Title

Presentation

Operator: Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation’s Fourth Quarter 2022 Earnings Conference Call. My name is Julian, and I will be your conference operator today. At this time all participants are in a listen-only mode. And as a reminder, this conference call is being recorded. This afternoon, ChromaDex issued a news release announcing the company’s financial results for the fourth quarter of 2022. 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 call over to Tom Shumaker, LifeSci Advisors, Agency IR Counsel for ChromaDex. Please go ahead Mr. Shumaker.

Tom Shumaker: Thank you. Good afternoon and welcome to ChromaDex Corporation’s fourth quarter 2022 results investor call. With us today are ChromaDex’s Chief Executive Officer, Rob Fried; Chief Financial Officer, Brianna Gerber; and Senior Vice President of Scientific and Regulatory Affairs, Dr. Andrew Shao, who will join the call for Q&A. Today’s conference 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; business development opportunities; future financial results; cash needs; operating performance; investor interest; and 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, including the effect of the COVID-19 pandemic as well as inflationary and adverse economic conditions on our business, results of operations, financial condition and cash flows.

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 and earnings press release, which were issued this afternoon and are 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 my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Rob?

Rob Fried: Thank you, Tom. Good afternoon everyone, and thank you very much for joining us on our investor call today. It’s good to be with you again. I’m pleased to report that we delivered our best ever quarterly revenue in the fourth quarter of 2022, $21 million, up 18% year-over-year and 23% sequentially. Furthermore, as promised, we achieved positive adjusted EBITDA, defined as EBITDA without share-based compensation and severance, of approximately $400,000 for the quarter. We believe it is important for enterprises to prioritize profitability as well as growth at all times, but given today’s challenging macroeconomic environment, frugality is particularly important. We have a trusted quality brand in Tru Niagen and a portfolio of protected NAD precursors, especially Niagen that can endure turbulent times.

The Tru Niagen brand is based on strong science and in truth. It is the safest, most researched, indeed the best product in the fast growing NAD marketplace. On our last earnings call, we briefed the market on major events that occurred in the fourth quarter reporting period, including the signing of an amended long-term supply agreement with Nestle Health Science, which expanded their rights to sell Niagen in multi-ingredient formulations and included a $2 million upfront purchase. We also formed a ChromaDex Asia joint venture, our operating entity in China that is working with Sinopharm Xingsha that broadened the Tru Niagen’s penetration in the region. Alongside these two major events, Nestle and our existing strategic investors collectively invested $7.7 million net of fees into ChromaDex and we are very grateful for this vote of confidence.

We ended the year with over $20 million in cash and no debt. Brianna will provide detailed financials shortly, but in the second half of the year, which coincided with her promotion to CFO, we have dramatically improved our management of operating expenses and this discipline will continue in 2023. Fourth quarter selling and marketing as a percent of net sales was down to approximately 30% as compared to approximately 49% in the year ago period. Legal expense was significantly lower, a trend that was evident throughout the year as well. As we’ve said, the litigation is largely behind us and we continue to build upon and protect our extensive long-term intellectual property portfolio, which was noted in my letter to shareholders last month. G&A in the fourth quarter was also down approximately $500,000 year-over-year.

In that shareholder letter, I cited a series of new critical patents that we were able to obtain last year, which in combination with existing IP and patents from W.R. Grace, who supplies NR to ChromaDex exclusively. We expect to protect NR for at least the next 10 years. Two of ChromaDex’ recently granted patents protect methods of making NR and various salt forms. Third recently granted patent covers a crystal form of NR methanolate chloride, NRMCl, while a previously granted patent in 2018, covers a crystal form of NR triacetate chloride, NRT. NRMCl and NRT are important intermediates in the production of the final ingredient NR Chloride. Despite these important financial and strategic improvements, our primary objective has not changed to keep building and growing our trusted global brand, Tru Niagen.

We do got some challenges in the fourth quarter. There was a decline in our direct website sales in part due to scaling back our acquisition spend. We are addressing this by revamping our website design and functionality and by optimizing our customer acquisition strategy. We were also impacted by an inaccurate press release from a university attempting to associate NR with cancer. This research article is in the top 5% of articles of its kind due to the media coverage resulting from the misleading and sensationalist university press release. This according to an Altmetric rating that measures attention for published studies, but I am quite proud of how the ChromaDex team responded to this misleading piece of PR. The ChromaDex employees and the Scientific Advisory Board responded quickly by emphasizing the large body of scientific research that shows no such correlation.

