Niagen Bioscience Inc (NAGE) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's Fourth Quarter 2018 Earnings Conference Call. My name is Sonya, and I'll be your conference operator today. (Operator Instructions) As a reminder, this conference is being recorded.

This afternoon, ChromaDex issued a news release announcing the company's financial results for the fourth quarter 2018. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex website at www.chromadex.com.

I would now like to turn the conference over to Brianna Gerber, Senior Director of FP&A and Investor Relations. Please go ahead, Ms. Gerber.

Thank you, Sonya. Good afternoon, and welcome to ChromaDex Corporation's Fourth Quarter 2018 Results Investor Call. With us today are ChromaDex's Chief Executive Officer, Rob Fried; Founder and Executive Chairman, Frank Jaksch; and Chief Financial Officer, Kevin Farr.

Today's conference call may include forward-looking statements, including statements related to ChromaDex's research and development and clinical trial plans and the timing and results of such trials; the timing of future regulatory filings; the expansion of the sale of TRU NIAGEN in new markets; plans to add to the management team; future financial results; business development opportunities; future cash needs; ChromaDex's operating performance in the future; future investor interest; and clinical trial studies, that are subject to risks and uncertainties relating to ChromaDex's future business prospects and opportunities as well as anticipated results of operations.

Forward-looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurance 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 presentation, which was issued this afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures.

Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com.

With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Thank you, Brianna. Good afternoon, everyone, and thank you for joining our fourth quarter 2018 investor call.

Recently, the FDA announced that it's taking a new look at the dietary supplement space. We think this is potentially great news for customers and for ChromaDex. It means the FDA is going to support enterprises that do it the right way, that are truly committed to science and to improving health.

We have 21 employees in our Longmont, Colorado lab, a majority of whom are scientists and who are committed to safety, efficacy and developing new science. Our ingredient, NIAGEN, has twice been successfully reviewed under FDA's new dietary ingredient, NDI, notification program and has been successfully notified to the FDA as generally recognized as safe. ChromaDex is well positioned if the FDA updates its enforcement of the dietary supplement space. We hope they do.

Before reviewing 2018 and fourth quarter results, I will turn the call over to our Executive Chairman, Frank Jaksch, for an update on recent developments in scientific research. Frank?

Thank you, Rob. Since our last update, the science surrounding NIAGEN and the importance of NAD on human health continues to expand. There are 28 ongoing completed and published clinical trials currently registered on ClinicalTrials.gov to investigate the pharmacokinetics and the therapeutic effects of NR. This is 2 more than our last quarterly update. An additional 5 clinical trials are registered to test NR in combination with other ingredients for a total of 33.

We finished the quarter with about 170 signed research collaborations, approximately 10 more than last quarter. Over 60% of the studies that are in progress are being planned focused on neurological and cardiovascular areas, with other key areas being obesity and aging.

As I've said, not only does the research validate the efficacy of NR, it provides valuable insight that may translate into potential new benefit areas for NR with additional research. Importantly, many blockbuster vitamins and ingredients that have a high level of consumer awareness also have a substantial number of published research and clinical studies validating their safety and health benefits.

Here are a few important highlights related to clinical studies since we last spoke. In January 2019, Dr. Doug Seals from the University of Colorado Boulder registered a new clinical trial that will investigate the use of NR as a fasting mimetic to lower systolic blood pressure. This could be a more practical alternative to caloric restriction, which has been shown to be effective. It is also a follow-up to the Martens 2018 study showing trends toward lower blood pressure and decreased arterial stiffness in patients taking NR. The study will use a larger cohort to look at changes with an estimated enrollment of 118.

High blood pressure and arterial stiffness are 2 promising variables in the Martens 2018 study, have also been linked to an increase of risk of dementia. A complementary follow-up study from Dr. Chris Martens at the University of Delaware was registered last year and is currently recruiting. It will provide insight into whether NR improves brain blood flow and memory in older adults with lower memory abilities.

