Niagen Bioscience Inc (NAGE) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ChromaDex Corp. second-quarter 2015 earnings conference call. My name is Abigail and I will be the conference operator today. (Operator Instructions). As a reminder, this conference call is being recorded.

On Thursday, ChromaDex issued a news release announcing the Company's financial results for the second quarter of 2015 and filed a Form 10-Q. 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 10-Q 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.

Thank you, Abigail, and good morning and welcome to ChromaDex Corp.'s 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 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 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.

Our annual report on Form 10-K filed with the SEC on March 19, 2015; recent and forthcoming quarterly reports on Form 10-Q; recent current reports on Form 8-K and 8-K amended; and other SEC filings discuss 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 statement, 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 to the appropriate GAAP measures and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

Finally, this conference call is being recorded via webcast. The webcast will be available at the investor relations section of our website at www.ChromaDex.com.

With that, it is now my pleasure to turn the call over to Frank Jaksch and Tom Varvaro.

Thank you, Andrew.

Over the last five quarters, we are pleased to have shown truly impressive growth from our proprietary ingredient business, a trend 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 would like to turn the call over to Tom so he can provide you the details of our second-quarter 2015 financial results. Tom?

Thank you, Frank, and good morning, everyone. I want to preface by saying that the following numbers are all approximates.

For the three months ended July 4, 2015, our Q2 2015, ChromaDex reported net sales of $6.101 million, an increase of 58% as compared to $3.856 million for the quarter ended June 28, 2014, our Q2 2014, and a 16% sequential increase over Q1 2015.

The ingredient segment generated net sales of $3.412 million for Q2 2015, an increase of 98% compared to $1.722 million for Q2 of 2014 and a 27% sequential increase over Q1 2015.

The core standards and services segment also posted a 28% growth as it generated net sales of $2.371 million for Q2 2015, compared to $1.857 million for Q2 2014 and 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 and 13% sequentially over Q1 2015.

Gross margins for the quarter were $2.471 million versus $1.399 million 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 million in Q2 2014 and negative $1.026 million in Q1 2015.

Net income for the quarter after adjusting for non-cash 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 million versus $3.216 million at the 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 the Company's June drawdown of the second $2.5 million tranche of debt from [Hercules Growth Technology].

With that, I will now turn the call back over to Frank so he can provide our Q2 2015 highlights.

Thanks, Tom.

I am pleased to report our record revenue and I would now like to update you on our recent developments at 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 continued to accelerate and now represents the majority of the Company's revenue, a trend we expect to continue.

NIAGEN continues to be the primary growth driver within the ingredient business and is the first section within the ingredient space 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 have already announced like Thorne Research, Life Extension Foundation, Healthy Directions, Live Cell Research, and 5LINX in the network marketing channel.

We have been very successful with the early adopters in the dietary supplement space, and as the NIAGEN story continues to develop, we expect the larger dietary supplement companies to incorporate NIAGEN into their products as well. Although revenue growth has been robust over the past five quarters, we are still only in the early stage of expanding into additional distribution channels, not only in the dietary supplement space, but other markets such as food, beverage, skin care, cosmetic, medical food, and other markets as well.

From a regulatory aspect, we are on track to have self-affirmation of GRAS, and for those of you who might not know what GRAS is, GRAS is generally recognized as safe, which is a regulatory distinction that allows for this ingredient to be included in food products, and we are on track right now to have that completed sometime by the end of the year.

When we gain GRAS, we will have the opportunity to move into additional markets, 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 oxidative stress and promotes healthy aging. Healthy Directions is a direct-to-consumer nutritional supplement retailer and a wholly-owned subsidiary of the NASDAQ-listed Helen of Troy. 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.

On other business development fronts, we have 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 of 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 shelves such as GNC, CVS, Whole Foods, and Sprouts, just to name a few.

This is just the start of NIAGEN appearing in products at retail and we expect there will be numerous other retail offerings over the next six 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 in a significant recurring revenue stream and that's one of the, as we'd say, 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 have been telling everyone now for several years that it is 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, or any of our ingredients, for that matter, will continue to be one of the most important catalysts for the Company moving forward. These studies are critical not only to confirming the effectiveness of NR as a NAD precursor, but also verifying the effect of NAD precursors to an array of different therapeutic endpoints.

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 patents, 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 finding from the first human study regarding an NAD biomarker called NAAD, which is actually nicotinic acid adenine dinucleotide. These findings led to the filing of an additional patent.

Dr. Ryan Dellinger from ChromaDex also presented a poster summarizing further details about the human study, and that study was largely focused again on shoring or showing more data regarding NR's effectiveness as an NAD precursor.