We also appreciated the widespread support from the research community, including one of the study’s very own authors, who publicly denounced the university’s coverage of this study as clickbait. In fact, the majority of the data shows that NR may be cancer preventative. Numerous published studies of NR at high dose levels have also shown it to be safe, along with studies on the safety of vitamin D3 in general over the past 70 years. An important Tru Niagen’s sales highlight was Watson’s where revenues in the fourth quarter were up over 50% year-over-year, and we are quite optimistic, but we’ll see more consistent sales from Watson’s now that China has ended its zero COVID policy. Brianna will provide a full year 2023 revenue growth outlook that is appropriately conservative in the challenging macro environment.

However, as I look at the landscape of upside potential, there is a realistic possibility that we could see significantly greater growth this year. Innovations that we have worked on for years are close to commercialization and we could see additional upside from new partners, new channels and new products, and we have several additional opportunities for growth. First, we have planned a significant brand awareness event scheduled for this month. This event might have an impact on EBITDA in this first quarter, but we expect that to pay off significantly during the year. We also believe that the FDA’s recent decision to ban the marketing and sale of NMN will benefit Tru Niagen. With the FDA’s decision, NMN cannot legally be sold or marketed as a dietary supplement in the U.S. since it was first investigated as a drug.

Niagen is superior to NMN as an NAD precursor, but NMN has recently gained traction, although no primary dietary supplement companies of which we are aware are selling NMN in the U.S. There are a large number of smaller players. But according to a study conducted by ChromaDex and republished by ConsumerLab.com, less than 40% of NMN sold on Amazon was accurately labeled and many NMN products had no NMN at all. Just to be clear, this FDA decision to ban NMN does not apply to our proprietary ingredient, nicotinamide riboside, or NR, patented Niagen. Speaking of the science behind Niagen, our cumulative body of research is truly remarkable. When I joined the company as an executive nearly six years ago, there was impressive preclinical data, but until you have the results of clinical studies, it is hard to assess the value of an ingredient like Niagen.

Results of now 24 peer-reviewed published clinical studies have exceeded our expectations and proving that this is indeed a special ingredient. Speaking of SERP, it’s subjected as not a link to support health benefit claims for our consumer product, but more broadly, it is to advance our understanding of this ingredient with potential applications beyond the supplement industry. As an example, we understand mechanistically that NR reduces systemic inflammation, it penetrates the blood-brain barrier and reduces inflammation in the cerebral spinal fluid. And as such, we are excited but not surprised when we see positive results of NR supplementation for patients with important neurological disorders. Recently, a clinical study published in the peer-reviewed journal Aging Cell found that NR oral supplementation significantly increased NAD+ levels in the brain and positively impacted neurodegenerative biomarkers.

Studies like this as well as the more than 40 ongoing studies that largely focus on disease states highlight the value of the deep intellectual property portfolio and scientific expertise at ChromaDex, which is largely untapped today. I do not know of another dietary supplement company that has an innovation pipeline of next-generation NAD precursors that may have significant therapeutic or prophylactic value in the pharmaceutical arena, as does ChromaDex. I would now like to turn the call over to Brianna to discuss the quarter’s results in more detail and then onto Q&A and closing remarks. Thank you for your attention. Brianna it’s all yours.

Brianna Gerber: Thank you, Rob. It’s a pleasure to speak to our investors, partners and employees, who have joined us today. ChromaDex delivered on our latest full year 2022 financial outlook to investors across all metrics, and we exceeded our targeted reduction in G&A expense. For the full year we delivered total net sales of $72 million, a 7% year-over-year increase, including 8% growth in E-commerce. Gross margins of 59.4% reflecting the strength of our business model as we navigated significant inflationary pressures across global supply chains. Selling and marketing expense down approximately 270 basis points as a percentage of net sales. An increase in R&D expense of $1 million. And a decrease in general and administrative expense of $8.1 million year-over-year better than our outlook of a $6 million to $8 million decline.

The underlying business as measured by adjusted EBITDA, a non-GAAP metric, posted a full year loss of $10 million compared to a loss of $18.9 million for full year 2021. We have provided a reconciliation to the appropriate GAAP measure in our earnings release slide. Going forward, we have decided to discontinue providing adjusted EBITDA, excluding total legal expense as we believe adjusted EBITDA is the more suitable metric to assess our current underlying performance. To underscore this, we delivered positive adjusted EBITDA of $0.4 million in the fourth quarter, a significant milestone for the company. Balanced growth remains an important objective, and our results stand as a testament to our amazing ChromaDex team who have committed to looking at our business differently.

