ChromaDex Corporation's (CDXC) CEO Rob Fried on Q1 2020 Results - Earnings Call Transcript

May 11, 2020 9:40 PM ETChromaDex Corporation (CDXC)
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ChromaDex Corporation (NASDAQ:CDXC) Q1 2020 Results Earnings Conference Call May 11, 2020 4:30 PM ET

Company Participants

Brianna Gerber - VP, FP&A and IR

Frank Jaksch - Founder and Executive Chairman

Rob Fried - CEO

Kevin Farr - CFO

Conference Call Participants

Jeff Van Sinderen - B. Riley

Mitchell Pinheiro - Sturdivant

Jeffrey Cohen - Ladenburg Thalmann


Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's First Quarter 2020 Earnings Conference Call. My name is Julia and I’ll be the conference operator today. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded.

This afternoon, ChromaDex issued a news release announcing the Company’s financial results for the first quarter 2020. If you have not reviewed this information, both are available within the Investor Relations sections of ChromaDex’s website at

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

Brianna Gerber

Thank you. Good afternoon, and welcome to ChromaDex Corporation's first quarter 2020 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, future financial results, business development opportunities, future cash needs, ChromaDex's operating performance in the future, and future investor interest 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 risks factors include those contained in ChromaDex's quarterly reports on 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 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, present reconciliations to the appropriate GAAP measures.

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

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

Rob Fried

Thank you, Brianna. Good afternoon, everyone, and thank you for joining our first quarter 2020 investor call. I hope everyone listening is navigating well these troubling times. ChromaDex had another strong quarter with total net sales of $14.3 million. Overall sales increased 10% sequentially and 43% year-over-year. Tru Niagen net sales were $11.1 million, a 10% increase sequentially and a 50% increase year-over-year. Sales of Watsons were down slightly compared to the prior quarter due to the impact of the coronavirus and the protests on retail traffic in Hong Kong stores.

Importantly, our efforts in reducing costs continued to show positive results as adjusted EBITDA excluding total legal costs was a net loss of $316,000. ChromaDex reacted swiftly when the coronavirus hit. We already understood that there is an impact on NAD when viruses are present. We immediately initiated preclinical research in the area in the first quarter led by our chief scientific advisor Dr. Charles Brenner.

And as you may have noticed, after Brenner published promising results in the initial preclinical study last month, further research is required and further research is underway. Additionally, we adjusted our marketing messaging in the first quarter to include the impact that lifestyle viral and age-related stressors have on our NAD levels and our cellular health. This in addition to be existing messages of cellular energy, cellular repair, and aging. And finally we stepped up our ongoing efforts to streamline costs.

With regard to the overall outlook for the year it is still not clear if COVID-19 will be positive or negative for our business. We are currently expecting a reduction in our top line growth, but improvement in the bottom line results relative to the outlook presented last quarter. This includes some recent changes to our organization as well as some ongoing initiatives across our supply chain. Kevin will provide additional context when he discusses our financial outlook for the year.

Let's now get to the three pillars of our business strategy; build a global brand to own the science and to focus on the fundamentals. First, the brand. As mentioned, global Tru Niagen net sales were $11.1 million in the quarter, a 10% increase sequentially and a 50% increase year-over-year. Tru Niagen represented 78% of the $14.3 million in the quarter. International sales for Tru Niagen represented approximately 29% in the first quarter. This includes sales to Watsons in Hong Kong and Singapore, and also cross-border sales in China, Japan, Europe and sales to our partners in Australia, New Zealand, UK and Canada.

Sales to Watsons were $1.8 million in the first quarter, a slight decrease versus the previous quarter. Lower sales in the base business in the first quarter were largely offset by shipments for Tru Niagen Beauty which launched in stores in late April. Tru Niagen Beauty builds on the success of the Tru Niagen brand as an award-winning and best selling health product among Watsons Hong Kong loyalty members, as well as driver of their healthcare category.

Tru Niagen Beauty will allow us to reach new demographics seeking our science-based solutions for their beauty routines. We're pleased to extend our product portfolio with a strong partner like Watsons. At this time, there are no plans to extend Tru Niagen Beauty beyond the region.

E-commerce net sales were $8.2 million, a 4% increase sequentially and a 39% increase year-over-year. Sales from returning customers in the U.S. continued to outpace new customer sales. In addition, we have cross-border sales in the UK, Japan, Korea, Germany, France and China which grew 179% year-over-year, currently expanding distribution to include two of China's largest online retailers, Kaola and in the second quarter. These platforms will complement our existing Tmall presence in China.

We also added two European cross-border markets in the first quarter following the EFSA approval France and Germany. Additionally, we're continuing to build our brand with strong global partnerships. We shipped initial orders to the Australia, UK and Persona Nutrition in the first quarter, expanding our partnerships with Matakana, Superdrug in the UK, a division of the A.S. Watson Group and Nestlé Health Science respectively.

In late April, we announced that our UK partner is Superdrug, leading health and beauty retailer with over 800 stores in the UK and a member of the A.S. Watson Group. This represents our interest into the European market and we're proud to expand our partnership with the A.S. Watson Group.

As mentioned last quarter, the initial launch is a small test launch in 200 Superdrug stores across the UK as well as We very much applaud the efforts of Superdrug and Watson for keeping essential items such as Tru Niagen available to customers worldwide during this unprecedented time.

We've build upon our relationship with Matakana to include exclusive distribution rights in Australia in online and retail sales channels. Matakana is an established dietary supplement manufacturer and distributor with more than 90 lines of organic and super food products.

Tru Niagen complements Matakana's existing portfolio of products and their broad distribution as well as knowledge of our science-based product. This positions the brand for strong growth in Australia. We are partnering with them on a number of influencers, social media, and own media initiatives to drive awareness and sales in the market.

We are very much looking forward to Nestlé Health Science Tru Niagen products later this year which will emphasize the importance of cellular nutrition. As I previously said, the initial test launch will be in loose powder format and Nestlé plans to begin initial marketing efforts next month.