ChromaDex was a sponsor of this important conference, which was largely focused on NAD biology or NAD metabolism, and the conference was well attended by many top researchers, along with 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 is one of the hottest spaces 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 monitoring not only the effects of nicotinamide riboside as an NAD or an effective NAD precursor, but we will also be looking at several therapeutic endpoints that may result from increasing NAD with NR.

In Q2, we also announced a collaborative study, a human clinical study on NIAGEN, with the University of Colorado in Boulder. Dr. Doug Seals will investigate the effects of NIAGEN on physical function and metabolism in healthy adults age 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. Endpoints that will be assessed in this study include physical function, cardiorespiratory fitness, and overall metabolism.

ChromaDex is providing the NIAGEN supplements for this study, along with the matched placebo pills, or control pills, and ChromaDex has awarded a $100,000 research grant to Dr. Martens, a postdoc researcher at Dr. Seals' lab, which will fund approximately 25% of the cost of this study.

ChromaDex has executed to date over 40 collaborative agreements with universities and research institutes regarding nicotinamide riboside, and this is very important to note because these collaborative agreements almost always result in some form of peer-reviewed published research. We couldn't possibly fund all this research on our own and having this much interest from independent universities willing to fund these studies validating the effectiveness of NR as an NAD precursor is incredibly 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 beating the drum on and we will continue to beat the drum on hard, is that published research is critical in attracting media attention and media attention is critical in building consumer awareness. The media has always looked to high-profile, peer-reviewed published studies -- published research, basically, to drive important editorial about up-and-coming healthy ingredients.

We have seen an increased interest from multiple sources of the media regarding NR. We have 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 an article by David Stipp, 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 linchpin of energy metabolism, among other roles, and as it diminishes -- diminishing level with age has 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 was important for us.

The article also reasserted ChromaDex's first-comer status in the NAD game by announcing that it had conducted a clinical trial demonstrating a single dose of NR resulted in statistically significant increases of NAD. And it was also, I would say, a sidebar important piece, but the article also highlighted pterostilbene, which was our first ingredient.

David Stipp 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 Association's 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 pickup in the future as well.

There was also some recent news, at least from a television standpoint. Nutrition expert Jonny Bowden told Sonoran Living viewers you can boost your energy by taking NIAGEN. The patent ingredient increases NAD levels in cells and tissues, enabling our bodies to transform the food that we eat into energy.

And another sort of comment on the media that I need to highlight is related to that, you probably have noticed that Rob Fried joined our Board of Directors. Let me be the first to 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 of media experience and contacts to the ChromaDex team.

As I mentioned before, media attention is critical in driving consumer awareness, and as we continue to 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 at 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 that may not know what it is, is a rare pediatric orphan disease. These kids suffer from a genetic abnormality that causes this accelerated aging condition.

The researchers concluded that NR showed promise as a potential therapy for the disease, as well as for other age-related neurodegenerative conditions. We believe there is an immediate opportunity to pursue NR as a pharmaceutical therapy for treating Cockayne Syndrome. We are currently preparing to file applications for both an IND and an orphan designation with the FDA.

Shifting to PURENERGY, one of our 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 Alsa Energy. The Alsa product features PURENERGY to provide sustained energy boost and mental alertness without the jolt of the typical energy drink. Alsa 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.

Alsa Energy is a single-dose powder pack designed to be dissolved in water, so it is not a ready-to-drink product. It's something that would be added in a sachet pack to water. And we look forward to Alsa rolling that product out 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 have 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. The University of California, Irvine, completed a pterostilbene study for prevention of skin damage from UV exposure. The study demonstrated that topical application of pterostilbene onto 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 in skin care and sun care protection products.

We have also been working on strengthening our patent portfolio for pterostilbene. We have expanded our patent rights for pterostilbene by adding a list of exclusive patent 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 patent rights, we are 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 anothcyanin-rich Suntava Purple Corn. ChromaDex will use proprietary Suntava Purple Corn to produce a highly concentrated anothcyanin extract.

For those of you who might not know what anthocyanins are, they are pigments or colorants that are contained in most highly pigmented fruits, such as blueberries, strawberries, red grapes, also cranberries. These berry biomass sources are generally too expensive to produce cost-effective concentrated anothcyanin ingredients.

We planted our first crop this spring. We are expecting to harvest the crop in late August and we should be in the 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 US and is handled, harvested, and processed using the same modern efficient methods and equipment as traditional corn crops.

