relationship. This P&G relationship is an enormous opportunity for ChromaDex as they have the right to incorporate NIAGEN to a number of P&G products, some of which are the highest volume consumer products in the world. So NIAGEN continues to be our primary revenue growth driver. We began 2015 with just five NIAGEN customers and by the start of 2016, our customer account had risen to 13, so we are more than double the amount of customers. So if you take a look at if we only had five and we generated the revenue that we did last year, we expect those same customers that we had last year to continue to grow, but we have eight additional clients coming into this year, which is a good sign for what the revenue growth potential for NIAGEN might be. Although we may not give guidance, at least it will give you some indication of what effect that could have on our revenue. One better way to look at this might be that we actually have one client that we had last year and that one client we expect to actually do the same amount of revenue, just that one client, the same amount of revenue that we did with all of NIAGEN sales for last year. In addition to these new clients, we’re proud to say that NIAGEN will soon populate the shelves of tens of thousands of major brand retail locations throughout the U.S. I think it’s also very important to note that we were in the very early stages or the very early innings of commercialization and business development for NIAGEN. And with the recent regulatory qualifications, the NDIN status, the GRAS status that we have now achieved, we have opened doors for NIAGEN to be included as a featured ingredient in a growing number of food, beverage, supplement markets that we haven’t really even had previously had the opportunity to penetrate. And we expect that further developments that we are working on right now will also lead to future penetration to other markets that we haven’t even discussed today. I hope all of you had a chance to read the shareholder letter that I wrote in January. It is very exciting to witness the ever-growing excitement that we see surrounding published research and the commentary on NR’s potential health benefits as an NAD precursor. In fact, our commercialization of NIAGEN in mid-2013 may one day be looked upon as a seminal event in the advancement of healthy aging. Even with all of our early success, I firmly believe that we are in the bottom of the first inning with respect to the commercial potential of NIAGEN as the vitamin of healthy aging. To the general population, NIAGEN may still be largely unknown and with respect to the investment community, it is both relatively unknown and in my opinion, underappreciated and consequently I believe our company is significantly undervalued. Published research has shown that NR is perhaps the most effective precursor to boost NAD in the cell and we believe this is a key point to keep in mind when considering the potential value of NIAGEN. An abundance of published studies from esteemed researchers and institutions have demonstrated the potential health and therapeutic benefits of NR as a precursor to NAD. NAD is arguably the most important cellular cofactor required for improvement of mitochondrial performance and the function of every cell in the human body. As we age, NAD levels decline, which in turn leads to mitochondrial dysfunction and poor cellular energy metabolism. Scientists have now shown that depletion of NAD results in numerous age-related health issues. Our vision for NIAGEN is that it will become part of an important nutrient deficiency story, similar to vitamin C, vitamin D, folic acid, or even the omega-3 fatty acid story. Ingredients that address significant nutrient deficiencies are always amongst the largest ingredient markets and they are often fortified into the food supply in everyday products, such as milk, bread, juices, cereal, and even baby formula. Perhaps the most unrealized value for ChromaDex shareholders may lie in NR's pharmaceutical applications. We have been working closely with NIH now for several years, actually, on the therapeutic indication for NR as a treatment of a rare pediatric orphan disease called Cockayne Syndrome. We expect to file for orphan designation, as well as an IND, with the FDA in 2016. Collaborators such as NIH are currently performing preclinical studies on the use of NR to treat several other orphan indications as well. In November, the company announced an extension of our MCRADA, or collaborative research agreement, with National Institute of Aging at NIH, which will expand the scope of the original agreement to perform additional preclinical studies for Cockayne Syndrome, as well as several other new orphan diseases, such as ataxia or xeroderma. So if we move now to science and a clinical update, in August of 2015 the company announced the results from our first human clinical trial of NIAGEN, which demonstrated