Moving forward, we have initiatives underway to continue to optimize the business, which will have a larger lasting impact in 2024 and beyond. With that, let’s turn to the fourth quarter of 2022 financials. ChromaDex delivered a solid quarter with total net sales of $21 million up 18% year-over-year, the gross margin of 57.2% and selling a marketing expense of 29.5% of net sales, a significant improvement from 48.7% of net sales in the prior year quarter. The underlying business as measured by adjusted EBITDA, a non-GAAP metrics, posted a profit of $0.4 million in the fourth quarter, an improvement of $3.8 million from the prior year quarter. Moving to the P&L details, as I said, total net sales were up 18% year-over-year compared to the fourth quarter of 2021, with 14% growth in Tru Niagen including flat sales in E-commerce, and 67% growth in combined Watsons and other B2B sales.

Watsons’ sales were driven by timing due to a catch up in shipment from earlier quarters. They have also seen recent improvement in sell through as COVID-19 restrictions have been listed in Hong Kong as well as China, encouraging the return of some tourism. As I mentioned last quarter, China cross-border sales that were previously captured in E-commerce are now captured in Tru Niagen other B2B sales due to our wholesale agreement with Sinopharm versus direct sales model on these platforms previously. Niagen ingredient net sales were up 53% year-over-year, largely due to an upfront minimum purchase of $2 million from Nestlé Health Science, as part of the newly amended supply agreement. Gross margins declined by 400 basis points to 57.2% compared to 61.2% in the fourth quarter of 2021.

The decline in gross margin percentage is attributable to increases in supply chain headcounts, including higher wages and other inflationary pressures across the supply chain, as well as business mix, which was more pronounced in the fourth quarter. In 2023, we anticipate trending closer to the full year 2022 gross margin as business mix normalizes, but we are still contending with inflationary pressures that impact our P&L with a lag. Selling and marketing expense as a percentage of net sales declined 1,920 basis points to 29.5% compared to 48.7% in the fourth quarter of 2021, as we pivoted to spend on distribution channels and marketing campaigns with the highest short term return on investment and a strong focus on conversion beginning in the third quarter of 2022.

In the fourth quarter, our customer acquisition costs or CPA declined by 40% year-over-year. As reported, general and administrative expense decreased by $0.5 million, primarily due to lower legal expense of $0.4 million. Finally, our operating loss improved by $3.9 million year-over-year as higher sales and initiatives to optimize our spending across the organization were partially offset by lower growth margin and investments in R&D. Moving to the balance sheet and cash flow, our balance sheet remained strong. We ended the quarter with $20.4 million in cash. In October, we raised $7.7 million net of offering costs, with a new investor, Nestlé Health Science, and existing strategic investors in two separate transactions. We did not access our committed line of credit.

In the fourth quarter of 2022 our net cash used in operations was only $0.3 million versus a $4.9 million use of cash in the fourth quarter of 2021. The difference this quarter was primarily driven by a lower net loss, a decrease in inventory, and increase in accounts payable due to timing of payments to our vendors, partially offset by an increase in accounts receivable due to timing of orders and collections from our B2B customers, including the $2 million upfront minimum purchase from Nestlé and higher purchases from Watsons. We collected cash from these customers in the first quarter of 2023. We’ve provided details on key P&L metrics for our 2023 full year outlook in our earnings press release along with the slide presentation. As it relates to full year 2023 net sales, we expect at least 10% growth year-over-year with a realistic possibility of significantly greater growth.

In light of the uncertain macroeconomic environment we are taking a conservative approach and only considering recurring steady revenue growth from our E-commerce business and established partnerships. As Rob said, we see potential upside from new partnerships, channels, and products in the pipeline. We anticipate that our gross margin will remain stable year-over-year as cost savings initiatives on over all scale are expected to largely offset inflationary pressures. Further, we expect that selling and marketing expense will continue to decline as a percentage of net sales on a full year basis as we pursue new focused customer acquisition strategies and further optimization. Deep quarterly volatility driven by the timing of targeted brand awareness campaigns like the one Rob mentioned in the first quarter.