Scientists are increasingly discovering connections between mitochondrial health and neurodegenerative diseases. The Department of Neurology at Haukeland University Hospital recently registered a new clinical trial to determine if NR improves motor symptoms associated with Parkinson's disease. This study will also determine whether NR improves NAD metabolism by measuring levels of NAD in body fluids and muscle tissues relative to a control group. Each of these clinical trials is placebo-controlled and double-blinded.

Finally, there's a newly registered clinical trial to explore the effects of NR supplementation in a single participant with Li-Fraumeni syndrome. This is an orphan disease in which the patient has a long-standing history of fatigue, muscle weakness, decreased mitochondrial functions in her leg muscles. Studying the effects of NR on patients with in-born errors of metabolism may provide insight into future research opportunities.

I'd also like to take the time to highlight one very important published study that happened since our last update. The full list of studies can be found via link in the Science section of our Investor Relations website.

On January 22, Cell Reports published a study entitled Maternal Nicotinamide Riboside Enhances Postpartum Weight Loss, Juvenile Offspring Development and Neurogenesis in Adult Offspring.

While we typically don't issue press releases for preclinical studies, we did in this case given its significance, including implications for potential business development opportunities.

Led by our Chief Scientific Adviser, Dr. Charles Brenner, the study is the first to examine the NAD metabolome and NR supplementation in the context of lactation and postpartum period. The results show that NR supplementation confers significant and enduring physiological benefits on mothers and offspring. Specifically, researchers observed that rodent mothers supplemented with NR lost more weight and produced more milk than the control -- their control counterparts. Their offspring also showed greater coordination, strength and capacity for learning, even weeks after being weaned from their mother's milk. We look forward to testing these discoveries in people, which could provide insight into new business development opportunities for NIAGEN in women's and family health.

In summary, we believe the depth and consistency of the science supporting NR speaks to its value for promoting healthy aging and are excited about the building pipeline for future published research.

With that, I'll pass the call back to Rob Fried. Rob?

Thank you, Frank. Kevin Farr will go through the numbers in greater detail in what was another strong quarter for us and a strong year in general.

We showed a 12% increase in revenues from the third quarter of 2018 and a 20% increase from the fourth quarter of 2017. As most of you know, our strategy is to build TRU NIAGEN into a global brand, and in 2018, we got a lot done to that end.

We opened 2 new international markets, Canada and New Zealand. We launched in New Zealand with our partner, Matakana Superfoods, in September and received regulatory approval to sell TRU NIAGEN across all platforms in Canada in October. Today, our Canadian business is primarily an e-commerce strategy through Amazon Canada and our own website, truniagen.ca.

We're also leveraging our partnership with Fullscript Canada to reach health care practitioners and expanding distribution to retail channels in 2019. We also took an important first step towards China in 2018 with the announcement of a memorandum of understanding for the development of a strategic partnership for aging research with the Jiangxi Province.

We launched 2 new products targeted toward important influencers in the U.S.: health care practitioners and professional athletes. In the third quarter, we introduced our TRU NIAGEN PRO line for health care practitioners, featuring the highest dose of NR available in a single capsule at 300 milligrams, consistent with our second NDIN. And in the fourth quarter, we began selling a customized product for professional sports teams. That includes the NSF International Certified for Sport certification, which means it has been tested for over 272 athletic banned substances. We're early in the stages of execution. We believe this is a strategic long-term opportunity that has significant potential.

The personnel of the company, perhaps, are our greatest accomplishment and our most important asset. We continue to build upon that talent by strengthening capabilities in key areas like marketing, science and, of course, regulatory approvals. Today, we have a group of experienced, driven, mission-oriented executives with the requisite knowledge, attitude and experience to grow this company into a global enterprise by building TRU NIAGEN into an important global brand.

In 2018, we grew our e-commerce business to $15 million from around $1 million in 2017. We continue to show strong sequential and year-over-year growth while making choices today that will set the foundation for sustained long-term growth. We have not yet reached the tipping point of consumer awareness for TRU NIAGEN, and it is difficult to predict precisely when that will come, but we are well positioned when it does.

Tactically, we're encouraged by favorable trends in key metrics like customer acquisition costs and reorder rates, and we're pleased with the sequential improvement in marketing efficiency in the fourth quarter.