Persona Nutrition, a division of Nestlé Health Science launched Tru Niagen in the first quarter. Persona is a leader in the fast growing area of personalized nutrition and we believe it is a growth opportunity for Tru Niagen and one that also helps build the brand. Our second quarter objective is to own the science. We are confident in the science behind Niagen and are actively tracking the increasing volume of research on the molecule that is currently underway. Several new studies have been registered and published since our last update. Frank will summarize in a moment.

Recently we announced the first round of results of a combination tissue and in vitro study led by Dr. Charles Brenner our Chief Scientific Officer, and one of the world's foremost experts in NAD research, as well as Dr. Stan Perlman, one of the leading experts on coronavirus.

Dr. Brenner's preclinical studies showed two key findings; one, a COVID-19 introduction to the studied cells caused greater than three-fold reduction in NAD; and two, these infected cells specifically sort out nicotinamide riboside, Niagen I an attempt to replenish NAD levels in the face of the viral infection.

We expect additional research from Dr. Brenner to be made public soon. The next phase of his preclinical research will explore whether introducing nicotinamide riboside or Niagen may support cells innate immune response to coronaviruses and other viruses. We will publicly share the findings of this research when appropriate. We are also exploring additional preclinical research on nicotinamide riboside or Niagen and COVID-19 through our industry-leading ChromaDex External Research program.

We also continue to build upon and protect our intellectual property which includes our ongoing litigation against Elysium Health. A May 12, trial date to California litigation was postponed due to court closures in the wake of the coronavirus outbreak. We recently submitted a written joint status report and the court granted our request for a status conference in June.

In New York discovery has been extended by four months due to restrictions on taking depositions in the wake of the coronavirus and in Delaware regarding patent infringement by Elysium, it has been scheduled for trial on September 27, 2021 and is moving forward following the recent Court of Appeals decision that upheld the validity of the Dartmouth patent which is licensed by ChromaDex.

To remind everyone, Elysium could not appeal the rejection of their challenge to the 807 patent and now that Elysium lost their appeal of the PTAB decision validated the 086 patent, Elysium cannot raise those same arguments in the patent infringement lawsuit regarding any claims on the 086 patent. We remain confident in the facts of all three cases and are eager to get to trial. In the meantime, we expect lower near-term legal expense with delays attributable to the coronavirus.

Our third strategic pillar is to focus on fundamentals. It is our mission to lead by example in this industry. During a time when the world is looking for new solutions to maintain their health we strongly encourage consumers to choose trusted brands, supported by published scientific data, with regulatory approvals. We continue our basic philosophy of science-based marketing and conservative financial management. We recently announced a $5 million capital raise to provide some further strength to the already strong balance sheet.

In summary, in the wake of the coronavirus, we are successfully driving the business forward. We are leading important research in the field, delivering on incremental growth opportunities and adjusting our cost structure and maintaining a strong balance. I believe ChromaDex will be even stronger once this global macroeconomic crisis is behind us.

And now I will pass the call over to our Chairman, Frank Jaksch for an update on scientific research. Frank?

Frank Jaksch

Thank you, Rob. As Rob stated, one of our core objectives is to own the science. We are committed to remaining a global scientific authority on NR and NAD research as well as setting the standard for excellence in the industry with our commitment to science, safety, and quality.

Since our last call, publication of research on NR and NAD has continued to accelerate with the publication of the ninth human trial in multiple preclinical studies. As Rob mentioned earlier, Dr. Brenner and scientists from the University of Iowa, Oregon Health and Science University, and the University of Kansas recently published preliminary preclinical research on the potential impact coronavirus has on NAD levels in cell, animal and human tissue. The findings were published on BioRxiv, a preprint server. The research has characterized the key steps in what happens in a coronavirus infected cell and the impact it has on innate immunity.

Before moving on, I want to briefly discuss the concept of innate versus acquired or adaptive immunity. Acquired immunity is where the body's immune cells have developed specific antibodies after being exposed to a virus and they can quickly seek out the virus and destroy it before it can spread infection. This is how vaccines work using the acquired or adaptive immune response to protect us from viruses.

In contrast, innate immunity is where the cells go to work to fight off the infection when it was first introduced to the body. The body mobilizes immune cells to seek out attack and destroy the virus. What we've learned from these early publications is that NAD is important for the initial innate or nonspecific response. However, further preclinical research is required and those preclinical studies are underway.

There are 40 ongoing, completed, and published clinical trials currently registered on clinical to investigate the pharmacokinetics and the therapeutic effects of NR. This is one more than our last update. And additional nine clinical trials are registered to test NR in combination with other ingredients for a total of 49. We finished the quarter with 195 signed research collaborations up by approximately 10 compared to last quarter.

I'll highlight an interesting recent published study on NR since we last spoke. In April, a preclinical study demonstrating the effects of both niacinamide and our product nicotinamide riboside supplementation on cardiac electrophysiology was published in the Journal of Molecular and Cellular Cardiology.

Researchers from the University of Iowa were able to demonstrate that both NR and NAM increased NAD and NADH levels. However, only NR indicated the potential cardiovascular effect. These results reinforce earlier preclinical findings that suggest increased NAD levels may have a beneficial impact on cardiac conditions and arrhythmias. The researchers concluded that the results warrant further investigation into NR as a potential therapy for cardiac arrhythmic disorders.

Finally, I'll briefly touch on the newly registered clinical studies, all of which were registered in April. First a study was registered by Koc University Hospital in Turkey to establish metabolic improvements in obese patients with nonalcoholic fatty liver disease or NAFLD through dietary supplementation of NR with the combination of serine, L-carnitine and N-cacetylcysteine. Previous studies have suggested that each of these nutrients decrease liver fat. So also the researchers hypothesize that supplementation of a combination of these ingredients including NR will stimulate pathways to enhance hepatic oxidation resulting in decreased liver fat.