that nicotinamide riboside effectively and safely increases co-enzyme NAD+. The results of the study constitutes a significant milestone, as it was the first time an increase of NAD in humans have been demonstrated through NR supplementation. A week ago, the company announced the initiation of a second human trial for NIAGEN. This study will have a larger population and duration as compared to our first study and will study a number of therapeutic endpoints, in addition to continuing to study the success for the effect of NR as an NAD precursor. In February 2016, the company announced an obesity-related clinical study of NIAGEN in collaboration with the University of Copenhagen and Aarhus University. That started in January and we expect that to probably finish up by sometime the end of the year. In June of 2015, ChromaDex announced a human clinical study on NIAGEN with the University of Colorado at Boulder. The Integrative Physiology and Aging Laboratory, headed by Dr. Douglas Seals, will investigate the effects of NIAGEN on physical function and metabolism in healthy adults age 45 to 79. It’s also important to note that where these studies came from. Since 2013, we have signed over 50 collaborative agreements with universities and research institutes. Several of these have led to peer review published research, and I think it's also important for me to comment that if we only had four or five such collaborative studies, that would have been considered to be a good result. Having over 50 studies is well beyond anything that I have ever seen before. I have just never seen anything like 50 studies over a matter of just three years. It just goes to show you how important this is not just to us, but it is also very important to the research community out there, to see that much interest in it. Several of these collaborative studies have now transitioned from preclinical studies to human studies. I highlighted a couple examples with the Copenhagen and the Colorado study. Several more of these collaborative studies are also in the process of moving towards human studies. Some of those should start in 2016 and we have other ones that are slated for 2017 as well. Peer-review published data and clinical data is what drives media attention and media attention is what we need to build consumer awareness. And it is key to note here that science is always the best, especially independent peer-reviewed published science from independent researchers is what you need to really drive that media attention, and again, that media attention is critical because media attention is what we need to drive consumer awareness towards the value of an ingredient like we have created with nicotinamide riboside. Switching to our pipeline, we do have other things other than nicotinamide riboside and we are currently working on developing several other new ingredients following our model. In May of 2015, we announced an exclusive worldwide license and supply agreement for anothcyanin enriched Suntava Purple Corn. ChromaDex will use Suntava to produce highly concentrated anothcyanin ingredient at a price point that should appeal to mass markets, meaning we really firmly believe that we have a cost-effective solution for being able to produce a highly concentrated anothcyanin extract and that just doesn't exist in the market today. We're also working on several other new NAD precursors. Some of these are moving towards commercialization. We’re not exactly sure on the timeline for commercialization, but they're moving fairly quickly through that process right now. So, our plan as a Company is not just to be the NIAGEN nicotinamide riboside company. We plan on being the NAD precursor company, and we plan on bringing several of these NAD precursors to market and really be the controlling force behind the NAD precursor market as it really starts to gain traction not just within the research community, but in the commercial markets as an ingredient technology as that really starts to get traction. We're also working on several other new licensing deals regarding new technologies that we are putting into the pipeline as well. And again, the business model that we have right now of accumulating or licensing intellectual property that we then bring forward as novel ingredient technologies, that model is working fairly well and should continue to work as well. In conclusion, I’m convinced more than ever that we have an extraordinary opportunity to create substantial shareholder value with our patented NIAGEN nicotinamide riboside. A new vitamin this magnitude is the type of opportunity that comes along once every 25 years and all the important pieces of the puzzle, peer-reviewed science, media attention to the NAD story, and the rise of treatment of aging as a disease create an exceptional combination for NIAGEN to become the next billion-dollar ingredient. With that, I will open the floor for questions.