Beyond our direct-to-consumer business, we have several strong global partners, and I'll highlight 2 of them. First, we have a great partner in Watsons, with whom we are selling TRU NIAGEN in Hong Kong, Macau and Singapore. They have done an extraordinary job marketing TRU NIAGEN in Hong Kong, and their sell-through remains very strong. In fact, we extended and renegotiated our agreement with Watsons in the summer, and they have made purchase commitments that reflect their expectations of continued strength and growth in Hong Kong and Macau. We experienced an uptick in shipments in the fourth quarter and expect to see more consistent quarterly shipments in 2019.

Beyond Hong Kong and Macau, we have marketing claims approved by Health Sciences Authority in Singapore, and we continue to pursue additional claims. Watsons has expressed enthusiasm to expand the relationship into other territories, and we will continue to pursue regulatory approvals consistent with Watsons' priority markets.

We said that we intended on a selective basis to continue to supply NIAGEN to blue-chip global companies if it did not conflict with our strategy of building TRU NIAGEN into a global consumer brand. And in December, we announced a deal that was consistent with that strategy with another great partner, Nestlé. Nestlé is one of the best science-based food nutrition companies in the world. They recognize the opportunity with TRU NIAGEN, and we recognize the opportunity with Nestlé.

Nestlé Health Science has said that they are striving to forge a new industry of nutritional therapies by investing in innovation and leveraging leading-edge science. We and Nestlé believe that TRU NIAGEN is consistent with that strategy and will provide consumers the opportunity to improve their health with the power of nutrition.

The agreement includes protein-based nutritional drinks and medical nutrition. Many of you listening are familiar with BOOST, which is Nestlé's largest brand in the protein-based nutritional drinks category. The agreement also includes the medical nutrition business. And according to Grand View Research, medical nutrition is Nestlé Health Science's largest business. One of its key focus areas is acute care, with a wide range of nutritional solutions for disease-related malnutrition. It also sells a range of tube-feeding formulas and other products in the hospital setting. Kevin will provide further details on the terms of the agreement, but I want to highlight a few points.

First, in exchange to the exclusivity and co-exclusivity set forth in our supply and license agreement, Nestlé made an upfront cash payment of $4 million. In addition, there are progress milestones outlined in the agreement, which, if not achieved, could return those co-exclusivity and exclusivity rights. There is a technical hurdle of stability that needs to be achieved by the end of 2019 as well as regulatory and market testing hurdles. We believe Nestlé Health Science's portfolio with TRU NIAGEN will substantially advance their already strong market position. Importantly, this partnership will help educate people on the importance of elevating NAD levels with TRU NIAGEN. We're proud to be in business with Nestlé and look forward to a long, mutually beneficial relationship.

As I said upfront, we've built a great foundation in 2018, and as we begin 2019, we're focused on a few key strategic pillars. First, delivering on the opportunity with great partners like Watsons and Nestlé. This includes pursuing regulatory approval in priority markets for these partners and ChromaDex such as Europe, Brazil, Japan and Australia, where we've allocated more resources. Second, building TRU NIAGEN into a global consumer brand. And third, continuing to vigorously protect our intellectual property.

Before turning it over to Kevin, I'd like to say something about the science of nicotinamide riboside and NAD. Going into last year, we knew that nicotinamide riboside increases NAD to support many of the metabolic processes involved in cellular health, and we understand that relationship even more today. We're seeing fascinating studies commenced and completed in neurological areas such as Alzheimer's and Parkinson's, and there is also a great deal of interest in cardiovascular research as well.

We understand mechanistically why NAD and NR may prove to be beneficial in all those areas. There are now, as Frank said, 33 clinical studies on ClinicalTrials.gov, and we hope to see published results from some of those in 2019. And we expect there will be more studies added as we continue to communicate with members of the scientific community. But I will tell you this, I take TRU NIAGEN every day and I have for 4 years, and I believe that every executive at ChromaDex does as well. The people running this company genuinely believe in the product.

And now I will pass the call over to our CFO, Kevin Farr.

Thank you, Rob. Let's take a look at our financial results for the fourth quarter of 2018, which reflect continued progress against our key financial objectives. I'll focus my remarks on sequential growth in the fourth quarter of 2018 compared to the third quarter of 2018 as well as year-over-year results for full year 2018 versus full year 2017 results from continuing operations.

