Niagen Bioscience Inc (NAGE) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation's Fourth Quarter and Full Year 2017 Results Investor Call. My name is Kevin and I'll be your conference operator today. (Operator Instructions). As a reminder, this conference call is being recorded.

This afternoon, ChromaDex issued its news release announcing the company's financial results for the fourth quarter and year-end 2017. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's website at www.chromadex.com.

I would now like to turn the conference call over to Andrew Johnson, Director of Investor Relations. Please go ahead, sir.

Thank you, Kevin. Good afternoon, and welcome to ChromaDex Corporation's Fourth Quarter and Full Year 2017 Results Investor Call. With us today are ChromaDex's Founder and Chief Executive Officer, Frank Jaksch; President and Chief Operating Officer, Rob Fried; and Chief Financial Officer, Kevin Farr.

Today's conference call may include forward-looking statements including statements related to ChromaDex's research and development and clinical trial plans and the timing of results and such clinical trials, the timing of future regulatory filings, the expansion of the sale of TRU NIAGEN in new markets, plans to add to the management team, future financial results, business development opportunities, future cash needs, ChromaDex's operating performance in the future, future investor interest, clinical research studies and subject to risks and uncertainties related 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 these activities and results anticipated in forward-looking statements. These risk factors include those contained in ChromaDex's annual report on Form 10-K and Form 10-Q most recently filed with the SEC. Please note that the company assumes no obligation to update any forward-looking statements after the date of this conference call to conform with forward-looking statements' actual results or 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 this afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

Finally, this investor 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 over the call to Frank Jaksch.

Thank you, Andrew. Good afternoon, everyone. Thank you for joining our fourth quarter and full year 2017 investor call. 2017 was a transformative year for the company. We acquired Healthspan Research in March 2017, marking our strategic shift to a consumer-focused nutraceutical company under our brand, TRU NIAGEN. We began our international expansion of the TRU NIAGEN brand with a successful launch in Hong Kong and Macau with our strategic partner Watsons in the third quarter of 2017, followed by the first quarter 2018 launch in Singapore.

Another important milestone was the sale of the analytical testing service business to LabCorp in the third quarter, which helped us focus on NAD and TRU NIAGEN. We raised $48 million of capital with the strategic investment led by Mr. Li Ka-shing and Horizons Ventures. Rob will spend a little more time discussing the transformation in more detail. But before I get to that, I'd like to discuss the scientific developments on NIAGEN.

The science surrounding NIAGEN continues to validate the health benefits of NIAGEN. Healthy aging, mitochondria, NAD and NR continue to be a hot topic in the research community. In 2017, there were over 1,000 studies on mitochondria. In 2017, there were over 150 studies on NAD. And in 2017, there were 14 publications on nicotinamide riboside. We now have over 140 collaborative agreements in place with universities and research institutes all over the world, many of which have led to successful peer-reviewed publications. We have seen many of these studies, which started as preclinical research, pivot to human clinical trials, and we expect further clinical trials on NIAGEN to come from this process.

Presently, the most active areas for NIAGEN research involve healthy aging, areas such as cognition, neurological health and disease, cardiovascular health and metabolic syndrome or obesity. I'd like to highlight a few of the important published studies on NIAGEN during 2017.

A study published in Nature in December performed by Dr. Johan Auwerx and colleagues at EPFL in Switzerland demonstrating that Alzheimer's disease mice treated with NR had improved mitochondria energy production and improved memory. Dr. Matthias Mericksay and colleagues at the University of Paris, along with Charles Brenner and his team at the University of Iowa, revealed in a mouse study that the administration of NIAGEN stabilizes NAD levels and leads to protective effects on cardiac function and heart failure in a published study in the journal, Circulation.

University of Iowa researchers also published a study in the prestigious Journal of Pain, showing that NIAGEN ameliorates chemotherapy-induced peripheral neuropathy, or CIPN, in an animal model. Results from that study suggest that NIAGEN may be an effective therapy for relieving CIPN in humans. In February, we announced the study published by the National Institute of Aging at NIH, where NIAGEN was shown to prevent neurological damage and improved cognitive and physical function in an Alzheimer's disease mouse study.