[Operator:]

[Operator Instructions] And the first question is from Todd Harburn of Harburn Enterprises. Your line is open

[Todd Harburn:]

Hi guys, congratulations on 2015. As a longtime shareholder, it has been terrific to watch a company both develop its unique business model and grow its revenues over the past few years at least. I was wondering about the volatility of the revenues quarter over quarter. Third quarter was higher than the fourth, and yet I think you're expecting revenue to be record breaking in the first quarter of 2016.

[Frank Jaksch:]

Yes, that's right. Todd, thanks for your question. Also, thanks for your support as a long-term shareholder. We appreciate that. I believe this is an important item for shareholders to understand, so I’m going to take a little while here to probably answer this in pieces for you. So, we’ve had exceptional revenue growth over not only the past one year, but actually over the past two years, and this is the first year, of course, that the majority of our growth is now coming from the ingredients business and it is pretty much right on pace that we thought 2015 was going to be that year and it was, which is great. This is a validation of our business model, now that the sales from the ingredient now represents the majority of our revenue, so again it was a good turn for us in 2015. And with respect to the volatility of quarterly revenue, it is important to understand that throughout 2014 and 2015 we had a fairly narrow customer base. As I outlined in the call, we only had five NIAGEN customers really coming into 2015. And we had a lot fewer than that going into 2014. So, we are still in a very narrow base, and given that small number of customers, we're going to be susceptible to timing of purchasing decisions for one or two customers making a decision to buy or not buy or the volume that they buy is going to have an impact on quarter, on the quarterly revenue, whether it could be positive or negative in terms of their purchasing decisions. As you noted, Q4 was down, but it’s still important to note that Q4 also, even though it was down compared to Q3, was a record revenue quarter for us in terms of Q4 over Q4. And we already announced that we are expecting a record Q1 in 2016. So, things may be a little bit lumpy, but largely due to the customer base, but at the same time everything is tracking in the right direction. So, we budget on an annual basis, so I’m far more concerned with the intermediate long-term trends of the business versus quarter-to-quarter volatility. And again, I can't stress enough here that the - we're in the early stages, and I think I have said this in the letter as well, but we are in the first inning of commercial development of NIAGEN. It is great that we're getting this revenue growth now, but we still view this as being in the early stages of it, of that revenue growth. And the NDI and the GRAS status that we got is going to change the landscape in terms of business development and customers we can go after, and then the BPI. Just one comment on BPI's piece of that as well is that we haven't even really gotten any significant revenue from BPI yet. It was announced in January, and we expect a little bit of revenue in Q1, so they are not really going to impact our Q1, as much as we expect them to really impact, or that business development activity to really start impacting Q2, Q3, Q4. So, I hope that answered your question, a little bit long, but…

[Todd Harburn:]

No, that was good. I did have another question, with regard to the orphan drug, the Cockayne Syndrome. I am just trying to figure out how you as a Company value that future possibility here. I don't know about the cash flows to develop it and what you think the ultimate market size is for the drug.

[Frank Jaksch:]

Well that's a great follow-up to the first question. The orphan drug, I don't think there is really any value in ChromaDex's stock right now to the opportunity to the business - some of the business development opportunities that we are working on that are going to be difficult to see in the quarterly revenue, and the orphan drug is one of those. You're not going to see an impact of quarterly revenue for the orphan drug opportunity. Although I think it's something that we are definitely working on right now as I've been giving updates on where we are with that, but it’s not going to take a lot of money for us to do this development. It is not going to be some incredibly dilutive deal where ChromaDex is going to have to go raise money to continue to support the development of NIAGEN as an orphan drug. And again, I still think that we don't have any real value in the stock right now until we start really materializing that opportunity and it starts to show. And that's really the comment I have on that, so I hope that answers your question.

[Todd Harburn:]

It does, thank you. No more questions.

[Operator:]

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

[Ram Selvaraju:]

Hi. Thanks very much for taking my questions. Frank, can you hear me?

[Frank Jaksch:]

I can hear you. Hi, Ram.

[Ram Selvaraju:]

Hi. So, I had two sets of questions. One pertains to the clinical development of nicotinamide riboside in these orphan indications that you previously described. And the two questions I had there were in Cockayne Syndrome, could you maybe give us some background on the nature of this disease, how chronic it is, how debilitating it may be, and the prevalence and incidence of it both in the U.S. and abroad? And then, secondly, you alluded to other orphan diseases that might potentially be indications within which NR could be developed therapeutically. Could you give us some color and some sense of what those diseases are and collectively, along with Cockayne Syndrome, what kind of patient population we might be talking about in total? And then, thirdly, with respect to the clinical trial that you were alluding to earlier that is currently ongoing, could you give us a better sense of the efficacy-related endpoints that are being measured in this study? And then the second set of questions is related to financial metrics. Firstly, do you anticipate that the company might be able to eke out a profit this year if we look at the year in total? And secondly, what do you anticipate is likely to be the ramp between the first quarter of this year and the second half of this year with respect to top line? Thank you.

[Frank Jaksch:]