At this stage of our growth cycle, we believe sequential trends are important to demonstrate progress towards our objective of cash flow breakeven. In that framework, we continue to experience strong sequential growth in sales, improved advertising efficiency and lower operating expenses, especially when you exclude noncash equity compensation.

For the 3 months ended December 31, 2018, ChromaDex reported net sales of $9.1 million, up 12% compared to $8.1 million in the third quarter of 2018. For the full year 2018, net sales were $31.6 million, up 49% compared to $21.2 million for full year 2017. Our TRU NIAGEN business was up 24% sequentially against the backdrop of lower selling and marketing spend, which I'll discuss in a moment.

For full year 2018, net sales of TRU NIAGEN grew by 238% versus 2017. The strong growth was partially offset by expected declines in our ingredients and other legacy businesses. Our NIAGEN ingredients sales were down 4% compared to the third quarter. As expected, our NIAGEN ingredients sales from full year 2018 declined by 33% as we successfully pivoted from an ingredient company in 2017 to a consumer product company in 2018.

Turning to gross margins for the fourth quarter. Our gross profit was up sequentially in absolute dollars. However, our gross margin declined from 53.7% in the third quarter to 52% in the fourth quarter of 2018. In the fourth quarter, gross margin was negatively impacted by 140 basis points due to our decision to wind down sales of 2 ingredients, Purple Corn and PURENERGY.

For full year 2018, gross margins increased by 150 basis points to 50.9% versus 49.4% for full year 2017. We experienced better gross margins due to positive impact of TRU NIAGEN consumer product sales, which we anticipate will continue.

Our operating expense for the fourth quarter of 2018 was roughly flat to the third quarter at $13 million. Notably, in the fourth quarter, our selling and marketing spending was down $100,000 to $4.7 million compared to $4.8 million in the third quarter of 2018. As a percentage of net sales, this was down 820 basis points from the third quarter of 2018 as we made good progress on achieving marketing efficiency in our e-commerce business.

In the fourth quarter, G&A expenses were higher by $175,000 to $6.9 million versus the third quarter of 2018. Excluding legal fees and equity compensation expense, G&A expense was higher by $100,000 versus the third quarter of 2018.

For the fourth quarter, our operating loss improved slightly to $8.2 million versus $8.6 million in the third quarter of 2018. The net loss attributable to common shareholders for the fourth quarter of 2018 was $8.2 million or a loss of $0.15 per share as compared to a net loss of $8.6 million or a loss of $0.16 per share for the third quarter of 2018.

For full year 2018, total operating expenses were up by $22.4 million to $49.2 million versus $26.9 million in 2017. Consistent with our expectations for full year 2018, we invested additional $12.1 million in advertising and marketing expenditures to build the TRU NIAGEN brand, increased R&D expenses by $1.5 million and an increased G&A expenses by $9.5 million. G&A was higher due mainly to incremental legal cost of $4.7 million, primarily related to protecting our intellectual property and pursue regulatory approvals in new international markets, additional noncash equity compensation expense of $1 million and incremental royalties of $0.7 million due to higher revenues. Excluding legal spending and equity compensation, G&A expense was up by $3.8 million.

For the full year, our operating loss increased by $16.8 million to $33.2 million versus $16.4 million in the prior year primarily due to higher selling and marketing spend and increased legal fees, partially offset by higher volume. For the full year 2018, net loss attributable to common stockholders was $33.3 million or a loss of $0.61 per share as compared to a net loss from continuing operations of $16.4 million or a loss of $0.37 per share for full year 2017.

Adjusted EBITDA, a non-GAAP measure, was a negative $6 million for the fourth quarter of 2018 compared to adjusted EBITDA of a negative $7.1 million for the third quarter of 2018. For full year 2018, adjusted EBITDA was negative $26 million compared to negative $11.2 million from continuing operations for full year 2017. ChromaDex defines adjusted EBITDA as net income or loss which is adjusted for income tax, interest, depreciation, amortization and noncash equity compensation costs.