We expect that R&D will be up year-over-year as we invest in new NAD precursor development related to our recently granted patents, as well as other innovation to drive future growth. Finally, we expect that reported G&A will be down $2 million to $3 million, driven by a reduction in severance and restructuring expense, lower share-based compensation driven by a reduction in executive headcount and a reduction in other general expenses as we optimize all areas of our cost structure. We recognize that disciplined expense management is only half of the equation to achieve sustainable profitability, the other half is growth. We are confident in a stable level of growth based on our existing business infrastructure, but we plan to make measured investments in growth this year.

As Rob mentioned, we have one such brand building investment this month. The full expense for this event will be recognized in the current quarter with sales upside that is realized over the next few quarters. Overall, we expect to be close to adjusted EBITDA break-even or better each quarter in 2023, with the exception of the first quarter due to this brand building investment. In summary, we’ve made meaningful progress in the last six months. We delivered on our immediate business and financial objectives, and positioned the company for success in 2023. We are planning conservatively, but have many reasons to be optimistic based on initiatives and partnerships already in the pipeline. I’m incredibly proud of the ChromaDex team for their efforts to bring Tru Niagena to market to date, and I’m encouraged by our renewed focus on operational efficiency as we pursue growth.

Rob and I look forward to leading the company through the transition to a leaner and more focused organization that is positioned for continued innovation-driven growth and profitability. Operator, we are now ready to take questions.

Operator: Thank you. Our first question comes from Mitch Pinheiro from Sturdivant. Please go ahead. Your line is open.

Mitch Pinheiro: Hey good afternoon.

Andrew Shao: Hi, Mitch.

Mitch Pinheiro: Hey, so I just want to your e-commerce business was flat year-over-year, and I just, you talked about it in your remarks, Rob and I was just curious if you could dive a little deeper into what was going on in e-commerce in the fourth quarter, and how it’s looked so far in the beginning of this year?

Rob Fried: Well, first we were affected by that cancer press release, so we did notice an impact in conversions and in subscribers, but it seems to have recovered, it only lasted about six weeks. But I would say that overall there for the €“ at least the website business during the last year, maybe year and a half, there’s been an inefficiency in our conversion rate and in our marketing spend. So, we’ve pulled back. We’re seeing a much greater efficiency now, but we’re not really hitting the gas pedal yet until we see a meaningful and stable improvement on return on ad spend, like we’ve seen in other parts of the business. We don’t €“ it’s definitely not an indication of demand. It’s just basic blocking and tackling. And yes, it looks a little better already.

Mitch Pinheiro: And so it just on the conversion side, what led to the inefficient conversions? What type of things either weren’t happening for you? Or is it just marketing messages were off?

Rob Fried: Nope, I don’t think it was about marketing messaging. I think we made the decision to outsource some of the basic functionality in that business and the enterprise to whom we had outsourced didn’t have sufficient resources to do it. So the basic blocking and tackling of running an efficient basic e-commerce site dipped. There’s landing pages, there’s creative, there’s AB testing, there’s optimization, there’s retention, there’s the process that we’ve generally been pretty good at, but we have not been very good at for the last, I would say year, maybe year and a half, although we’ve made some changes and I see improvements already, and my expectation is that we’ll see dramatic improvements this year.

Mitch Pinheiro: Okay. And then sort of just a follow-up just the with 10% revenue growth as the sort of the bottom end of the range, are you €“ and I did hear your comments regarding your adjusted EBITDA being positive in the, I guess the final three quarters. Are you going to be able €“ at a 10% revenue level, can you get to adjusted EBITDA breakeven or better for the full year? Or do you need a little bit of help from the potential upside?

Rob Fried: The answer to that is it depends on certain costs that are unknown right now for example. We have prepared for litigation costs for during this year that may be unnecessary, are likely to be unnecessary, and in the event that we do not invest in those litigation costs or royalty expenditures on certain patents, then yes, we get to EBITDA positive even at a 10% growth rate. There are other potential savings that we could see that would get us there, but you’re probably right. If we fully load all the costs, we probably have to do a little bit better than 10%.

Mitch Pinheiro: All right. Well thanks for the questions. I’ll get back in the queue.

Andrew Shao: Sure.

Operator: Our next question comes from Jeff Van Sinderen from B. Riley. Please call ahead. Your line is open.

Jeff Van Sinderen: Hi everyone. So Rob, I’m wondering if you can speak a little bit more about the new patents who’ve been awarded, the significance of those, and how that IP can be incorporated into your products? Maybe give us a sense of the new product pipeline and timeframe.