Okay, let me organize these. So Cockayne Syndrome is a rare pediatric orphan disease. It is a very small population, so you're talking about less than 1,000 kids in total that may have been diagnosed with the disease. And Cockayne Syndrome is a rare genetic abnormality and the genetic abnormality essentially causes an accelerated aging condition in these kids. So the genetic abnormality upregulates PARP. They have a significant PARP response to the genetic abnormality. The PARP cannot repair the gene, and it just keeps on trying to repair the gene over and over again, and the PARP actually depletes NAD and it depletes it so severely that you end up with a lot of the accelerated aging problems. So these kids essentially die of old age by the time they are 12. The average age of a Cockayne child is about 12 years old. And there is currently nothing out there that successfully treats this. So, we are looking at it as nicotinamide riboside in this case is addressing the side effect associated with the disease, which is the NAD depletion or massive NAD depletion. And these kids show all the hallmarks of an accelerated aging condition, the loss of vision, loss of hearing, Alzheimer's like or neurodegenerative disorders by the time they are 5 years or 6 years old. Muscle wasting, they never really fully develop so they don't necessarily experience the typical growth, so they tend to be a little stunted in terms of growth as well. And again, eventually it is going to get them in the aging process in terms of the fact that they don't really live very long. So, we have been looking at the use of nicotinamide riboside to essentially repair the NAD depletion. It’s not going to necessarily cure the disease itself, but can we impact and repair the NAD depletion and affect the quality of life of the these kids as they suffer from the disease and maybe potentially have some sort of an impact on life span and the other side effects that are associated with that. So, again, it is a very small population there, but I hope that at least addressed the majority of your question there.

[Ram Selvaraju:]

Yes.

[Frank Jaksch:]

Okay.

[Ram Selvaraju:]

Yes, that's very helpful.

[Frank Jaksch:]

Okay, the second - I will go into the second portion of that, which is the other diseases. So the other diseases that we are currently looking at are things like, progeria is another example. Progeria is very similar to Cockayne Syndrome. It is basically - I mean, they're exactly the same. It is just a different genetic abnormality. And again, that's a very small population as well. And the reason why we are focused right now on Cockayne is that we have support at NIH. They have done a lot of the preclinical proof of concept. We have access to the advocacy group who can bring the kids into the study and NIH is prepared to basically facilitate that study. And they're really motivated right now to do that, both from the advocacy group, as well as from NIH to get that going. So, that's why we are - from a low-hanging fruit standpoint, we are focused on that first. The other areas that we are looking at outside of even progeria, and I’ll talk about one, which is a much bigger opportunity, is mitochondrial myopathy. And mitochondrial disease or mitochondrial myopathy is really starting to gain momentum. There are some other companies out there with drugs either moving toward the clinic or already in the clinic right now. Edison Pharmaceutical may be the best example of a company that is focused on the mitochondrial myopathy area. There has been a lot of data published on nicotinamide riboside for mitochondrial disease or mitochondrial myopathy. And we are currently working on a grant, working closely with MRC in the UK on a potential of a grant funding of the initial stages of what I will call a Phase I/Phase II trial for nicotinamide riboside in mitochondrial myopathy. And that's a more sizable opportunity for us because you're talking about 50,000 patients versus 500 to 1,000, so it's a much larger, a much more significant market opportunity for us as well.

[Ram Selvaraju:]

Just to be clear, progeria, the other orphan disease that you mentioned, it’s effectively a disease of extremely accelerated aging, is it not?

[Frank Jaksch:]

It is. It’s caused by the genetic abnormality causing a PARP response and the PARP response causes NAD depletion, and a lot of the accelerated aging is linked to that part of the process.

[Ram Selvaraju:]

So not to get too far off track here, but could you perhaps speculate on the general and broader applicability of NAD and the use of NR within the context of potentially antiaging therapy?

[Frank Jaksch:]

Yeah, absolutely. That is a big piece of our story moving forward because in a much lower regard people suffer that same process that these kids in progeria or Cockayne suffer just in a much slower time line. NAD is something that declines as you age and NAD or low NAD is linked to a whole range of energy metabolism breakdown – issues with energy metabolism breakdowns in energy metabolism that also relate to mitochondrial performance. And mitochondrial performance is a failure of mitochondria or energy metabolism is linked to progression of a lot of age-related diseases. So, this is something you can’t really look at as a – in the sense that resveratrol took off with this Ponce-de-Leon we’re going to repair aging and make people feel or look younger. That is not the story that we are moving forward with here. We’re moving forward with a story where, look, we are repairing the nutrient deficiency of the aging process, low NAD, and by repairing that you are potentially combating some of the age-related issues that may be linked or age-related diseases that could potentially be linked to low NAD or progression of low NAD or failure of mitochondrial performance. And that is gaining a lot of traction in the research community right now and that’s the story that we want to be linked to in the aging – and as the aging story develops and NAD becomes linked to that.

[Ram Selvaraju:]

Very helpful. The financial questions, if you may?

[Frank Jaksch:]

Tom, do you want to jump on real quick and answer the financial question? It looks like Tom may have dropped off the call, so could you – the financial question you had was related to profit – it was a profitability related question I think.