The first half of 2018 is shaping up nicely as we have seen the addition of 2 human studies in the first quarter that have been initiated investigating the role of NIAGEN on mitochondrial biogenesis at the University of Cambridge, and systolic heart failure at the University of Washington. These 2 studies bring the human clinical trial count up to 16 with at least 10 of them that examine human efficacy outcomes.

We are eagerly anticipating the imminent publication of the University of Colorado Boulder study. The study will be the first focusing on specific therapeutic endpoints, whereas previous NIAGEN human studies have demonstrated that NIAGEN is safe and effectively raises NAD levels and ATP levels. We're in the process of publishing the results from our second human study. The 8-week, 140-person study established an effective dose range for NIAGEN, showed elevated levels of NAD throughout the study and supported safety for daily use.

In January of 2017, we opened our state-of-the-art facility in Longmont, Colorado to support the discovery and development of novel NAD-related molecules and we will continue to investigate additional applications for NIAGEN and NAD precursors.

With that, I'll pass the call to Rob, where he can give you an overview on the transformation we made throughout the year.

Thank you, Frank. We made the strategic decision last year to transition from an ingredients and testing business to a consumer-focused company. We successfully shifted the company's focus to TRU NIAGEN and began building an international consumer brand.

One of the most important aspects of the shift was a dramatic reduction in the number of resellers of NIAGEN. A year ago, we had more than 20 resellers of NIAGEN. By year-end, that was down to 5 and currently, we have 2 that are still under contract. There are still several companies selling through their inventory.

Along with the shift in strategy, we raised $48 million of capital from strategic investors, which include Mr. Li Ka-shing and Horizons Ventures. This relationship has opened doors to our international expansion plan with the launch of TRU NIAGEN at Watsons in Hong Kong and Macau and just recently in Singapore in the first quarter. We will likely expand our relationship with Watsons.

We're in discussions with blue chip international partners to launch TRU NIAGEN in new markets. We are currently pursuing regulatory approvals. Worldwide awareness of TRU NIAGEN is building.

The compound month-to-month growth rate in the U.S. since ChromaDex acquired TRU NIAGEN has been in excess of 25%. Additionally, we are pleased to have made an excellent addition to our scientific advisory board with Dr. Rudolph Tanzi. Dr. Tanzi is the Vice Chair of Neurology and Director of the Genetics and Aging Research Unit at Mass General Hospital; and the Joseph P. and Rose Kennedy Professor of Neurology of Harvard Medical School. Expect more additions to this already prestigious scientific advisory board.

I'm especially proud of management additions: Kevin Farr, Chief Financial Officer; and Mark Friedman, our General Counsel and Corporate Secretary. Kevin has joined us at from Mattel, where he spent the last 17 years as Executive Vice President and CFO. His leadership and experience with the global S&P 500 consumer company has already been impactful. Mark joined us from Herbalife Nutrition in January, where he served as Executive Vice President and General Counsel and Counsel to the Executive Chairman. Expect more management additions.

With that, I will pass the call over to Kevin Farr.

Thank you, Rob. As Frank and Rob has noted, we've been executing a strategic shift for the last 12 months, and I'd like to update you on the financial aspects of our progress. The Healthspan Research, LLC stock acquisition took place on March 12, 2017. This marks the date of our strategic shift to a consumer-driven nutraceutical company devoted to pioneering technologies that can improve the way people age. 9 months into the shift, we continue to be doing better than expected.

First, as Rob said, we reduced the number of NIAGEN brands in the marketplace. This is a result in the shift of our sales away from resellers and through truniagen.com and through retail partner, Watsons. Despite having fewer ingredient customers, our NIAGEN-related revenues increased significantly in the fourth quarter and full year 2017 driven by the growth in TRU NIAGEN.

Second, we began our international expansion of the TRU NIAGEN brand with a successful launch in Hong Kong and Macau with our partner Watsons in the third quarter of 2017, followed by a first quarter launch in Singapore.