Rob Fried: The new patents, which were awarded approximately a year ago, they’re actually, some of them are extensions of existing patents, are really exciting for us, because it’s a combination of processed patents as well as composition of matter patents. And in combination with those also other patents that we have and, of course, the grace patent. We don’t believe anybody can make nicotinamide riboside chloride without us. That Dartmouth patent in some sense did its job for 17 years. There’s really only three, three and a half years left on that patent. So, we properly anticipated that and we built up a very, very strong moat around nicotinamide riboside in the interim period. That’s not to say that we are necessarily going to go full blown in suing people who are infringing.

We’re going to take it one step at a time and see how it goes. But we are very, very protected. Outside of nicotinamide riboside chloride, however, there are a number of analogs, not just those intermediate analogs, but other analogs like NAR and NRH that we have been researching and working on that are also very protected from a patent standpoint at ChromaDex. And there are indications that some of these analogs could be even superior to nicotinamide riboside chloride.

Jeff Van Sinderen: Okay. And I’m sorry, as far as those new things like NARH, are those in test mode at this point? Or when can we think about those being productized? Kind of perhaps starting to generate some revenue?

Rob Fried: We hope that another analog will generate revenue at ChromaDex within a year.

Jeff Van Sinderen: Okay.

Rob Fried: The process is fairly complicated though, Jeff, because ChromaDex does not cut corners. As frustrating as that may be to some investors, we do it the right way, if needed, we will get an NDI. There is another company that infringed on the Dartmouth patent that’s releasing a version of nicotinamide riboside. This company applied for an NDI or was rejected by the FDA for the NDI. So they are selling an illegal product on the marketplace right now. To our knowledge, they haven’t disclosed that. I guess they’re assuming that the FDA may not enforce it. That’s not something ChromaDex would do. We get the proper regulatory approvals. We apply for the patents. We manufacture it in a very, very safe approved way. What we release in the market is first rate, first quality, and safe.

We advertise it in a way that’s consistent with the research that’s done. We know that that’s inconsistent in the dietary supplement space. We know that it’s more time, it takes more time and it takes more expense, but it’s the way we do it. There’s a real foundation here. So in the case of these other analogs, in the event that we decide to commercialize them as a food or a dietary supplement, remember there is always the chance that we would develop them as a pharmaceutical product, but in the event that we commercialize it as a food or a dietary supplement, we are going through the proper toxicology processes, the proper regulatory processes, the proper scalable manufacturing processes before we release it as a product. But it is my hope that we will see another analog in the market within a year.

Jeff Van Sinderen: Okay, good to hear. And then if we can switch gears a little bit, just wanted to I guess get your thoughts on what you’re anticipating with Nestlé, Sinopharm, Watson, sounds like Watson is starting to turn around for 2023. What’s baked into your guidance from those for revenues greater than 10% growth, and then maybe what catalyst could potentially drive revenue to exceed that 10% level or substantially exceed, I think is how you put it?

Rob Fried: The 10% guidance is extremely conservative. We bake into its zero revenue from Nestlé, zero additional revenue this year from Nestlé. We are extremely conservative with Sino, and the Watson’s projections are just what’s contractual. Indeed, all of the assumptions around 10% are based on existing partners, based on the contracts that we have in conservative projections on our DTC business. That’s why we think there’s a very realistic chance that we will exceed 10%.

Jeff Van Sinderen: Okay. And then just to follow-up on the e-com business, your direct DTC business, are you €“ at this point, does that business turn positive? Would you anticipate that to be positive in first quarter? Or how are you thinking about that one?

Rob Fried: What do you mean by positive?

Jeff Van Sinderen: I mean up year-over-year.

Rob Fried: Oh, revenue overall, yes.

Jeff Van Sinderen: Yes, revenue.

Rob Fried: Yes, of course, we expect the DTC business to be quite a bit positive in the first quarter. Just remember the DTC business has several components of it, one of which is Amazon, another, which is Shopify. There are other international components to it. The one where there’s a great opportunity is our €“ what we call Shopify. It’s basically our domestic website that may not grow quarter-to-quarter, but we expect it to grow in the coming quarters.

Jeff Van Sinderen: Okay. So I’m sorry, so just to clarify the €“ for your own website, I guess you’re calling the Shopify website that business you’re saying may, right, that business might not grow in the first quarter, but you anticipated that…

Rob Fried: No, its 100% will grow. 100% will grow, it might not grow in the first quarter though.

Jeff Van Sinderen: Okay. Okay, fair enough. All right, very good. Thanks for taking my questions. I’ll jump back in the queue.