Additionally, a pilot study was registered by the Cleveland Clinic, a comprehensive cancer care center, to investigate the effects of nicotinamide riboside supplementation in allogenic hematopoietic cell transplantation. The objective is to find a safe and tolerable way to improve engraftment after transplant. Research studies have shown that adding NR to donor cells has the potential to increase blood stem cell numbers and potentially decreased the time to engraftment.

Before turning the call over to Kevin, I'd like to briefly discuss our new framework for categorizing the areas of ongoing research on NR. In the past, I've discussed studies categorized by various health conditions such as heart health or cardiovascular health, brain health or neurological health, liver health as well as many others.

At ChromaDex we've begun to frame the discussion in the context of a new way of looking at health called intrinsic capacity which is part of the World Health Organization's framework for healthy aging. According to WHO, intrinsic capacity is the composite of all mental and physical capacities that a person can draw on including their ability to walk, think, see, hear and remember. It is an indicator of one's ability to cope with physiological stress and still maintain these functions.

We categorize these concepts into five domains of intrinsic capacity; vitality, cognition, locomotion, sensory and psychological. In other words, our intrinsic capacity is defined by the underlying health of our cells. Nutritional solutions such as NR represent an opportunity to help maintain or even improve intrinsic capacity. We've included a slide in our earnings presentation illustrating how cellular health supports intrinsic capacity. Going forward, I'll be presenting the summary of our ongoing clinical studies in these intrinsic capacity domains consistent with our internal framework.

In summary, ChromaDex is committed to remaining the leader in the NR, NAD and cellular health conversation. As Rob mentioned, Dr. Brenner's preclinical research is ongoing, and we will provide updates when appropriate.

With that, I'll pass the call over to Kevin Farr. Kevin?

Kevin Farr

Thank you, Frank. Let's look at our financial results for the first quarter of 2020, which reflected continued progress against our key financial objectives, and strong underlying business performance. The underlying business is measured by adjusted EBITDA, excluding total legal expense, approach breakeven in the first quarter with a loss of $316,000. This was a $1.8 million improvements sequentially, and a $2.4 million improvement year-over-year.

Compared to the fourth quarter of 2019, we delivered strong sequential topline growth, higher gross margins, significant lower advertising expenses as a percentage of net sales and lower general administrative expenses primarily driven by the absence of Elysium related bad debt expense in the current quarter, partially offset by higher severance and restructuring charges, which are related to cost savings initiatives.

In April, we strengthened our balance sheet with a $5 million common stock raise from existing strategic investors. Where there was not an immediate need for the additional capital, we believe it's prudent given the current economic uncertainty. We're always opportunistic if an investor wants to invest capital into the company, and it benefits all of our shareholders.

With this additional $5 million, based upon our current outlook, we believe we have enough cash to reach cash flow breakeven and defend our intellectual property, excluding our $7 million committed line of credit. The line of credit provides additional financial flexibility.

Moving to the first quarter results, for the three months ended March 31, 2020. ChromaDex reported net sales of $14.3 million, up 10% compared to the $13.1 million in the fourth quarter of 2019. Year-over-year net sales were up 43% compared to the first quarter of 2019. Tru Niagen net sales were up 10% sequentially and grew by 50% year-over-year with diversified growth across U.S. e-commerce Watson's and international cross border launches year-over-year.

Watson sales remained solid at $1.8 million in the quarter, but were down slightly versus last quarter. As expected, Watson's experienced softer consumer takeaway in the first quarter due to store closures in the wake of the coronavirus. As the economy began to reopen in March, these trends improved, but have yet to return to prior levels.

As Rob mentioned, we also shipped our new product Tru Niagen Beauty in the quarter, which aligned with Watson's late April launch. We expect continued impact on sales at Watson's in the second quarter due to the coronavirus. Total Tru Niagen related net sales were up 8% sequentially, and 53% year-over-year, we've experienced strong demand for Niagen from our customers.

Turning to the rest of the P&L on a sequential basis, our gross margin was up 90 basis points from 57.0% in the fourth quarter of 2019 to 57.9% in the first quarter of 2020. Year-over-year gross margin increased by 520 basis points to 57.9% compared to 52.8% in the first quarter of 2019. As a reminder, last year we recorded a 250 basis point charge related to the wind down of our Purple Corn Ingredients sales.

Product cost savings initiative and overall scale on our supply chain drove the improvement in gross margins. We believe both factors, as well as favorable mix from growing Tru Niagen consumer products sales, represent a tailwind to gross margins in 2020. On a sequential basis, our total operating expenses for the first quarter of 2020 was $14.2 million, down $2.1 million compared to the fourth quarter of 2019.

As a reminder, the fourth quarter of 2019 included a one-time bad debt charge of $2.2 million related to the full write-off of our Elysium receivable. Our selling and marketing expenses were down $0.7 million to $4.4 million in the first quarter of 2020 compared to $5.1 million in the fourth quarter of 2019. As a percentage of net sales this expenditure was down 800 basis points in the first quarter of 2020, versus the fourth quarter of 2019.

We made continuing progress, improving market efficiency in our Tru Niagen business, driven by strong returning customer growth, while investing in initiatives to drive new customer growth, both in the U.S. and internationally. We continue to monitor daily e-commerce metrics such as customer acquisition costs to adjust messaging and spending, which is increasingly important in this fluid environment.

As reported G&A expense was down $1.3 million to $8.8 million in the first quarter of 2020 versus $10.1 million in the fourth quarter of 2019. This included $2.4 million illegal fees and $1.0 million of severance and restructure expenses in the current quarter. Excluding legal fees severance, restructuring, equity compensation expense, first quarter 2020 G&A expense was lower by $0.1 million versus the fourth quarter of 2019 comparable G&A expense, which also excluded Elysium related bad debt expense.

Legal expense was up slightly compared to the fourth quarter of 2019. Motions for summary judgment were decided following hearings in the California matter during the first quarter, and discovery accelerated in the New York litigation. Sequentially the trial was delayed in California case due to the suspension of all jury trials caused by the coronavirus. For the same reason, deposition discovery was delayed in New York.