Moving to the balance sheet and cash flow. We ended the fourth quarter of 2018 with a solid balance sheet, with cash of $22.6 million, which does not include the $4 million upfront payment from Nestlé since we received it in the first quarter of 2019. In the fourth quarter of 2018, our net cash used in operating activities was $5.1 million versus $5.2 million in the third quarter of 2018. Total cash outflows were $5.6 million in the fourth quarter compared to $5.2 million in the third quarter. The slightly higher cash outflows this quarter primarily relate to working capital, which was $0.9 million source of cash in the fourth quarter compared to $1.8 million source of cash in the third quarter. For full year 2018 versus 2017, cash used in operations was $20.9 million compared to $9.8 million in full year 2017. Total cash outflows were $22.8 million for full year 2018. We ended the year with inventory of $8.2 million, which was up $2.4 million versus the prior year as we invest in inventory to support growth in 2019.

Now let's take a look at our expectations for 2019. We expect continued strong growth in our top line, primarily driven by TRU NIAGEN and our U.S. e-commerce and Watsons international business as well with other distributors and cross-border opportunities in certain new international markets, partially offset by continued declines in the ingredient business as we focus on a few NIAGEN resellers and a few other ingredients.

We expect gross margin expansion, driven by increased sales of TRU NIAGEN, our e-commerce business and cost savings across the supply chain, which are supported by better economies of scale and other efficiency initiatives; selling and marketing expenses that are roughly flat in absolute dollars but down significantly as a percentage of net sales as we leverage 2018 investments in new customer acquisitions and diversify our marketing strategies beyond digital and direct-response marketing. Lastly, we're targeting general and administrative expenses that are roughly flat in absolute dollars as we largely built out the management infrastructure to scale the business.

Furthermore, we'll continue to tightly manage legal costs in 2019. Legal costs are a critical investment to protect our intellectual property. It's worth noting that we expect litigation expenses to ramp up in the first half of 2019, ahead of the California trial, which is currently scheduled for July. We also added certain of our key executives in the second half of 2018, so we expect that 2019 quarterly overhead costs will be consistent with the run rate that we experienced in the fourth quarter of 2018 rather than prior year seasonality.

In summary, the key drivers in 2019 are the continued strong growth in the sales of TRU NIAGEN, improved gross margins as a percentage of net sales, continued increases in the efficiency of our TRU NIAGEN selling and marketing expenses, leveraging fixed overhead spending and managing our legal costs as efficiently as possible. Based on these drivers, we continue to expect the company to be cash flow breakeven by the fourth quarter of 2019 or early 2020.

Before we conclude, let me briefly touch on the market opportunity as well as the economics of the Nestlé supply and licensing agreement. In December, 2018, ChromaDex and Nestlé Health Science, which I'll refer to as Nestlé, entered into a global license and supply agreement. The agreement provides Nestlé with exclusive rights to include TRU NIAGEN in Nestlé's branded medical nutrition and co-exclusive rights to include TRU NIAGEN in certain protein-based beverages. The territories in agreement include North America, Europe, Latin America, Australia, Japan and New Zealand. We received an upfront payment of $4 million in cash in the first quarter of 2019, consistent with the terms of the agreement. This will be amortized as revenue over a minimum of 3 years.

There are also certain commercial milestone payments tied to the sale of TRU NIAGEN to Nestlé as they launch in new markets. The aggregate payment is up to $6 million to ChromaDex, which we will realize as the product launch milestones are achieved. Beyond the upfront fee and milestone payments, most revenues will be driven by ingredient sales and royalty payments from Nestlé.

As it relates to the amount of ingredient in each product, Nestlé is required to include a minimum effective dosage of TRU NIAGEN in each serving. Nestlé can put more into each serving if they choose, subject to regulatory approvals. In addition, Nestlé will pay tiered royalties equal to low to high single digits of worldwide annual net sales for the products that include TRU NIAGEN. These royalties are based on wholesale prices, and we'll receive higher royalties as Nestlé achieves higher sales on a global basis.