Now let's look at our financial results for the fourth quarter of 2017. For the 3 months ended December 30, 2017, ChromaDex reported net sales of $7.5 million, up 69% compared to $4.5 million from continued operations of the fourth quarter of 2016. The increase from the fourth quarter was driven by growth in sales of TRU NIAGEN.

For the fourth quarter, NIAGEN-related revenues was $5.7 million, which represented 75% of fourth quarter sales. We also delivered improved gross profits for the fourth quarter of 50.9%, which was up by approximately 580 basis points as compared to 45.1% for the fourth quarter of 2016. We delivered better gross margins due to the positive mix of TRU NIAGEN sales.

Our operating expenses for the fourth quarter were up by $8.4 million to $12.6 million as compared to the fourth quarter of 2016 of $4.2 million as we made incremental investments in sales and marketing expenditures, research and development and general and administrative expenses to support growth in our business.

Sales and marketing expenses increased to approximately $2.4 million from $0.4 million last year as the company continued to invest in building -- in marketing to build out the TRU NIAGEN brand. The company incurred $1.45 million in research and development expenses for the fourth quarter, an increase of $0.9 million compared to $0.5 million last year. These investments related to human clinical trials and new NR technology development.

General and administrative expenses increased by $5.5 million to $8.8 million as compared to $3.3 million in the fourth quarter of 2016. The increase was driven by higher equity compensation expense of $3.1 million, higher legal fees of $1.8 million related to litigation and severance expenses of $0.6 million.

The balance related to investment in capabilities, people and IT infrastructure, offset by lower bad debt expense. The net loss attributable to common stockholders for the fourth quarter was $8.8 million, which was up by $6.7 million as we continue to make investments in the quarter to accelerate our future growth. Looking forward, we expect to continue to invest ahead of growth to capture the global opportunity for TRU NIAGEN.

Loss per share from continuing operations for the fourth quarter of 2017 was a negative $0.17 per share compared to a negative $0.06 per share in the prior year. EBITDA adjusted for noncash charges associated with share-based compensation, which is a non-GAAP measure, was a negative $5.2 million during the fourth quarter of 2017 compared to adjusted EBITDA of a negative $1.7 million last year. We also ended the fourth quarter of 2017 with a solid balance sheet with year-end cash of $45.4 million.

Turning to full year 2017. For full year 2017, ChromaDex reported net sales of $21.2 million from continuing operations, a decrease of 2% as compared to $21.7 million for the year ended December 31, 2016. This decrease was largely due to the shift in business strategy from an ingredient and testing company to a global consumer-focused nutraceutical company. For the second half of 2017, net sales were $13.6 million, an increase of 62% as compared to the $8.4 million in the second half of 2016. Net sales were up by $5.2 million due to TRU NIAGEN.

We also delivered improved gross profits for the full year of 49.4% which was up by approximately 140 basis points as compared to 48% for full year 2016. The net loss attributable to common shareholders for the full year 2017 was $11.4 million, which was up by $8.4 million as we invested in marketing expenditures to build out TRU NIAGEN. In addition, we incurred higher legal cost associated with the ongoing litigation of $3.8 million and higher stock-based compensation expense of $3.4 million.

Loss per share from continuing operations for the full year 2017 was a negative $0.37 per share compared to a negative $0.10 per share in the prior year. EBITDA adjusted for noncash charges associated with share-based compensation, which is a non-GAAP measure, was a negative $5.9 million during the full year 2017 compared to adjusted EBITDA of a negative $0.9 million last year.

As we look forward to 2018, the company expects to continue to deliver significant growth in sales driven by our U.S. e-commerce business and Watsons international business and the launch of TRU NIAGEN in new international markets. We expect that the growth of full year 2018 will be skewed towards the back half of the year, as the U.S. and Watsons businesses are expected to continue to grow and we launched TRU NIAGEN in new international markets.