[Ram Selvaraju:]

Yes, profitability, whether or not that might be achievable this year, whether on a full-year basis or in one of the later quarters, and then what you anticipate the ramp in top line to be looking like between the first quarter and the second half of this year?

[Frank Jaksch:]

Okay. So the first piece, I will just allude to what you saw potentially in Q3. As you know, we don’t give guidance on these things, but I will do my best to answer your question. We were tracking – we did generate positive cash in Q3 and we also were very close to GAAP breakeven on a $6.3 million number in Q3. So, the short answer is that if we continue on the track that we are on right now, which is potentially growing past that $6.3 million per quarter, we should continue to generate positive cash over the course of the year, but the profitability is going to be a little lumpy over – as we spend some money. We actually increased our research budget. I’m not going to get specific on what our research budget is, but it is significantly higher than we were last year and a lot of that is associated with the clinical spend. And depending upon when we have to make the payouts for that, it could potentially impact quarterly cash flow and profitability. But our target is to move in the direction of profitability this year, but there is going to be several factors that are going to dictate whether or not we’re actually going to get there to GAAP profitability this year. Cash flow positive is going to be a little bit more – or being cash flow positive is going to be a little more easier for us to manage this year. And the other question was regarding where we are in Q1 and where we expect the second half of the year. If we keep going the way that we are going right now and based on what we did in 2014-2015 and based on our customer count coming into this year and the business development activity that we have, our expectation is that the revenue is really at least for Q1, Q2, Q3 is going to continue to grow quarter-over-quarter, which is going to put us in a nice growth position, probably pretty consistent – at a minimum consistent with what we have done over the past couple of years in terms of top line growth over the past – year-over-year for the past two years.

[Ram Selvaraju:]

Okay, thank you very much. I appreciate it. I will jump back in the queue.

[Operator:]

Thank you. The next question is from Michael Kay of Kay Associates. Your line is now open.

[Michael Kay:]

Hello, thank you very much. Could you mention something about how are things going in terms of pterostilbene because that was supposed to be very important revenue driver as well since it seemed to be synergistic with resveratrol or even better? And secondly, do you think there would be some studies in which you combine NR with pterostilbene to see if you get an enhanced synergistic effect which one cannot get from each of the individual ingredients as such?

[Frank Jaksch:]

Right. Okay, that’s a good question. We still continue to promote pterostilbene. NIAGEN or the importance of NIAGEN in the portfolio has I wouldn’t say gotten in the way of but we continue from a sales and business development standpoint to go after it, and we have been saying for the past couple of years that the best of pterostilbene is really going to come more out of the potential skin care opportunities and there is a lot of benefits in skin care. And that definitely on a business development standpoint is where we are spending a lot of time. But from a research standpoint, the limited budget that we have, a majority of our budget right now is actually going into NIAGEN because it is a more sizable opportunity. But to the point that you just made, I think this is very important to highlight because it is public now. If you look, there was an 8-K filed not that long ago with Elysium Health and Elysium have launched a product that is in fact a combination of nicotinamide riboside and pterostilbene. And they are in the process of actually taking that combination to the clinic, so they are going to evaluate in a human clinical trial the combination of our nicotinamide riboside and pterostilbene for the combination of their product, which is on the market already, called BASIS. And so, right now, the good news is that combination is going to the clinic.

[Michael Kay:]

Well, that's very good. Also, I noticed like in Life Extension’s two-a-day multiple, they just have 1 milligram of NR. Could you indicate in terms of human use what would be the minimum amount of milligrams necessary for it to have some type of positive effect on human beings?

[Frank Jaksch:]

Sure. The 1 milligram or the small amount that they are putting in is a multi – that is more of a multivitamin product.

[Michael Kay:]

Right, that's in their…

[Frank Jaksch:]

So multivitamins typically are not going to contain a therapeutically effective dose of everything, although 1 milligram may be a little bit short. But anyway, they were one of the first to put it in a multivitamin format and we appreciate the opportunity. Although right now, all I can tell you is that we do have clinical data at 100 milligrams, 300 milligrams, and 1 gram. So we feel comfortable with 100 milligrams a day at least at the low end, and our second clinical trial which we just announced as starting, what, a couple weeks ago now, we are doing this a much longer – it is an eight-week study in 140 people that we’re going to evaluate the same doses that we did in the first study, 100 milligram, 300 milligrams, and 1 gram. And that longer study should give us a bite at or a better indication of what the dosing is going to look like when we do dosing over eight weeks versus the single dose that was done in the initial study. So, we still have some dialing in to do on the dosing, but I can tell you that 100 milligrams will deliver. It will deliver a benefit in terms of raising NAD. Personally, I take 500 milligrams a day, and I – several of us at ChromaDex who have been taking the product now for three years or so, coming up on three years, are taking somewhere in the range of 250 milligrams to 500 milligrams a day.