Finally, recognizing we're in the early stages of execution with Nestlé, I'd like to frame up the financial opportunity over the long term. According to Euromonitor, the global market for supplemental nutrition drinks which include protein-based beverages, was approximately $2 billion in wholesale dollars in 2018, with approximately $800 million in the U.S. According to Grand View Research, the global market for medical nutrition, including the oral and enteral categories, was approximately $16 billion in 2018, with approximately $4 billion in the U.S. There are a few major players in both protein-based beverages and medical nutrition where Nestlé has significant shares. Nestlé lists some of their brands on their website, which we referenced in our slide presentation that accompanies this earnings release.

As it relates to our financial outlook, we do not anticipate meaningful revenues related to this agreement in 2019. There is a technical feasibility requirement that must be met this year as well as regulatory approvals and market testing beyond 2019. We're also taking a conservative view to 2020, which is the likely launch year. We'll provide more details as we learn more.

We know NR and we know what it does for cellular health. If the launch is successful, over time, we believe there are compelling scientific reasons why TRU NIAGEN should be included broadly across Nestlé's protein-based beverage line.

Beyond the U.S., we're focused on obtaining the necessary approvals in Nestlé's high-priority international markets for protein-based nutritional drinks category. For medical nutrition, Nestlé is considering clinical trial results and other scientific information in order to launch in all markets, including the U.S.

We're committed to realizing the full potential of bringing TRU NIAGEN to the market in categories that are complementary to our core dietary supplement business with the marketing power of a strong global partner like Nestlé. There's a wide range of possibilities with respect to the partnership with Nestlé. If we achieve technical feasibility, a successful initial market launch in the U.S. and obtain regulatory approvals in key priority markets, given the global size of these markets for protein-based beverages and medical foods as well as Nestlé's share of these categories, over the long term, we believe this represents a significant opportunity for both ChromaDex and Nestlé's.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from Jeffrey Cohen of Ladenburg Thalmann.

Could you talk a little bit more about the technical feasibility study or studies that you're referencing as far as Nestlé goes, what is the timing required as far as what needs to be done and who will be doing the work and if we'll see any of the data there?

The primary technical feasibility issue is stability in liquid. We are, both Nestlé and ChromaDex, separately working on this issue, but we're very confident that there is a solution to this problem.

Okay, got it. And it's safe to say at this point you would anticipate, and I don't expect you to speak on behalf of Nestlé, but a commercial offering from them in 2020 is the current goal.

Yes, that is the plan, middle of 2020.

Okay, got it. As far as margins from 52%, you do expect some improvement during 2019. And will that be seasonal in nature? Or do you expect that to gradually increase, where you'll come out the back half of '19 with better margins than the front half, for example?

Yes, I think they'll get better as we go through each quarter as we see TRU NIAGEN driving the growth in the business. If you look at our 10-K that we filed today and you look at the consumer products segment, it's generating about 61% of margins. And when you look at the run rate for 2018 full year, it's about 51%. So we should see continued growth in gross margins because of that tailwind in 2019.

Okay, got it. And then lastly, if you will, could you walk me through what we should expect as far as -- you talked about legal expenses. Could you give us a range or give us a comparison as opposed to $4.7 million for '18? And could you talk more specifically about the trial that begins in July and what we could possibly anticipate as far as time lines go?

Frank, do you want to answer that?

Yes. Why don't I give you an answer to the legal fees for 2019. We're going to spend what we need to spend in 2019 to protect our intellectual property and to win these cases. With regard to what I talked about with the timing, we expect to spend more in the first half of the year because we're getting ready for the trial in July, and we should see that taper off in the second half of the year. If you look at our 2018 in total, our legal spending was about $9.8 million in 2018, with those primarily related to the litigation as well as some investments in regulatory approvals in new markets.

And do you want to repeat -- this is Rob speaking. Jeff, can you repeat the second half of that question?

I think I was looking for a little color as far as how the trial may kind of read out or what we could expect to hear and, perhaps, some guesstimates on when we will expect to hear it.

From a financial standpoint?

No, from a legal standpoint, like the California trial, which commences in July, I believe.