Our NIAGEN sales are expected to come from essentially 4 segments: ingredient sales to resellers in the U.S.; sales of TRU NIAGEN in the U.S.; sales of TRU NIAGEN through our retail partner, Watsons; and sales of TRU NIAGEN through prospective blue chip international partners that we're currently analyzing or in discussion with for new international markets.

We expect to see significant growth in these segments in 2018, except for ingredient sales to resellers, which we forecast to be down slightly versus 2017 as we continue to wind down our NIAGEN ingredient sales to resellers in 2018. We currently expect these sales to be approximately $6 million to $8 million in 2018 and we estimate this represents about 5x as much, around $30 million to $40 million of retail sales, that we're not yet able to capture our share of these sales in the U.S. in 2018.

As we continue to focus our business on the build-out of TRU NIAGEN, we anticipate that TRU NIAGEN will grow throughout the year. Although net sales are expected to grow year-over-year in the first quarter, the first quarter sales in absolute dollars may be less than the fourth quarter of 2017 due to lower NIAGEN ingredient sales and the timing of orders from Watsons, despite continued strong consumer takeaway for TRU NIAGEN in Hong Kong and Macau.

Also, we plan to continue to invest in marketing to build out TRU NIAGEN ahead of growth as well as in infrastructure and new capabilities to support growth. We expect the gross profit percentage will continue to improve in 2018 due to better mix of revenues to TRU NIAGEN sales. We also expect to continue to invest ahead of growth in marketing, global infrastructure as we move into new markets and we continue to build key capabilities.

We also continue to believe that there is a tremendous opportunity for significant growth at TRU NIAGEN in 2019 and beyond, as more sciences published global awareness of TRU NIAGEN increases and we continue to launch TRU NIAGEN in new international markets. Finally, we expect that cash on hand of $45 million at year-end 2017 is more than enough to fund our operations in 2018 and beyond.

With that, I'll now open the call for questions. Operator?

(Operator Instructions) Our first question comes from Ram Selvaraju with H.C. Wainwright.

This is Mitchell on for Ram. So my first question is, are you at an optimal number of distributors here in the U.S.?

Is that a question about NIAGEN in particular?

Yes. In particular about NIAGEN, yes.

Our plan, as you know, was to reduce the number of resellers of NIAGEN and to build our own consumer brand, TRU NIAGEN. Right now we're down to 2 companies to whom we're still supplying. And they're under contract through parts of this year, and we haven't yet decided whether or not to extend those contracts. It may be just strategic to continue working with them. They're very good companies, but we certainly won't be increasing.

Okay, got it. And the other question is, how is stock-based compensation likely to trend in the coming quarters?

I think with regard to the coming quarters that it should not be a big driver, but I think the one thing that I'd caveat that with is that we had new capabilities. You may see some inducement grants to attract those new capabilities, those new people.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Okay. So a few questions I want to run through. Firstly, Rob, you had a little bit of commentary as far as what you're stating on the U.S. growth, 25-plus percent. Was that a compounded growth rate? Were you describing an annualized growth rate? Is that right?

It's actually a compounded monthly growth rate. But remember, it's the law of small numbers. We started at a small number, but it doesn't take too long at that growth rate to become a fairly significant number.

Got it, okay. Can you give us a little further clarity as far as the footprint out there currently for Watsons as far as Hong Kong, Macau and Singapore? I know that some of the orders come in, in a lumpy level, but can you give us kind of a flavor for a number of stores that the product's in or growth of the number of stores that the product's in currently.

Yes. In Hong Kong they're in all of their stores. It's 160 stores. In Singapore, it's 100 stores, and they are in all 100 stores.

Fantastic. Okay. And then, can you talk a little bit about margins? You had a little bit of commentary, so now you're driving 75% of revenues with 54% gross margins. Do you expect some further expansion there as far as margins through 2018? Or is that largely dependent upon volumes?

No. I think we do expect -- as we sell more TRU NIAGEN, we do expect, as I said in my comments, for gross margins to continue to improve for 2018. And I think both -- with regard to selling direct-to-consumer as well as our business with Watsons, both have good margins and margins are better than the selling ingredients.