Andrew Shao: Anytime.

Operator: Our next question comes from Ram Selvaraju from H.C. Wainwright. Please go ahead. Your line is open.

Ram Selvaraju: Can you hear me?

Andrew Shao: Yes. Hi Ram.

Ram Selvaraju: Hi guys. So if you could just sort of give us a bit more granularity on the changes in customer acquisition strategy that you’re looking to make and which ones do you expect to be the most impactful and why? And then the follow up I have is specifically with respect to the decision making process around choosing a pharmaceutical development path versus a supplement or a food path; and if we should expect such a selection process to conclude over the course of 2023. So if indeed you’re going to potentially go after an Rx product development approach, with anything you perhaps even with one of these newer analogs. If you’re going to reach conclusion of that decision making process and disclosure of the target indication in question before the end of 2022? Thanks.

Rob Fried: So I’m going to answer in order that you asked. First of all, I’ll answer the customer acquisition question and then I’ll answer the pharmaceutical question. The way we approach customer acquisition is largely based on the science. So as studies come out, we begin to understand better and better how nicotinamide, riboside impacts consumers. Initially it was all preclinical studies. Now you’re seeing a whole state of clinical studies and we understand fairly well now that it has a very serious and positive impact on a whole host of indications and structure function. You see liver, you see brain, you see cellular energy there’s quite a few; they all ladder up to aging if you will. We break that down into individual cohort groups and then we target those cohort groups through customer acquisitions.

So you create creative materials that attack €“ that appeal to cohort groups that are interested in for example, cognition. And then you create a series of ads that appeal to them and you target them and then you create a click path process for optimizing that sale, and we do it fairly well on several platforms and we used to do it better. On our fundamental website, and we will in the coming weeks get back to that again. But over the last year or so, we’ve adopted a strategy that is not optimized and so that is our process. Once you do that process, it’s then just a sense of consistent measurement. Which ones are converting? Do we have to make minor changes to optimize them? Are any of them falling off? If so, do they? And the ones that are converting with a reasonable return on ad spend that’s paying off, then you hit the gas pedal hard and you spend more in those cohort groups.

And those are the basic fundamental economics of running an e-commerce business. And we’ve done it fairly well, but we’ve done it less well of late. So it’s an opportunity for us to improve it. And my expectation is maybe not in the first quarter, but shortly thereafter we’re going to start seeing real growth. We did not bake that growth into our projections, however. It’s another reason why we are conservative with our projections, at least on the website. That’s the acquisition strategy. The retention strategy, once you have them as a customer or as a subscriber, has to do with two things. One is regular communications, and the other is we find that people that take a sufficient amount of Tru Niagen that’s generally more than 100 milligrams, 300-plus and who take it for more than a couple of months rarely cancel.

Because if they pay attention to the way the body is performing, they realize it’s a meaningful difference. We also notice that people who take it for a period of time and stop notice the difference once they stop and then come back as customers. So Tru Niagen has a very, very strong retention rate for those that take it for a couple of months and take sufficient dosage. And those are the two component pieces, acquisition and retention, and that’s how we approach it. We have found that aging works as a cohort group. Cellular energy works as a grow cohort group and a growing cohort group for us is cognition. So if you have no follow up questions, okay, great. So let me jump to the second question, which is pharmaceutical. So you in particular have been very helpful for us in thinking that our pharmaceutical strategy, because you consistently ask good and smart questions about that.

Obviously you know a lot about the space. When we release a product in the pharmaceutical space, and we don’t think it’s an, if we think it’s when, we think it is part of our strategy at the company. It’s important that it not be identical to the product that we’re selling as a dietary supplement, not just in dose, but also in composition and molecular structure. So this is why some of the other analogs that we have are so valuable and why you and others know this company is really two companies. It is a consumer company, but it is also a fairly significant R&D company for which the investment community has not yet embraced. But there is some ample R&D going on here for some very important indications as you’ve seen in the studies. It’s not just Parkinson’s, it’s not just Alzheimer’s there’s many others.

Neurological, mitochondrial, inflammation is also a disease, there’s quite a few put and there is all these orphan diseases like Cockayne syndrome, which represent opportunities for us. But that process takes a while and we’ve done quite good work in preclinical and Phase 1 and now in many cases Phase 2 studies, which one we will propose, which pursue. Now of course the company’s not really fully financed or structured as a straight biotech R&D company, so the likelihood is that we will be working with a partner and we do have frequent meetings with many biotech and pharmaceutical companies about this topic. And a lot has to do with what their interest is. I do expect us to do something in 2023 in the space structurally in terms of pursuing pharmaceutical strategy.