Right. So as you know, this conflict is taking place on 3 fronts. There's a California dispute, a New York dispute and a Baltimore, Maryland dispute. And the trial in July is the California dispute. There are a great deal of public records available that one can read about how these disputes are progressing. And with great consistency, the courts have been ruling in our favor, and we would encourage you and anybody to look at those public documents to see the facts as they are being presented and how these cases are materializing. We have a great deal of confidence in the facts. We have a great deal of confidence in the law, and we have a great deal of confidence in the results. Assuming that there is not a delay, the trial in California should commence in July. We are very eager for it to begin. We are very eager for more of the facts to come out in the public, and we expect a good outcome.

Okay. And no dates or information regarding New York or Maryland at this point in time as far as the court progress on timing?

I said no -- I meant Delaware. I'm sorry. No, no, we have no dates yet set in either Delaware or New York.

Okay, got it. And then lastly, if you can walk me through the OpEx, Kevin. It sounded like what I was hearing, generally speaking, was that the total OpEx for '19 should be at approximately similar levels to 2018 as you continue to leverage the top line.

Yes, that's correct. I think when you look at sales and marketing expense, we expect it to be roughly the same as 2018, although we expect to see scale in that particular line item like we saw good scale in it in the fourth quarter of 2018, where it improved by 820 basis points to 51% for the total company. What drove that, I think, was again advertising efficiency related to tightly managing digital marketing by focusing on certain consumer groups that had higher conversion rates as well as we had higher reorders. And then when you look at SG&A, I think we've also said, look, it's going to be roughly the same as 2018. Again, I think we've talked about the run rates probably more like the fourth quarter rate as we've built out the infrastructure for the company. And we, again, would expect that to, as we grow through strong sales of TRU NIAGEN, to leverage that as a percentage of net sales.

And our next question comes from Jeff Van Sinderen of B. Riley FBR.

Maybe you can speak a little bit about how you're thinking on the Watsons business this year, maybe what you see the drivers being as far as store count or increased volumes, existing doors. Just any more color on what you're expecting with Watsons would be helpful.

Well, of course, it's very strong in Hong Kong. We had had issues getting good health claims cleared and strong marketing in place for Singapore, but we expect that to resolve itself during the year as well. So we're hoping and expecting for stronger growth in Singapore as well. We've had some complications getting regulatory approvals in Taiwan, where we also have a deal in place with Watsons. It's a complicated process. You're talking not about getting an approval for an existing ingredient and a new product. In these cases, we're actually having to get the ingredient approved in these countries. So many of these countries are unfamiliar with nicotinamide riboside, so this is why it is a long, complex process. It's more than just safety, and in many cases, there is no existing data available to them about the ingredient. They know about the approvals in the other countries, and that's often helpful, but it still is a time-consuming process. We recognize that this is a high priority for the company, and we are putting much more time and attention into this area. But until we receive regulatory approval in Taiwan, we will not be able to sell in Watsons stores in Taiwan or, frankly, other territories. We are expecting strong -- continued strong growth, obviously, in Hong Kong, stronger growth in Singapore, and Watsons is as well.

Okay. And I know you're focused on getting approvals internationally, and you've added to your team there. Can you touch on what you expect in contribution from Canada this year and maybe what -- which countries you think are the most promising for approvals in 2019? Do you think it's Taiwan or are there others that might happen before that? Maybe you could just talk a little bit more about that.

We've decided that we're going to stop giving guesses as to when we will receive regulatory approvals in these countries. There are just too many factors beyond our control. These are government bodies that have their own processes in place, and there are individuals, and we just don't know. We know that we are putting a lot of energy into 5 or 6 countries. We believe that receiving EU approval is important for our business. We think Japan is important. We think Australia is important. We continue to believe that Taiwan is important. And of course, China is important. Our deal with Nestlé also includes Latin America, so we are also putting some energy there. With the partnerships with Watsons and Nestlé, there's very, very clear path towards significant business growth. So our efforts are aligned with where we think there is the largest opportunity.

Okay. And then just to follow up on that. On Canada, maybe you can just touch on the contribution or how you see that business ramping in 2019 now that you do have approval.

Well, of course, the Canadian population is very sophisticated, actually, in the supplement world. But the population is about 10% of that the U.S., and we have a head start here in the U.S.