Okay, got it. And Kevin, could you give us any further clarity -- not that I'm necessarily looking for guidance, but as far as OpEx for 2018. How might we think about that? I see 2017 at $26.8 million, strip out, it looks like $7 million or $8 million in onetime. How might that look for 2018? Do we expect that to grow kind of commensurate with the top line growth rate on the OpEx line?

Yes. I think it's going to grow less than the rate at the top line. The one thing that we are going to do is we're going to invest in marketing expenditures to drive the growth of TRU NIAGEN. And I think the good news about this company is since we're doing a lot of that through truniagen.com, that we are monitoring it every day and we can make decisions on a real-time basis, so should we be investing more or less depending upon how it's driving revenues. But when I look out to the full year, this year, I think we do have a larger base that you see in the second half of the year. So I think, again, we are going to invest in infrastructure and we're going to invest in growth for international operations. But again, I think that we're looking at optimizing that.

Okay, got it. And then lastly, Frank, could you walk us through a little bit kind of big picture as far as the couple studies that are ongoing now? Maybe give us a little flavor for the types of studies that you've had some discussions about with some of the universities and some of the researchers out there as far as specific therapeutic areas of focus, and where we may see more studies in 2018 or hear about them.

Yes. So I mean, are you specifically referring to some of the newer ones that sort of started popping up on ClinicalTrials.gov?

Yes. As well as perhaps, some of the interest you've seen with some of the areas of focus out there.

Okay, okay. Well, the one area right now which I'll highlight the most which has been the biggest area in the peer-reviewed published side of things recently was around, what I'll call, neuroprotection or cognitive or mild cognitive impairment that could be related to neurodegenerative-type diseases. So the latest studies -- and there's been -- as you've probably been following through our press releases, there's been quite a few, just even over the past few months, that specifically relate to neuroprotection or neurodegenerative diseases and using NR to modulate NAD to impact that. And there's been some pretty tremendous studies on that. We're also seeing that, now, that interest is translating into human trials. And that's one of the hotter areas, I would say, at least from a clinical perspective, the interest in the mild cognitive impairment, stopping short of really focusing on diseases in the clinic, it looks like these clinical trials are focusing on more, what I'll call, structure/function claim orientation human clinical trials around mild cognitive impairment. That would be useful for us in making structure/function claims related to TRU NIAGEN as a dietary supplement.

Okay. And would you expect to hear of some of these human trials coming out of university researchers or being sponsored by them or the company?

Right now, the ones that are the most active are actually university-sponsored trials. However, we're currently evaluating what our -- and I can't talk about it in specific detail, but we're currently evaluating what our next steps with -- and we haven't gone public yet with what the next steps we're going to be looking at for our own sponsored trials.

Okay. But I imagine there's a number areas that you're also interested in beyond what some others are doing there?

There are, yes. The, what I'll call, the mild cognitive impairment is one of those that is of interest to us very much, but there are other areas of interest. And as you know, most of our focus in the clinic over the past couple of years has been around more pharmacokinetic, pharmacodynamic areas related to using nicotinamide riboside, or TRU NIAGEN, to increase NAD levels which we've pretty clearly demonstrated at this point.

Our next question comes from Bill Dezellem with Tieton Capital.

I have a group of questions. First of all, what markets outside of the U.S. are you planning on launching during 2018? And what is it that is leading you to choose those markets?

Well, we aren't yet disclosing those specific plans. We're in discussions with a number of, I would say, blue chip partners, excellent partners in some of the largest territories. But it's in early stages, so we're not yet disclosing which territories we're going in and we may not be, if the deal doesn't come together the way we hope.

Again though, I think we're targeting markets that have the greatest potential and that's a focus as well as we're -- as Rob said, we have blue chip partners to launch in those countries.

That's helpful. And in the commentary, there was a reference to blue chip relationships outside of the U.S. So was that more at the retail level to launch into new countries? Or was that more in the category of identifying partners to bring out new products that might use NIAGEN?

No. At this point, we're thinking about strategic partners to distribute or release TRU NIAGEN in other territories.