[Michael Kay:]

And there's never been any indication that such a dose could have any type of negative side effects, right, if you take 500? It would be still looked upon as safe?

[Frank Jaksch:]

Oh, yes. We have the data that supports that. So, we have no real concerns over the dosing and even up to – one of the clinical studies. If you look the Copenhagen study, which is underway right now, it started in January, they’re dosing 2 grams a day in that study.

[Michael Kay:]

And it makes no difference which company one gets it from because ChromaDex is the only company that could produce it or have it licensed? Is that correct?

[Frank Jaksch:]

That's a good point actually and nobody has brought that up, so I will talk about that. That is correct. Nobody else has nicotinamide riboside but us. There are – any product that is advertising nicotinamide riboside in their – although there has been a few rogue companies that have appeared with products that claim to have nicotinamide riboside. One of them was on Amazon. If anybody saw it, it disappeared pretty quickly because we were all over them about that. But any legitimate product in the market that has NIAGEN, claims our brand NIAGEN or uses the compound nicotinamide riboside has our stuff in it. And just to let you know, we do aggressively pull products off the shelf, even our good customers, and we test those products in our own laboratory to ensure that they contain the amount that they are supposed to.

[Michael Kay:]

It may be a good idea to have on your website something that is a bit consumer oriented with a list of companies that sell your product so consumers would not be deceived in any way. I think you once mentioned, Frank, in the last conference call you were going to have some section on the website which would be more amenable to consumers who want to buy the pterostilbene or NR.

[Frank Jaksch:]

So pterostilbene, that’s a good point. Pterostilbene has its own consumer-facing pTeroPure site, and we haven’t created or finished the site. We are going to create a more consumer-facing site for nicotinamide riboside and that is something that we expect to launch this year as well.

[Michael Kay:]

I would think that any of the companies like Life Extension, Jarrow which have been in the area for a long time, that they would be legitimate if they claim they have NR in it, right?

[Frank Jaksch:]

Without a doubt. The brand value – look, we’re still in the early stages of this whole thing, but yes. Those guys are – a lot of the other companies who don’t have nicotinamide riboside, even some of the bigger brands, are eventually going to pick up nicotinamide riboside as it gains momentum. It is a good idea for us to have a consumer-facing website that can point people to the products that contain our material.

[Michael Kay:]

And one last question, do you anticipate any need for additional financing either via debt or equity or a secondary offering, which would create dilution or do you think the company is pretty well set as far as that is concerned?

[Frank Jaksch:]

No, I think we are pretty well set. As some of you guys may have noticed, we did a small amount back just about a week or so ago, and that was just largely something we needed to do in part of this uplisting process that you all know that we've been going through for the past several months. And I am not going to talk specifically right now about that process, but we are in the later stages of the uplisting process right now. But outside of that, no. We are comfortable with the cash position we have, based on the forecasts in the budgets that we've put together. Even including our R&D spends are based on covering that. We do have a small amount of debt, but that was two years ago that we took that down and that was largely necessary for just funding our – the biggest cash need we have had over the past couple years really was more inventory based. But we are comfortable with the cash position that we have right now.

[Michael Kay:]

Thank you very much. I appreciate very detailed substantive answers to not just mine, but other questions as well, and it seems the company is clearly on the straight – on the right track for huge profitability and revenue as well as doing good for people.

[Frank Jaksch:]

That's exactly right. Thanks.

[Michael Kay:]

Bye.

[Operator:]

Thank you. The next question is from Jack Grimaldi of Grimaldi Investment. Your line is open.

[Jack Grimaldi:]

Hi, thank you for taking my call. I just wanted to clarify one thing. You mentioned record revenue for Q1. Are you talking about for any Q or just for Q1s?

[Frank Jaksch:]

More in line with any Q.

[Jack Grimaldi:]

Okay. Can you give us any update on the stability, progress you have with NR for P&G?