It is likely to be one of the other analogs.

Ram Selvaraju: Thank you very much.

Andrew Shao: Thank you.

Operator: Our next question comes from Jeff Cohen from Ladenburg Thalmann. Please go ahead. Your line is open.

Destiny Hance: Hey, thank you. This is actually Destiny on for Jeff. I hope everyone is doing well. Most of my questions have actually been answered, which is great. I am curious to know a bit more about this branding initiative or event that you mentioned. Could you give us a few more details on that please?

Rob Fried: Hi, Destiny. If you recall a year ago we endeavored to pursue a television campaign for about six weeks. And we created a television spot, which we tested and launched and it actually did quite well. The reason why we pulled back from that campaign is, it’s a number of reasons. One of which is we all know what’s happened in the economy in the last year and what’s happened in the capital markets and the importance of being cash flow positive and focusing on the bottom line as well as the top line. And it was doing well, but not well enough to pay for itself. So we €“ it’s not that we are not going to pursue that strategy. We decided to pull back from what is a very expensive and aggressive strategy, mass retail plus television at the right time we will get back into it, but it’s not now.

But we understand that what we’re sitting on with Tru Niagen at 20% growth annually, 10%, 20%, 30% growth is pretty good, but not good enough. A company that’s doing $20 million a year with a product like this should be doing $200 million a year €“ a quarter. It’s too good a product. It has too good an impact on people’s health. So we do need to take some shots and yes, we’re conservative, but we need to take our shots carefully and we are going to take another shot in the coming weeks and if that works, we’re going to hit the gas pedal again on that. And we have other shots that we’re planning later on in the year. We recognize the upside potential. We just want to do it smartly and carefully. There’s not much more that we can tell you about that specific opportunity right now.

The reason for that is, look, we’ve learned a lot about this dietary supplement business and those of you that have been with us for the last few years have also seen there are a lot of different players out there, very few of whom actually do science or research, but a lot of whom like to steal other people’s research or steal credit for it or infringe on patents. There are a lot of strategies out there and we find that we are imitated quite a bit and when we try something, we find that quickly thereafter, a lot of people are following us either in message or in platform or in channel in some cases very aggressively. So we think it’s important that we be in stealth mode until the campaign launches in the coming weeks, and that’s the only reason.

But you’ll see it and we have high hopes for it, but we’re not counting on it. We have nothing in the projections for it. We have very conservative projections for it, but we’ll see. We think it has a good risk reward profile. I can’t really tell you much more than that right now.

Destiny Hance: Okay, no problem. I’m excited to see it when it launches, so that’ll be great. I’ll keep an eye out for it in the next couple of weeks. I just want to switch over to Watsons for a second. I’ve heard you, mention it in a couple of other people’s questions or answers to their questions. Has the strategy there changed at all in terms of commercial efforts? Or are things staying pretty consistent? Like now that you €“ some of the restrictions have been lifted, is there more of a marketing push? Is there anything like that, that we should be thinking about going into 2023?

Rob Fried: The tactics are the same. It’s a, they promote it aggressively in store and they do some marketing out of store. The only €“ and the market is very, it’s very popular. There continues to be very popular there. The only strategic shift is that there is interest in Watsons in expanding the product offering from the Tru Niagen brand. So there is the possibility that we’ll see more than just Tru Niagen and sold in store in Hong Kong.

Destiny Hance: Got it. Okay, very interesting. Thank you so much for taking my question.

Rob Fried: Sure.

Operator: Our next question comes from Sean McGowan from Roth MKM. Please go ahead. Your line is open.

Sean McGowan: Thank you. Can you talk a little bit more about the impact of the mix shift that you referenced? Is that due to the strength in Watsons? Is that what’s causing that?

Brianna Gerber: Gross margin, Sean, gross margin and business mix?

Sean McGowan: Yes.

Rob Fried: Thanks, Brianna. Yes, look that is the reason.

Sean McGowan: Okay. And now in €“ when you talked about R&D spend being up, are you talking about it being up as a percentage sales or in dollar or both?

Brianna Gerber: $1000, Sean.

Sean McGowan: Okay. And the brand awareness is all of that, this event that you’ve referenced, and I appreciate you not wanting to give the detail, but is all of that expense going to be shown in sales and marketing?

Rob Fried: Yes.