As a result, we expect legal expense to be lower in the second quarter of 2020 despite ongoing investments in the Delaware patent infringement case in preparation for the McMahon hearing in December 2020 and the trial in September 2021. For the first quarter of 2020, our operating loss was $5.9 million versus $8.9 million in the fourth quarter of 2019, which included the $2.2 million bad debt write-off.

The net loss attributable to common shareholders for the first quarter of 2020 was $5.9 million or a loss of $0.10 per share, as compared to the net loss of $8.9 million or a loss of $0.15 per share for the fourth quarter of 2019. The fourth quarter of 2019 net loss per share included the $0.04 per share bad debt expense. As we said, we believe it's important to focus on sequential trends in our business to demonstrate progress towards cash flow breakeven.

To help investors better engage the underlying performance of our business, in the second quarter of 2019 we introduced a new non-GAAP measure adjusted EBITDA excluding total legal expense. ChromaDex defines adjusted EBITDA excluding total legal expense as net income or loss which is adjusted for income tax, interest, depreciation, amortization, non-cash stock compensation cost, bad debt expense related to Elysium, severance and restructuring expenses and total legal spending.

We have included a reconciliation to the appropriate GAAP measures in our earnings release slide. Litigation expenses represents the majority of our legal spend today. We are excluding total legal spending from adjusted EBITDA since we expect to decline significantly after the matters are concluded. In the fourth quarter of 2019, we began excluding severance and restructuring expenses that we expect to deliver measurable, sustainable, net cost savings in late 2020 and beyond.

We made changes to the organization in the first quarter and completed negotiations of part of our end-to-end supply chain evaluation. On an annualized basis, we identified at least $2 million of gross savings with the majority of the savings delivered to be realized in 2021. We incurred $1.2 million of severance and restructuring expenses related to these cost savings initiatives.

As is prudent in this uncertain economic environment, we'll continue to evaluate our cost structure and see additional opportunities in our supply chain. As I previously highlighted, adjusted EBITDA, excluding total legal expense improved by $1.8 million to a loss of $0.3 million in the first quarter of 2020, compared to a loss of $2.1 million in the fourth quarter of 2019.

Year-over-year, we delivered a $2.4 million improvement in the first quarter of 2020 versus a loss of $2.7 million in the first quarter of 2019. The improvement in the first quarter of 2020 was primarily driven by higher sales and gross margins and marketing efficiency.

Moving to the balance sheet and cash flow, we ended the first quarter 2020 with cash of $13.6 million, down $5.2 million versus the fourth quarter of 2019. In the first quarter of 2020 our net cash used in operation was a negative $5.2 million versus a negative $0.6 million in the fourth quarter of 2019. Consistent with our expectations, the higher cash outflows from operation this quarter was driven by working capital, which was a $1.6 million use of cash in the first quarter of 2020, compared to a $3.9 million source of cash in the fourth quarter of 2019.

The use of cash in the first quarter is related to increase in accounts receivable and a decrease in accounts payable largely due to lower Niagen ingredient purchases.

Today, we've successfully navigate the business during the coronavirus pandemic. At this time, we do not expect any supply chain disruptions from coronavirus, and have implemented risk assessment strategies to manage this going forward. As it relates to revenues, the COVID-19 situation remains fluid and difficult to predict.

Against this backdrop, we are managing our expenses to mitigate the bottom line impact to the company. As Rob said, we took a hard look at our 2020 financial plan to ensure we're prioritizing investments with the highest return in the current environment. For full-year 2020, we expect continued top line growth driven by our U.S. e-commerce business, launches in the new international markets such as the U.K. and Australia, and launches on new platforms such as Persona Nutrition.

As we have said, we anticipated lower growth rate in the 47% in 2019 due to a larger revenue base, the impact of the coronavirus, and the impact of divesting our Spherix regulatory consulting business, which accounted for roughly $700,000 of 2019 net sales.

As Rob mentioned, we see the coronavirus having impact on Watson's in the second quarter. There has also been a modest impact on our HCP business where some sales are tied to trade shows, which have been canceled.

COVID-19 mildly also impact our international market launches at retail, but these are incremental opportunities relative to 2019. It's too early to determine the impact of the coronavirus on our e-commerce sales. Consumers are likely to balance concerns about employment, overall macroeconomic weakness with their desire to invest in their health with supplements like Tru Niagen.

Based on the trends of the day, we're planning for continued growth in this business in 2020. We continue to expect gross margin expansion, do the favorable mix from our growing e-commerce business, the product design changes implemented in late 2019 and additional supply chain cost savings initiatives.

We continue to expect an increase in selling and marketing expense of $3 million to $5 million including investments in brand awareness and investments in new market launches. We expect continued improvement in selling and marketing expense as a percentage of net sales driven by strong sales growth from returning customers.

Lastly, we continue to expect the G&A, excluding severance and restructuring expenses and legal expense will be up by $1 million to $2 million year-over-year, comparable to 2019 G&A expense excluding the Elysium related bad debt expense in 2019.

We're excluding legal expense from our outlooks since two of the trials have not been rescheduled and there may be further discovery and other delays in our other matters due to the uncertainty caused by COVID-19.

Severance and restructuring expense is included in reported G&A. Adjusted EBITDA excluding total legal expense remains a key metric. We expect this to improve throughout the year. We continue to believe we can achieve cash flow breakeven at $17 million to $19 million of quarterly revenues if the litigation ends and legal costs decline.

Total quarterly operating expenses will be higher in the near-term driven by higher litigation expense. As a result, we need sales of approximately $19 million and gross margin that's slightly better than 60% to achieve this, we believe will deliver higher gross margins as we execute on our supply chain cost savings initiatives.

In short, the overall framework is unchanged, and we will continue to manage all lever of the P&L to deliver on this important objective.