ChromaDex believes there is a huge untapped ready market for cost-effective concentrated anthocyanins. The proprietary Suntava Purple Corn should be a game changer in providing a cost-effective price point to enable mass-market distribution of anthocyanins, which currently really don't exist in the marketplace.

Regarding our new pipeline of intellectual property, our unique ChromaDex business model for acquiring intellectual property continues to work very well. We're 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 standards, services, consulting, and verification businesses continue to grow at a steady pace and should continue to perform well as quality pressure continues from the New York Attorney General action earlier this year. There is also pressure now from that same action that is really starting to drive even at the Congressional and Senate level that we believe is going to further push eyes 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 Instructions). Michael Kay, Kay Associates.

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, if Life Extension or Swanson 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 of payment? I'd appreciate some clarification on that.

So it's a little bit of both. Most of the revenue that we generate is 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 are largely covering most of our revenue under that.

But some of the licensing arrangements or some of the 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 has been increasing as well.

And the contracts are -- they are nonexclusive, so that means you could deal with a variety of companies for the same substance, right?

That's correct. But we do have some exclusive arrangements as well, just to be clear. So there are some, but the majority of them are actually nonexclusive relationships.

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

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.

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

I wouldn't -- pterostilbene, yes, has -- it is a natural sun block, so there is a natural sun block effect to it.

But more importantly, it is a natural sun block that actually prevents a lot of the effects associated with UVA or UVB exposure, meaning DNA damage. It has some protective abilities in terms of barrier function, 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.

That's crucial, because several studies recently have shown that actually many of the products on the market, sun block products, actually could be carcinogenic or they don't do the job, so this could be a great market for the product.

There's no doubt, and as I mentioned during the call, that's a big piece of focus for us in terms of pterostilbene. We have 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 and we are starting to get interest from the larger Fortune 500 companies that are aware of the science. That is starting to prove out there.

Thank you very much for your responses.

(Operator Instructions). [Anthony Gullu], Private Investor.

About five years ago, at least, I had the pleasure of 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 have gained a lot of intellectual property and personnel.

I have a couple of questions. As an investor, I have been disappointed in that we still at this point in time have not come into the black. I noticed that the retained earnings now we have a deficit in excess of $40 million. I look at the last statement that was made and I see $507,000 that was earmarked for, quote, unquote, non-cash 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 in excess of 8% of our topline?

So I would appreciate if you could address some of those issues and thank you so much.

So the majority of that was related to non-cash-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. Or if Tom is on mute.

Sorry, I was on mute. The $507,000 that you are specifically referring to is based around share-based compensation. That's, again, as Frank mentioned, the annual employee option grants and we grant those across the entire breadth of the Company.

We feel it is critical for the Company to maintain the high-quality employees that we've built, and giving stock options, as everyone is very well aware, is a very good way to retain these people and keep them loyal to the Company. That is where the majority of that $507,000 came from in Q2.

How dilutive is it to the shareholders?

Stock options are issued at market price, so it is not really dilutive in the sense that they were issued below market.

Frank, could you address some of the issues in terms of profitability? When can we look and see and enjoy some profitability here? It has been at least five years since I'm acquainted with the Company.

Right, well, most of the -- over the past five years -- five years ago, we launched our first ingredient, so we have been spending money and developing out the ingredient portfolio that we have, including NIAGEN, and that costs money.

At the same time, we have been having the revenue ramp up, and if you notice in Q2 that we started -- we did generate positive cash in Q2. And you'll notice that the financials have gotten a lot stronger over the past three or four quarters, in particular, and we expect that trend to continue.

So, we are 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 the revenue. But if the revenue keeps growing at the pace that it is, we should finally get to a point where it will turn the other way.

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

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.

Thank you so much. I appreciate it. Good luck. Take care.

[Isaac Vidamilosky], Private Investor.

Question is, are you going to implement the reverse split and list yourself -- the Company on the AMEX? It was promised a long time ago. I am an investor for many, many years and it was promised a long time ago, and as I have said, they promised you a bonus if you will list the Company on the AMEX.

And my second question is, is Dr. Frost still active in the Company?

So the first question is -- and we have been talking about this publicly, but we are -- have started a few months ago a strategy basically to move in the direction of uplisting the Company to a national exchange. So we had been for the first time in several years been aggressively pursuing that, and I can't talk any more 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. He is still the largest shareholder of the Company next to myself, the second-largest 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, our Nobel Laureate. That helped build the framework for a scientific advisory board and he continues to be an asset for the Company when we need it.

All right, thank you.

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

Thank you, gentlemen, or everybody, for joining the call today. We're 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, and 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.

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.