Sean McGowan: Okay. And I have a question about other brand awareness stuff, but I appreciate you wanting to keep that close to the vest. That’s it. Thanks a lot. Appreciate it.

Rob Fried: Thank you, Sean.

Brianna Gerber: Thank you, Sean.

Operator: Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead. Your line is open.

Bill Dezellem: Thank you. I appreciate it. Would you please give us a more detailed update relative to Sinopharm and where they are at in their cross border strategy and the other strategy initiatives that they have?

Rob Fried: Sinopharm is very methodical. We’re very impressed with the quality of their work and the thoroughness of their work. We’re not that impressed with the speed of their work. They’ve launched on two platforms. I think they’ve plan to launch on two more platforms. They’ve been now at two conferences, presented at two conferences. There was one last week. I can’t really, there’s really not that much more to say about it. The market is fairly large there, and NMN sales in China are still very significant cross-border. Sinopharm is also assisting us in obtaining Blue Hat approval, so we can do in-country sales. But, it’s a conservative estimate that we’re giving them this year. We like them as partners. They’re trusted partners, they’re quality partners, but they’re very methodical in their pursuits.

Bill Dezellem: Rob, would you please highlight what’s happening with NMN in China? I had the impression that the authorities there, were pushing back on some of the marketing practices for NMN. And I’m wondering what, if any window of opportunity is that creating for Sino?

Rob Fried: It’s not just Sino that’s selling, by the way, cross-border into China. H&H is a deal we made that is also selling cross-border in China. And H&H is actually doing quite well with Niagen into China. It’s actually doing better than Sino already. Watsons is also begun selling a little bit of cross-border into China of Tru Niagen. So, we’re seeing overall growth NMN in general? Yes. The most of, there are literally hundreds of sellers in China selling cross-border into China. And the government has cracked down on claims. Initially, they were making a lot of claims that were basically Tru Niagen claims, including, companies advertising that Li Ka-shing was taking NMN, which is obviously not true. He takes Tru Niagen and they have pulled back.

However, the thing to understand is that NMN works. NMN is a precursor to NAD. It’s just very inferior to Niagen. In fact, NMN is Niagen plus a phosphate group attached to the perimeter. So some companies, in order to make NMN, they start with NR or Niagen, and they literally add the phosphate on top of it. The problem with that phosphate is that it blocks transport into the cell. So once it’s in the blood, once you consume NMN and its circulating through the body, it doesn’t have a way to enter cell. So within the body, the phosphate is pulled apart, and what is left is Niagen is nicotinamide riboside, which then gets upregulated into the cell and elevates NAD. So it’s basically inefficient NR, but it does work. We believe that it works. We don’t know, if it’s as safe as NR, there’s some questions about that, but we do believe that it works.

So it just doesn’t work as well. So for that reason, with the passage of time, you are going to see studies come out that show that NMN has a positive benefit. It’s never going to have as positive a benefit is Tru Niagen, but it will have a positive benefit. So yes, there were some problems with claims in marketing in China, but we don’t expect that to be a long-term problem as NMN studies come out. Now NMN is now banned in the United States, and so it’s not an issue for us here, but it is an issue there in China that the market, look the market is already a very big market. The overall NAD market, I expect it to be tens if not even hundreds of billions of dollars in the future. At this point, there’s so much research out there, but if you’re on this call right now and you’re not taking Tru Niagen or you don’t understand the benefits of elevating NAD, when your body is under any kind of physiological stress, you’re not thinking properly, because we now understand that elevating your NAD levels by taking Tru Niagen make you healthier.

So, I expect that NMN is going to be around in China for the long-term. The question is what percentage of the market does it have, right now we have a very small percentage, but a growing percentage of the market there between those three partners. We’re hoping that soon Sino really gets aggressive and starts capturing a big chunk of the market. When they do the upside potential is significant. But as I said, Sino works fairly slowly. They take it one step at a time, and we are planning for very, very low growth in 2023 and hopefully big growth in 2024. I hope that answers your question.

Bill Dezellem: It does. Thank you for the perspective, Rob.

Rob Fried: Sure.

Operator: We have no further questions in queue. I would like to turn the call back over to Brianna Gerber for closing remarks.

Brianna Gerber: Thank you, Julianne. There will be a replay of this call beginning at 4:30 P.M Pacific time today. The replay number is 1-800-770-2030, and the conference ID is 4126168. Thank you everyone for joining us today and for your continued support of ChromaDex.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.