Operator, we're now ready to take questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Your first question comes from Jeff Van Sinderen from B. Riley. Your line is open.

Jeff Van Sinderen

Hi everyone. Just a follow-up on the growth rate, just wondering what are you contemplating in terms of the top line growth rate this year? I guess trying to get a sense of what your thinking is regarding your order magnitude versus the growth rate last year?

Rob Fried

Kevin? Well, we're not all in the same room right now, so we're – I'll have Kevin answer that question.

Kevin Farr

Okay. I'm sorry. Jeff, with regard to our outlook, we think that it's not going to grow as much as the 47% last year, and I think it's not growing versus last year because the base is higher as well as the sales are expected for the full year to grow with regard to the launch of new markets as well as the growth in the DTC business. And we think relative to what we indicated in the first quarter it is going to be slightly lower than what we had indicated in the first quarter.

Jeff Van Sinderen

Okay, that's helpful. And then maybe if you guys could delve into more on how your marketing is shifting or evolving for the COVID period. What are the milestones I guess we should think about in terms of getting to kind of the place you want to be with marketing?

Rob Fried

I can tell you how we're shifting our messaging. I'm not sure how to give you milestones for that. You know, as you've noticed we don't market beyond the published data and there is some published data on the impact of viruses on NAD and now we have some additional data specifically relating to coronavirus, but there is limited data on the impact of Niagen on coronavirus, especially in the human study.

We are working on it and as the data comes out, we will communicate that data. Anything that's preclinical, it can be marketed to healthcare practitioners, but cannot be marketed to consumers. And you know, we're very careful in the way we communicate these messages. So we are working vigorously to get these studies out. There are several underway, but we are not tone deaf about what the market is looking for. The market wants to understand how Tru Niagen could impact their risk for viruses in general and coronavirus specifically.

So we did make a pivot, we did slightly adjust or add to our messaging and show that cell defense and NAD and Niagen are related. We are showing a positive benefit to that shift in messaging. But until we have some published information, scientific studies, we're not going to be able to make the full message clear.

Jeff Van Sinderen

Okay. And then if I could squeeze in one more just on Nestlé, anything else that you can share in terms of the rollout strategy there, may be anything in terms of the color of what marketing might look like their initial launch?

Rob Fried

Well, they've shared some information with us. They haven't shared all of it yet. They're still developing their plans. They are slightly impacted by Coronavirus. They are still scheduled to be on track for a September, October release of the product and they are scheduled to begin their PR efforts in June.

We've seen some creative materials from them. We haven't seen any final creative materials from them. Generally, it looks pretty good, but it's a slow rollout. You shouldn't have an expectation of anything large or dramatic initially. They're testing it. They have very high hopes long-term, but they don't have high expectations in the short-term.

Jeff Van Sinderen

Okay, understood. Thanks for taking my questions and continuing success.

Rob Fried

Thanks, anytime.


Your next question comes from Brian Nagel from Oppenheimer. Your line is open.

Unidentified Analyst

Hi, this is William [indiscernible] asking on behalf of Brian Nagel. Thanks for taking our question. First, there is two main topics that we wanted to talk about. First, given the strong expansion recently in gross margin, did you discuss the sustainability of that in the longer term?

And secondly, do you have an expected timetable in determining whether Tru Niagen could become more of a factor in the fight against COVID-19? And at what point would ChromaDex begin to put more marketing spend behind Tru Niagen? Thank you.

Rob Fried

Kevin, why don't you take the first one and Frank, why don’t you take the second?

Kevin Farr

Sure. Okay yes, I think – we think that the gross margin improvements are sustainable, and we think there's more opportunities to continue to cut costs. Basically in the quarter, we grew 90 basis points from 57 to 57.9. And why we think that it's going to continue to move in the direction that it has been moving is because of the fact that we've got a tailwind from Tru Niagen.

And if you see growth in our DTC business, which has margins of over 60%, you should see it to continue to move in that direction and has been doing that for, since we launched the Tru Niagen brand in 2017. So that's one of the drivers. I think we've also instituted supply chain savings and we've been executing these initiatives at the end of the third quarter, and we realized savings from the fourth quarter of 2019.

In September of 2019, we launched the 300 mg 90 count, one bottle configuration that reduced product, packaging and shipping costs. We've also implemented an ERP system to help optimize our inventory and identify additional efficiencies. And we just completed a project where we've been driving CMO cost savings through a strategic sourcing process that established strong partnerships with new and existing CMOS.

So essentially, we've had four CMOS that blend, encapsulate, bottle and label our product. And with regard to this, we had a competitive strategic sourcing process and in there, we realized significant savings in that cost. And you should see those costs flow through in the second half of the year as well as the majority of them in 2021. Frank?

Frank Jaksch

Yes, so on your second question there – there has been quite a bit of research over the past few months or so that's published essentially showing the decline of any NAD or NAD under attack in Coronavirus. And we know now mechanistically why that's happening and a lot of that goes back to it's the same story we've been seeing as a product since the beginning. NAD comes under attack with age, it comes under attack in this case in a coronavirus infection.

So and we know mechanistically how that's happening and it's essentially the infected cell, once it's infected is essentially responding to the replication of the RNA that's in that cell. And that process of the cell defending itself is utilizing NAD and it's also knocking down the viruses attacking the supply of NAD by knocking down the supply of NAD. So it's very similar to the ageing story. It's just happening in days rather than in years.

But, so what we have to do now and Rob answered this in the other previous question, is that what we have to do is we have to do studies confirming the link between nicotinamide riboside's ability to essentially rescue or raise NAD when it's getting knocked down in that coronavirus cell. So those studies are still ongoing.

One thing we don't need to show is we know and as all of you that have been following this, we don't have to prove that NR can raise NAD, we know it does that. Multiple human studies have shown that nicotinamide riboside is safe. And multiple studies have shown that nicotinamide riboside is in fact very much capable of raising NAD levels. What we need to do here in connecting the dots is just showing that in this particular model that we can successfully use nicotinamide riboside or Niagen to rescue NAD supply in coronavirus.

