Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Chromadex corporations first quarter 2020 earnings Conference call. My name is Julian and I'll be the conference operator today.
At this time, all participants are in listen only mode.
A reminder, at this conference call is being recorded.
Afternoon, Chromadex issued a news release for now and nothing Companys financial results first quarter 2020.
I'm not refused to do this information both are available within the Investor Relations section of comedy DOCSIS website at Www Dot Com Index dotcom.
I would now like to turn the conference over to Briana Garber, Vice President of at PNM and Investor Relations. Please go ahead Mr. scrubber.
Thank you good afternoon, and welcome to Chromadex corporations first quarter 2020 results Investor calls.
With us today, our crummett access Chief Executive Officer, Rogge freed founder and executive Chairman, Frank Jacks, and Chief Financial Officer, Kevin Farr.
Today's conference call May include forward looking statements, including statements related to cram It acts as 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 true NIAGEN in new markets future financial results business development.
Opportunities future cash needs.
<unk> operating performance in the future and future investor interest that are subject to risks and uncertainties relating to kremen exits future business prospects and opportunities as well as anticipated results of operations.
Forward looking statements represent only the company's estimates on the data. This conference call and are not intended to get 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 kermit excess actual activities are results to differ materially from the activities. Our result anticipated and forward looking statements.
These risk factors include does contain increment access quarterly report on form 10-Q, most recently filed with the S easy.
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 Relations section of our website at Www Dot Chromadex dot com with that it's now my pleasure to turn the call over to our Chief Executive Officer, Rob freed Rob.
Thank you briana.
Good afternoon, everyone and thank you for joining or first quarter 2020 investor call.
I hope everyone listening is navigating well these troubling times.
Congrats had another strong quarter would total net sales of 14.3 million over.
Overall sales increased 10% sequentially and 43% year over year.
Nitrogen net sales were 11.1, a 10% increase sequentially.
50% increase year over year.
Sales to Watson's were down slightly compared to the prior quarter.
In the impacted the Corona buyers and the protest 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.
It was a net loss.
$316000.
Chromadex reacted swiftly when the Corona bars.
You already understood that there is an impact on a de wouldn't viruses are present.
So we immediately initiated preclinical research in the area in the first quarter led by our Chief scientific adviser Dr. Charles Brenner.
As you may have noticed.
Dr. Brenner publish promising results in the initial preclinical study last month.
Further research is required.
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 energy levels.
Our cellular health. This in addition to the existing messages of cellular energy cellular repair and agent.
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 it's called the 19 will be positive or negative for our business.
We're 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 some ongoing initiatives across our supply chain.
Evan 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 the global brand to own the science and to focus on the fundamentals first the brand.
As mentioned global to Nigel net sales were $11.1 million in the quarter, a 10% increase sequentially and a 50% increase year over year.
True knowledge and represented 78% of the 14.3 million in the quarter.
International sales for two knowledge and represented approximately 29% in the first quarter.
This includes sales to Watson's in Hong Kong and Singapore.
It also cross border sales in China, Japan, Europe, and sales through our partners in Australia, New Zealand, UK and Canada.
Sales to Watson's were $1.8 million in the first quarter slight decrease versus the previous quarter.
Lower sales in the base business in the first quarter were largely offset by shipments for two nitrogen beauty.
Which launched in stores in late April.
Nigel beauty builds on the success of the true nitrogen brand as an award winning and best selling help product among walks in Hong Kong loyalty members as well as driver of their health care.
Nitrogen beauty will allow us to reach new demographic seeking our science based solutions for their beauty routines.
We're pleased to extend our <unk> product portfolio with the strong partner like Watson's.
At this time there are no plans to extend true Nigel beauty beyond the region.
Ecommerce net sales were $8.2 million, a 4% increase sequentially kind of 39% increase year over year.
Sales from returning customers in the U.S. continue to outpace new customer sales.
In addition, we have cross border cells in the UK, Japan, Korea, Germany, France in China, which grew 179% year over year.
Currently expanding distribution to include two of China's largest online retailers, Kayla and J.D. dot com in the second quarter.
These platforms will complement our existing team all presence in China.
You also added to your opinion cross border markets in the first quarter following the EPS approval, France and Germany.
Additionally, we're continuing to build our brand with strong global partnerships.
We shipped initial orders for the Australia, UK and persona nutrition in the first quarter.
Expanding our partnerships with mokoena Super drugs in the UK Division of the I guess Watson group.
Nestle Health science, respectively.
In late April we announced that our UK partners, Superdrug, leading health and beauty retailer with over 800 stores in the UK and a member of the I guess Watson group.
This represents our entry into the European market and we're proud to expand our partnership with yes, Yes, Watson's group as mentioned last quarter. The initial launch is a small test launch in 200 Super drug stores across the UK as well as superdrug dotcom.
We very much applaud the efforts of superdrug in Watson's for keeping the central items, such as true nitrogen available to customers worldwide. During this unprecedented time.
He built upon our relationship with Matakana to crude exclusive distribution rights in Australia, and online and retail sales channels.
MOCON is an established dietary supplement manufacturer and distributor with more than 90 lines of organic in superfood products.