That's helpful. And I think you also mentioned in the same vein in the opening remarks at a likely expansion of the Watsons relationship. What can you tell us about that?

The original relationship contemplated just 4 territories, but Watsons' footprint expands far beyond that. And so we've -- their performance is excellent thus far and they've expressed strong interest in expanding in some of their other territories. But at this point, it's just preliminary discussions.

And those 4 territories would have been Singapore, Macau, Hong Kong and?

Taiwan.

Great. And then, lastly, as you all look at the various studies that are out there, I think, what, 140-ish or so, which ones are you most enthusiastic about, Frank?

Well, are you referring to -- well, the 140 -- we have 140 collaborative agreements in place with various universities. Are you talking about the collaborations or the publications that may have resulted from those?

No. I'm actually thinking about things that have not yet been published or the research maybe is not yet complete, but you're looking at it and concluding that that's really very, very exciting. I'm just trying to understand where your enthusiasm is being placed today.

Well, I think that the -- one of -- it goes to the previous question. I think, one of the top categories from, I'll say, from an enthusiasm standpoint that I think -- and would echo the sentiments, in some ways, of our scientific advisory board, is the area of cognition is going to be one of those areas. And it is one of the areas that is the most active, I would say, in transitioning at the moment from preclinical -- successful preclinical studies, which have led to some pretty outstanding peer-reviewed published studies that have come out recently; and now also translating into what I'll call getting those grant-funded research to basically carry it into a human clinical trial. So that's one of the key -- I would say, that's going to be one of the key areas right now is going to be around that area because -- especially, as it relates to cognitive, mild cognitive impairment or anything along those lines. I mean, that's one of the more notable hallmarks of aging and one that I think that we believe that nicotinamide riboside will deliver upon on that promise as well.

Let me take that just one step further. When you are referencing this, are you talking about kind of a -- many of us will jokingly call, a senior moment? Or are you talking about something as problematic as Alzheimer's or dementia?

Well, ultimately, I think it ratchets to that and we're going to have find ways of coming up with strategies to address getting towards that type of a market and being able to make -- attach it towards that type of a claim without necessarily going too far and without us having to go through a drug development process, because we don't want to go through a drug development process and we're not a drug company, we're a dietary supplement or a nutraceutical company, and we're going -- that's our path forward. That's pretty consistent from what you've been hearing from the call today. That's where we're going with this. So we have to stick with things that we can structure/function claims and claims that we can make that will facilitate the sale of the supplement product.

Our next question comes from Bill Nasgovitz with Heartland.

Who would you identify as your key competitor?

Well, the company that is selling, we believe, the most nicotinamide riboside right now at a consumer level is Elysium Health. There are numerous competitors in the nutraceutical space and in the antiaging space. And of course, we have our other ingredient businesses and our service businesses. But at our core business, which is the consumer sale of the ingredient that we developed, patented, tested and registered as safe with the FDA is nicotinamide riboside, and they are also selling a version of that in the marketplace.

Okay. So moving on to Watsons here, are you -- to drive demand, you said 150 stores in Hong Kong and 100 in Singapore. How do you drive demand? Or how are you driving demand or at least knowledge of the product?

In Hong Kong?

In both Hong Kong and Singapore.

Actually, Watsons has been spearheading the marketing efforts and they've done an extraordinary job. And their marketing campaigns which they do very -- in close conjunction with us has been extremely effective. But our goal is to create an international brand out of TRU NIAGEN. So we create the brand guidelines, the messaging, we disseminate the scientific information, we create the videos and other marketing materials and we've been sharing those materials and that thinking and that research with Watsons, as we will do with all the other international partners that we work with. So it's sort of a hub-and-spoke type of marketing strategy, where the brand is managed, the messaging is managed here in the U.S. and we share those materials with the international partners, including Watsons.

Okay. And how many stores does Watsons possibly have that might end up having TRU NIAGEN?

They have up -- almost 7,000 stores worldwide.

Ladies and gentlemen, this does conclude today's Q&A portion. I'd like to turn the call back over to our host.

Okay. Thank you, everybody, for joining us today.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.