And then by doing those studies – like Rob said, there are a few of them that are underway. We're hoping those will publish as soon as we can get them published. And then use them as mechanism to support or maybe amp up what we can say about the product. Do you want to add anything to that Rob?

Rob Fried

Only that the last piece of the question was when are we going to increase our marketing, is that right, William?

Unidentified Analyst

Yes that's right, thank you.

Rob Fried

So, as you know, ChromaDex is very sensitive to the topline as well as the bottom line. So we are constantly measuring the effectiveness of our marketing campaigns and assessing the efficiency of marketing, in fact all of our spending. And we hit the gas pedal when we find a vein that works.

So we find that we've improved over time. Our retention is very strong across people who buy Tru Niagen intend to continue to buy Tru Niagen, particularly those who have taken it for more than a couple of months. So for example, on this call right now are presumably several dozen people who are Tru Niagen customers. If you are an owner of the ChromaDex stock, I hope that you appreciate what a special product Tru Niagen is and are taking Tru Niagen.

It is our hope that by continuing to publish good science and being fundamentally sound in our marketing and our operations and in our scientific approach that essentially word of mouth will break out. As I said before, we're able to share preclinical data with healthcare practitioners and we're working hard to communicate with healthcare practitioners. We also have a very large and growing customer base.

We hope that those healthcare practitioners and our large and growing customer base, feel compelled to share the information, the special information about Tru Niagen and how it could be helpful, not just with Coronavirus, but with cellular stress in general. But today with coronavirus, rather than put the company in a position where we have to make a claim too soon.

Unidentified Analyst

Okay, that's very helpful. Thank you.


Your next question comes from Mitch Pinheiro from Sturdivant. Your line is open.

Mitchell Pinheiro

Yes hi, good afternoon. So Rob, I wanted to ask you, you sort of I think you said, maybe it’s Kevin, where you're still not sure if coronavirus circumstances will be beneficial to your results this year. But as you look at the second quarter, it sounds like, sort of the news and the science is certainly hitting home and I would think that can you talk about maybe any difference in sales rates? Are we seeing new customers hit here? Is that part of the first quarter? Are you seeing it in the second? Obviously your ongoing customers, your retention is strong and those that use Tru Niagen are terribly loyal to it through all the science that read. But can you tell – are you seeing anything – any nuances to your sales relative to the coronavirus circumstances?

Rob Fried

We do see that when the coronavirus publicly hit, it had an impact on sales across the board. We've said in the past that Watson sales began to decline in the first quarter mostly due to store closures. I am happy to say that we've seen as Watson stores start to open up we are seeing an uptick and a bit of a return from Watson's in Hong Kong.

But the same basically happened here when coronavirus hit the attention of the general public shifted away from ageing to coronavirus and although nutraceutical sales in general have been strong, non-immune related nutraceuticals have not. And we have seen that when we communicate based on the science that Tru Niagen has an impact on innate immunity that people do respond to it.

But as I've said a couple of times now and then a third time, we are very, very careful not to market any claims before the science is published. So it is interesting, what you're seeing concurrently is a very, very strong demand in the general public for products that are able to increase immunity, strengthen immunity, but for those that they believe do not you're seeing a decline in demand. So we're seeing both of those things concurrently. And that's why it's very difficult for us to say, if we think it's going to be a net positive or a net negative.

Mitchell Pinheiro

Can sales – that customers of Watson's in Hong Kong, if they obviously couldn't get to the stores, did you see a shift to e-commerce in [indiscernible]?

Rob Fried

Yes, Hong Kong online sales increased.

Mitchell Pinheiro

When we were looking at Q1 results, was there any - is there any channel fill in Q1 related to the U.K. or Australia or any other new market?

Rob Fried

Kevin, can you help with that?

Kevin Farr

Yes, I can. You know, given the nature of the business, there wasn't a ship in with regard to filling store shelves. It's more online businesses in Australia. U.K. is both online and it's also in-stores, and the in-stores is at 200 stores. So there is a minor amount with respect to the U.K, but basically, there is no big upfront purchases to put in their warehouses, it's more or less what they need to test in the U.K. So overall not a big impact. The launches in total, the new launches were about $700,000 for the quarter and was most of the driver of the growth rate in the quarter. And there is an opportunity I think for the rest of the year to grow that business since the incremental business over 2019. But again, it's hard to predict based upon the current economic environment.

Mitchell Pinheiro

And is the revenue breakdown to your Watson's line, is that where the U.K. revenue will go or will go into the other international line item?

Kevin Farr

It will go in the other international line item.

Mitchell Pinheiro

Okay. And then just finally, how long did these coronavirus studies take as a matter of, a couple of weeks, I mean the study is done and now you have to get it published, what's sort of the typical cadence on that?

Rob Fried

Well, it depends on the type of study you're doing, but coronavirus infection studies, because it doesn't last that long in any model, whether it's an animal or a human. So the studies themselves are not long-term studies. They're in days. It's just a matter of getting the studies staged, completed, data reported. So each one is a little different. Cell models are different than animal models are different than trying to get human studies going.

So - and human studies are a little different than the traditional sort of standard double blind placebo controlled study because you're not doing a study where you're infecting people. You have to actually introduce the study – introduce it into a place where they're receiving patients and then you have to dose patients that are already coming in infected.

So it's a little bit more challenging on that end, because it's more of an observational study than I would say a true double blind placebo study. So, but the studies themselves are not long. It's just a matter of the timing of when you can get into those studies more so than the amount of time it takes.

Frank Jaksch

And there are other complications as well. For example, it's difficult to replicate coronavirus in animals. So there aren't many places that have succeeded at replicating the human coronavirus in rats or mice - mice or rats or other animals for that matter. And then there is also funding issues. Some places have funding in place, some people require funding, and then there is sometimes contractual issues like intellectual property issues. So there are reasons why these things take a while separate from the actual study itself.