[Frank Jaksch:]

I can't – no, I can't give much of. That was pretty easy. No, we are not in a position to really give an update on the progress of that and if you remember, even the press release that we put out last November announcing the deal was rather light on details about what the whole agreement was. And although it did talk about stability, that is the main thing that we are working on or the major challenge we have right now is the stability issue and that is a chemistry issue. And we are working closely with them on that and that is about all I can really update you on, at least at this point.

[Jack Grimaldi:]

Okay. And then, can you help me understand why you lump Q4 numbers in with the full year and not break them out?

[Frank Jaksch:]

If you look back, that is how we have always done it.

[Jack Grimaldi:]

That's true, but others break it out. It would be helpful if we can get – receive a breakout on that.

[Frank Jaksch:]

That may be true and we’re looking at that moving forward, but again historically, we have always just reported the year-end because, again, we are not a quarter-over-quarter revenue story, although our revenue has been growing fairly nicely and the trends have looked really good over the past 18 months or so. Just historically, we haven’t done it that way and we did it much the same way that we have done in previous years. So if you look at 2013, 2014, and now of course, 2015, they were exactly the same in terms of the way we have carved it out.

[Jack Grimaldi:]

I agree.

[Frank Jaksch:]

But point taken. Point taken.

[Jack Grimaldi:]

Okay, thank you. It would be helpful. Others do do that. I had a question on the consumer cost side. In the past, you basically – you generally compare NR to omega-3, but omega-3 you can get for anywhere from $0.08 to $0.20 a day and NR is around $1.20, so it is quite a bit more. With the average family income around $51,000 a year for couples purchasing NR, they are going to be spending about $1,000 a year and it seems like that is an awful high hurdle for that kind of a market. So I was wondering if you can give us any idea what you eventually think you can get your costs down to or where you think – what kind of a market you're actually looking to get on the mass side?

[Frank Jaksch:]

That's a great question actually. It is a premium product right now, and we are very happy with where the pricing is, considering how early stage we are with it. So, although it is far from what I will call mass appealing in terms of the costs that you outlined are exactly correct. We are very happy where we are right now with bringing the cost – our production cost down, based on the scale that we are at today and we have a pretty good view towards the future in terms of what the cost is going to be and strategies that we have in terms of reducing our production cost so that we can bring the pricing down to make it more mass-market appealing. And that's going to be very important. And you are going to see that strategy come to light a little bit in BPI. BPI is launching a product that is designed for the mass market. When they are going into Wal-Mart and Walgreens and Costco and those types of outlets, they are coming out with a product or products, plural actually, that are going to be price point designed to be in the lower range so that they have more appeal towards that, and we are very much cognizant of that. And I'm very comfortable with where we are in the developmental stage of that in terms of costs and where we are going to be able to go, and this is – we're pretty confident that this is going to be cost – it will be approachable by the mass market as we move this thing forward.

[Jack Grimaldi:]

Okay, and then as you do that, then – so, obviously, per-unit costs will be going down. Will you be able to start giving out sales instead of just revenue by some kind of unit of measurement so we can see your units are going up, even though average sales per unit will be down?

[Frank Jaksch:]

Yes, we will be able to give more of that guidance as it starts to smooth out. As we have more customers with predictable revenue at predictable price points, it is going to make things a lot easier. It is pretty incredible, by the way, just to highlight the point you said about the omega-3, but the revenue that we've been able to get to in a matter of what I will call two years in terms of where we are with revenue of nicotinamide riboside is pretty incredible. It is not normal, let's put it that way.

[Jack Grimaldi:]

It's very good. Agreed, agreed, it's very promising and longtime stockholder myself also. So I'm very pleased and the long term looks very encouraging. But that’s all the questions I had for right now. Thank you.

[Frank Jaksch:]

Perfect, thanks, yes.

[Operator:]

Thank you. And the next question is from [Anthony Golo] of independent broker. Your line is open.

[Unidentified Analyst:]

Thank you for taking the call. Frank, congratulations on a wonderful report. It is an extremely exciting itinerary that you have outlined for us. I do have a number of quick questions for you. Vis-a-vis production, gluten free, is that something that we can claim?

[Frank Jaksch:]

Well, yes, we could claim gluten free – there is a whole range of things we could claim, and gluten free would be one that we could claim, although that – there is no gluten. It doesn't come from wheat, right, so –

[Unidentified Analyst:]

Could that be put on the label in order to make it more attractive for a certain segment?