Okay. And then just one follow-up I wanted to ask on marketing. I know that you've built your marketing team out a bit. Maybe you can just talk us or walk us through some of your team marketing initiatives that you have planned this year.

Well, we realized that the market for TRU NIAGEN is much larger than just anti-aging. We understand mechanistically what elevating NAD levels in cells through TRU NIAGEN does for health. And I want to say we understand how it impacts the health of the people that take it, and we believe that everybody listening to this call should be taking TRU NIAGEN and recommending it to those that they care about. But understanding what it does versus making health claims based on published clinical studies is a different story, and we are working aggressively to be able to make those health claims. But having said that, we understand that it is an important factor in general cell repair. So we see the fitness market as a very strong, growing market. The sports market in general, we now believe that there are dozens of professional NBA players taking TRU NIAGEN. We know of professional football teams that are taking TRU NIAGEN. We know of athletes in many categories that are taking TRU NIAGEN and contacting us frequently and telling us about dramatic results that they've experienced. These aren't people that are necessarily worried about aging in the traditional sense. They're more worried about healing. So we understand that it's important for us to create marketing campaigns that target this demographic and this market. And we intend to roll out campaigns that features that. In fact, recently, we released a number of ads featuring Hall of Fame football player Shannon Sharpe, who contacted us because he had been taking the TRU NIAGEN for 5 or 6 months and was extremely excited about the impact on his health. I expect that you'll see more ads with him and people like him. Broader speaking, we're going to aggressively work on our earned media and overall awareness of NAD. We're putting much more resources into PR in general. It is frustrating to us at times when we know that we have developed the science behind nicotinamide riboside in NIAGEN, we have invested years and millions of dollars in developing it and building a strong patent portfolio, when a journalist who chooses not to do their work will write an article about NAD or NR and actually not even mention the company that developed it or controls the intellectual property. So we intend to put more energy into this area of earned media and PR. And also, we have -- we are seeing very, very good numbers in general in terms of retention of people who do become customers of TRU NIAGEN. Our customers do tend to be satisfied, particularly those that take it for more than a month or 2. It takes your body a long time to age. It doesn't take a day or 2 for it to un-age. With a little bit of patience, people tend to be happy. But we will continue to work on that experience and on the retention plans for our existing consumers.

(Operator Instructions) Our next question comes from Bill Dezellem of Tieton Capital Management.

I have a group of questions and, first of all, following up on your last point, Rob, about more attention to PR. It has been my impression in the past that you have been a little bit cautious to push too hard on the PR front for fear that you could see a big influx of business that you were not ready for. If you were to see that big influx, are you now ready for it and so, therefore, you're going to be less shy?

I think there is some truth to what you're saying. I think we wanted to make sure that we have the platform and the infrastructure in place, online, customer service, internal management, responding to questions. Yes, I feel that this company is ready to scale.

And then one of the things that I had presumed was that your sales, marketing and advertising expense would increase in 2019 but not at the rate of sales growth, so you would have some leverage off of that. And yet you're talking about holding those dollars flat or even down in '19. Would you please discuss how -- I guess how you're doing that and still being able to grow sales in '19?

Yes. Again, I think there's opportunities with regard to our reorder rates as well as you doing broader marketing. We've talked about PR platforms, earned media as well as other platforms to basically market on. And I think we're going to see efficiencies from that. We're going to get more from what we spent this year as well as we're going to be able to, as a percentage of sales, to be much more efficient based upon those platforms as well as getting all the metrics with regard to our e-commerce business to continue to trend in the right direction.

And then lastly, the past 2 March quarters, you have had lower sales. Do I understand correctly that you are expecting sequential sales growth in Q1 of '19 from the fourth quarter of this year?

Yes, we should see sequentially -- continued growth in the quarter. So I think if you look at our growth over the last couple of years, that we've actually -- every quarter, we've been growing since the beginning of 2017 second quarter. So we've been sequentially growing for quite a while now.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Brianna Gerber for closing remarks.

Thank you, Sonya, and thank you all for joining us today. There will be a replay of this call available beginning at 7:30 p.m. Eastern Time tonight. The numbers to call for the replay is (855) 859-2056, and the passcode is 5675308. Thanks again.

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