Mitchell Pinheiro

Okay, thank you very much.


Your next question comes from Ram Selvaraju from H.C. Wainwright. Your line is open.

Unidentified Analyst

Hi, this is [indiscernible] dialing in for Ram Selvaraju, and thanks for taking my question. So I just wanted to start with the California court case. I know that you mentioned that the trial has been postponed. May be you can add a little color on that. And then what is the outcome of the ChromaDex’s conference with the court on May 4?

Rob Fried

Okay, Can you ask the first question one more time about the California court case?

Unidentified Analyst

Yes, sure. So the question was maybe you can provide some additional color on the trial that was postponed and then what was the outcome of the ChromaDex's conference with the court on May 4?

Rob Fried

As you know the trial date was initially supposed to be the first half of last year then it got moved to October. Then in January, it was scheduled for May 12. And now then the coronavirus, hit and it got pushed back. There is no specific date. We're estimating it's going to be sometime around October, but we don't yet know. And I think - I hope that in June sometime next month, we will be able to set a - finally set a date. That's been a frustration for us. The fact - most of the facts or many of the facts have now come out into the public record. Anyone who bothers to read the public record can see that the facts are fairly clear.

We're eager for those facts to come out in trial. We find it amazing frankly at this point with all the facts that have come out that there are investors, scientific advisors, frankly even employees that continue to be associated with that company given what has been disclosed into the public record, but it is what it is. One day there will be a trial, a jury will hear the facts, and we're confident in the decision that they will make.

Unidentified Analyst


Frank Jaksch

The May 4 conference relating to California was just an exchange of documentation at this point. In June, we will determine what the next trial date is for California.

Unidentified Analyst


Frank Jaksch

And, as you know, we've got a trial date scheduled for September of 2021 on the patent case, which is the largest of all of these cases, and as you also know Ram, the Court of Appeals recently rejected, Elysium attempt to overturn the PTAB decision from last year on the 086 patent. So their position looks very weak with regard to these patents. These patents look extremely strong. We're confident in these patents. Not quite sure what their argument might be. We have some indication of that, but we're not completely sure. It's seems like a pretty clear case of infringement on the patents, so we're eager to have that day in court as well.

Unidentified Analyst

Okay, understood. And then with respect to the New York case is there unlikely to be any further extension to the discovery period or this is going to be the last one?

Rob Fried

Well, I'd like to tell you that it's the last one, but we are amazed at how this process has gone on. And there have just been delays after delays. It often seems to us that that's the primary strategy of the other side to just find more delays. And to that extent, they've been somewhat successful. There have been delays. But we are confident that this is the last one. The judge in New York seems a little - very eager to get this thing to trial. And based on their public decisions that you can read, you see that they're very, very eager to finally decide this case. In all these cases, this is one of the longest cases on their dockets. So all the judges seem to want to finally get this thing resolved as do we.

Unidentified Analyst

Understood. And then shifting gears to the Asian and authorization market. Have any of these territories started to experience the recovery in the wake of the abatement of the COVID-19 pandemic? Do you expect a healthy rebound in consumer demand in 2020? In particular, are you anticipating substantial positive impact from Australia’s plan to reopen?

Rob Fried

Okay. I just want to make sure I understand the question Ram. You're asking if as - if and when COVID dies down, do we anticipate an increase, a surge in demand?

Unidentified Analyst

Do you expect a [indiscernible] bound in consumer demand?

Rob Fried

Do we expect an increase in consumer demand as COVID dies down?

Unidentified Analyst


Rob Fried

The only indication we have of that is what we're seeing in Hong Kong right now, and we are seeing that in Hong Kong right now as the Watson stores begin to open. We are seeing increased traffic in those stores and it appears as though the demand from the consumer level is restoring. There's also the possibility that as the studies come out on Niagen and its impact viruses and coronaviruses in particular, that that might increase consumer demand if the studies come out as we hope and we are able to properly communicate that information, which I expect we will be able to.

Unidentified Analyst

Understood. With respect to the coronavirus studies that you're conducting, maybe you can kind of comment on what kind of studies that are being conducted, and then is the plan to focus on use of Tru Niagen as an immune system boosting supplement or is it to conduct a full blown actual clinical investigation?

Rob Fried

So, it's a little bit of both. I mean, the plan right now is we're focusing on research, the research that's ongoing right now is focused on coronavirus, but you're right, I mean in reality, it ratchets to the claims that we can make which are going to be more around general immune function.

So we're trying to focus on those studies right now to demonstrate at least in this case, we'll have a good idea mechanistically of exactly how nicotinamide riboside by preparing NAD is going to impact a specific challenge coronavirus that's happening in the world right now. Ultimately that ratchets to an immune support claim. And I believe that fundamentally that there's going to be a demand for immune support related products ongoing well past this – this goes out.

I mean it's – I think people are going to be concerned. They're going to be worried about their immune support in general. And in reality, I think that's what the data is going to show us that NAD plays a central role in a healthy immune system. And that's going to be not only immediate I think it's going to be a long lasting effect.

Unidentified Analyst

Understood. And final one from me, how is the shift to online sales and e-commerce progressing? Is it in line with your expectation, and what might you execute going forward to accelerate this in the coming quarter? Thank you.

Rob Fried

Okay, I'm sorry. The connection isn't that great. So I wasn't able to hear the first part of the question. I know it was about e-commerce. Can you ask one more time, please?

Unidentified Analyst

Yes, yes I'm so sorry. So how is the shift to online sales and e-commerce progressing? Is this in line with your expectations and what might you execute going forward to accelerate this in the coming quarter?

Rob Fried

Well, the shift began as you know really, three years ago. And as you could see, there's been steady and consistent growth in the e-commerce business every quarter for three years now. The retention has been good, the customer acquisition cost has steadily come down. Our systems are strong and getting stronger in place for measuring conversion rates, retention rates. And we have a pretty good team in place for creating content, releasing that content and measuring the performance of that content.