[Frank Jaksch:]

Well, that would be not for us to make that claim. It would be for our customers to make that claim. Some of our customers do make those types of claims on their products, but again we really don’t get engaged with our customers on exactly what they're going to claim in terms of, say, gluten free as an example. But there is 1 million different things that people can claim these days. Gluten free obviously is one of those taglines. If our customer wanted to make that claim, they could. You could also claim GMO free, too, if you wanted to, because it is not made with a genetically modified organism. But with all of these growing list of acronyms out there, it is getting a little crazy these days.

[Unidentified Analyst:]

In terms of our customers, BPI, CVS, Jarrow, GNC, is there an educational perspective in their sales to customers? Are they going to give a little bit of a tutorial on the efficacy of NIAGEN in preparation of the products?

[Frank Jaksch:]

So, I will highlight two of them. That's a very good question, actually, because education is – most of the time it is hard to sell product at retail because if the bottle is just sitting there, staring at you at the face, it doesn't tell you anything, right? So, we're going to be relying on, in particular I would say in that regard, Thorne Research from a -- who sells direct to physician. They sell through the physicians' channel, so a physician can tell the story, okay? And if you take BPI, though, if we go to retail, BPI and the first product from Specialty Nutrition Group are the best examples because both of those companies are preparing a lot of educational material. In the case of the GNC product, Greg Horn's group at SNG have pulled together very technical briefs that are used to then train the staff at GNC so they can then push that information to customers. But, again, that's a very new – that program has only been in place really since December. But there is – it is a very education-driven model that SNG has with their first product, the NIAGEN product they have at GNC. BPI, a slightly different twist because they are not going to be able to have that, call it, training that you could do at the GNC chain if you have a product on the shelf at Wal-Mart or Walgreens. They're going to relying more on educational materials in terms of videos, YouTube videos, social media, advertising, and various other things that are going to come into play with the type of style that they are going to use in terms of educating or drawing customers to the value of nicotinamide riboside with the benefits of their products. And, again, those are two very new examples of that, but -- and then, there is a third piece. ChromaDex also is in the process of trying to garner some media attention to the science. Science drives media attention, media attention brings consumer awareness, and that's a very important element of what we have to do as a company to drive awareness toward the benefit of our ingredient nicotinamide riboside. So, those are the – at least an update on that aspect of it, but education is a huge piece of it, no doubt about it.

[Unidentified Analyst:]

Frank, there is one final question I would just like to get a little bit of clarification on. I appreciate very much the sensitivity and confidentiality that we have to maintain with P&G, but my question is this. Assuming, let's be positive, that they in fact do accommodate one of our products in their product line, would there be anything that we would have to do from an investment perspective in order to accommodate what they might be planning?

[Frank Jaksch:]

That’s a good question. I don’t believe that we would – there would be a lot that we would have to do. Because you’re talking about – we already have a good idea if this were to move forward that we've already been given some indication of the types of volumes that they would require, and so we already have a good idea of what sort of revenue and what the timing of that would look like. We have a pretty good idea of that. And as of right now, I don't think there would be anything substantial that we would have to do to accommodate their needs. But we haven't gone into the granularity of what that would look like over what time frame it would ramp up yet, either.

[Unidentified Analyst:]

Thank you so much, and continue the great work that you have been doing.

[Frank Jaksch:]

Thank you very much.

[Operator:]

Thank you. And the last question is from Issac Benilansky, a Private Investor. Your line is open.

[Unidentified Analyst:]

I will repeat a question from the past, which wasn't answered yet. My question is, when do you plan to register the company on the AMEX, and by this more institution will be able to follow us?

[Frank Jaksch:]

Well, we haven't gone – I can't get specific, but we are in the late stages of – and I wouldn't say AMEX or NASDAQ. I will be more – less specific, but we have been in the process of a national market uplisting for several months now and we are in the late stages of that process, and I really don't want to get into any specific discussions about that right now because of that.

[Unidentified Analyst:]

Okay, so I will ask next quarter again.

[Frank Jaksch:]

Let's put it this way. Hopefully, we won't have to have a discussion next quarter.

[Unidentified Analyst:]

Okay, I hope so. Okay, thank you very much and good luck.

[Operator:]

Thank you. And at this time, this concludes the Q&A session. I would like to turn the call back over for closing remarks.

[Frank Jaksch:]

Thanks, everybody. Thanks for the support. We definitely appreciate the long-term shareholders that we have had. We have a lot of long-term, fairly large shareholders that have been very supportive of the story and we appreciate that a lot and I just wanted to say that in closing here.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.