We also have a pretty strong team in place for own media and social media. Running an e-commerce marketing operation is a fairly complicated one and it's a fairly integrated one. There are many pieces to that puzzle and it needs to be very data oriented, quantitative oriented, but also needs to be very inspired and creative. And we are a pretty strong team and we keep getting better and we keep improving and the best way to continue to show growth in the numbers is to have continued strength in your processes.

And our processes are good and we will continue to improve those processes. I don't really have any – there's no magic bullet plan for how we're going to grow. We do a very, very good job of conducting research. And once the research comes out and is published, that we use that as the foundation of our marketing, creative materials. We are very, very careful to not make any claims that are not justified by published science and by published data.

We try to operate the company in general, as a very conservative one and fundamentally sound one. And what we like to think is a model for how companies should operate in this industry. We see ourselves scientifically as a biotech company. But our product happens to be a consumer product company – consumer product and because it's a consumer product, that doesn't mean we give up an inch on the science.

But it does mean that you have to be very careful in the ways that you market. So because we play by the rules and because we get NDINs from the FDA and we get regulatory approval and we patent our products and we conduct studies and we invest in research and we are very conservative with our messaging. We are at a strong disadvantage from companies out there that are willing to cross the line.

We recently read a warning letter to one such company from the FDA on NMN making false claims about NMN. NMN is a product that doesn't have an MDI. It's not a legal product in the U.S. technically. But if the FDA doesn't enforce it, what can we do? We are at a disadvantage. If we are going to pay royalties to patent holders like Dartmouth we are at a disadvantage if other companies are just going to infringe on the patents and not pay those royalties or not conduct those science, but that is what we have chosen to do.

We believe in the long run by being a fundamentally sound operation and by communicating that message to our consumers. The brand will resonate with time as a genuinely truly trusted brand. We think we've done a very, very good job of creating a trusted brand as indicated by the very high retention rates that our customers have. But there is no magic bullet. It's just taking one step at a time and operating the business in a very, very strong, fundamentally sound way and then we keep steadily growing steadily improving.

Unidentified Analyst

Understood, yes. Thank you so much for taking my questions.

Rob Fried

Sure anytime.


Our last question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

Jeffrey Cohen

Well hi, Bob, Frank and Kevin. How are you?

Rob Fried

Hi Jeff, good.

Frank Jaksch

Good. Thanks, Jeff.

Jeffrey Cohen

Just a couple of quick ones from me, so can you talk a little bit about the Tru Niagen Beauty product and with the 100 mg of NR, how do you see it playing out with the population, the geography in which you're marketing it? Would you expect that this would be largely in combination with NR, in addition to NR or a product unto itself?

Rob Fried

Well, the product has been launched in stores in Hong Kong, in Watson stores in Hong Kong and it is a combination product. There is a formulation there and NR is the hero product. Niagen is the hero product. And there are three other products as well that are Beauty related. This product was requested by Watson, so a year and a half ago we spent quite a bit of time, Frank did in particular, figuring out what ingredients we were going to combine with Niagen.

We had to make sure that it was stable, and that we could manufacture it. Watson's believe very strongly that this was a product that their market would embrace. Obviously, no one anticipated the coronavirus, which we launched the product right in the middle of it, but it did get launched. We did produce it and we did ship it to them. And I'm happy to say that they and we are very, very pleased with the early results.

Jeffrey Cohen

Okay, got it. And then Frank, could you comment a little bit on this study you were talking about the University of Iowa's first cardiovascular effect? Can you also at top of your head what specific cardiac conditions that they measured in the study?

Rob Fried

That study was specifically related to – one specific cardiovascular benefit and hold on, I am trying to pull it here for you, it was anti-arrhythmic effect. So – it’s basically mainly focused on arrhythmia is what it was focused on.

Jeffrey Cohen

Okay, measured before, during and after I assume?

Rob Fried

Exactly right.

Jeffrey Cohen

Okay got it. And then lastly from – you spent some time talking about this intrinsic capacity and some of the outlines and what you're looking at. Is this something that you think will penetrate into the payers in the United States over time?

Rob Fried

It's a little early to say. I mean – that side of the world they're trying to – there's a focus trying to essentially get ageing classified as a disease. Right? And World Health Organization and a lot of the other guys are really trying to start defining what healthy ageing really is. Now the World Health Organization has come out very clearly and has stated that healthy ageing is something or ageing itself is actually something that happens at the cellular level.

And that's great because all the data and the science really has been going, they are making it their decision on what that means based on the data where the science is going. And science is showing that aging is really something that ultimately happens within the cell. And so you have to find strategies for mitigating the damage or repairing the damage or impacting the way that cells are damaged as we age. And that's where the science is going today. That's what the published science is showing right now.

I mean, there are companies starting to pop up that focus on the nine hallmarks of aging, all of them ratchet to cellular function or ways of improving or start repairing cellular function. And intrinsic capacity, basically, ratchets to that as well. It's about molecular integrity, it's about cellular function, and ultimately gets to physiological function as well.

So, but in reality, where does it start? It starts with that molecular and then the cellular function and that's of course, that's where we're at. We're in the middle of trying to find a way of helping the best we can of repairing. In our case, the one thing that nicotinamide riboside or Niagen does best is it's - if you want to improve any de-function that becomes deregulated from aging or age related damage, then Niagen is the best way to improve NAD.

And now what we need to do in studies is connect the dots between by using NR or using Niagen to improve NAD levels that we can show that it ultimately connects to things specifically that fall under these models that are starting to come out like this intrinsic capacity concept. But it really talks to cellular health.

Unidentified Analyst

Okay, got it. That’s it from me. Thanks for taking the questions.

Rob Fried

Thank you.

Frank Jaksch

Thanks, Jeff.


I would now like to turn the call over to Brianna Gerber for closing remarks.

Brianna Gerber

Thank you, Julia. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1-800-585-8367 and the conference ID is 8259009. Thank you everyone for joining us today and for your continued support of ChromaDex.


Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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