Who nitrogen complements medicon as existing portfolio products on their broad distribution as well as knowledge of our science based product. This positions the brand for strong growth in Australia.
We're partnering with them on a number of Influencers, social media and earned media initiatives to drive awareness himself in the market.
We very much looking forward to the net Nestle health science true nitrogen 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.
Nestle plans to begin initial marketing efforts next month.
Persona nutrition, a division of Nestle health signs launch to nitrogen in first quarter.
Persona is the leader in the fast growing area of personal lives nutrition, and we believe it is a growth opportunity for true nitrogen and one that also helps build the brand.
Our second quarter objective is to own the science.
We are confident in the science behind nitrogen and are actively tracking the increasing volume of research on the molecule that is currently underway.
Several new studies had been registered and published since our last uptake 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 or try and Chief Scientific officer, one of the World foremost experts in energy research as well as Dr. span Perlman, one of the leading experts on Corona virus.
After brothers preclinical studies show two key findings one.
Co bid 19 introduction to the studied cells caused a greater than three fold reduction in any D.
And to these infected cells, specifically sought out nicotinamide riboside nitrogen in an attempt to replenish energy levels in the face of the viral infection.
We expect additional research from Dr., Brent or to be made public soon.
The next phase of his preclinical research will explore whether introducing nicotinamide riboside or nitrogen.
May support cells innate immune response to Corona viruses and other viruses.
We will publicly share the findings of this research when appropriate.
We're also exploring additional preclinical research on nicotinamide, riboside or nitrogen and coated 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 a leasing them help.
Our May 12 trial date for the California litigation was postponed due to court closures in the wake of the Corona virus outbreak.
We recently submitted a written join status report in the court granted our request for a status conference in June.
New York Discovery has been extended by four months due to restrictions on taking depositions in the wake of the krona virus.
In Delaware regarding patent infringement by at least him.
He has been scheduled for trial on September 27, 2021.
It is moving forward following the recent court of Appeals decision that upheld the validity of the Dartmouth patent which is licensed by Chromadex.
Remind everyone.
Cesium could not appealed the rejection of their challenge to the Aito seven patent and now better leaves the lost their appeal of the key PTAB decision validating the only six patent Louisiana cannot raise those same arguments in the patent infringement lawsuit regarding any claims the o. Eightsix Pat.
We remain confident in the facts of all three cases are eager to get to trial.
In the meantime.
We expect lower near term legal expense with delays attributable to the Corona virus.
Our third strategic pillars to focus on fundamentals.
Because 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.
Sorted by published scientific data with regulatory approvals.
We continue our basic philosophy of science based marketing and Conservative financial management.
We recently announced the 5 million dollar capital raise to provide some further strength to the already strong balance sheet.
In summary in the wake of the Corona virus, we are successfully driving the business forward.
You're leading important research in the field delivering on incremental growth opportunities and adjusting our cost structure.
Maintaining a strong balance sheet I believe chrome index will be even stronger.
Once this global macro economic crisis is behind us.
Now I'll pass the call over to our chairman Frank Jacks for an update on scientific research.
Frank.
Thank you Rob as Rob stated one of our core objectives is to own the science, we're committed to remaining a global scientific authority on an hour and any de 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 and aren't any D. is continued to accelerate with the publication of the ninth human trial and 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 kroner virus has on any de levels in cell animal and human tissue.
The findings were published on Bioarchive, a pre print server.
The researchers characterized the key steps and what happens in a corona virus in fact itself and the impact it has on the need immunity.
Before moving on I want to briefly discuss the concept of a neat 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.
Body mobilizes immune cells to seek out attack and destroy the virus.
What we've learned from these early publications is that any d. is important for the initial in eight or non specific 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 a clinical trials dot Gov to investigate the pharmacokinetics and the therapeutic effects of NR.
This is one more than our last update.
An additional nine clinical trials are registered to test and are 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 affects of both niacin in mind and our product nicotinamide Riboside supplementation on cardiac electro physiology was published in the journal of molecular and cellular cardiology.
Researchers from the University of Iowa, we're able to demonstrate that both NR and and am increased any d. and any de slot any D. H levels, However, only and our indicated the potential cardiovascular effect.
These results reinforce earlier preclinical findings that suggest increased any de levels may have a beneficial impact on cardiac conditions and arrhythmias.
The researchers concluded that the results weren't further investigation into and ours, a potential therapy for cardiac arrhythmic disorders.
Finally, I'll briefly touch on a newly registered clinical studies all of which were registered in April.
First study was registered by coach University Hospital in Turkey to establish metabolic improvements in obese patients with non alcoholic fatty liver disease or NAF LT.
Through dietary supplementation of NR with a combination of searing L. carnitine and Anna Cecil Cystine.
Previous studies have suggested that each of these nutrients decrease liver fat fast the researchers hypothesize that supplementation of a combination of these ingredients, including in our 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 allergenic hematopoietic cell transplantation.
Our objective is to find a safe and tall overweight to improve in grafman after transplant.
Research studies have shown that adding and our two 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.
I 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 organizations framework for healthy aging.
According to who intrinsic capacity is the composite of all mental and physical capacities that are person can draw on the including their ability to walk think see here 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 arc intrinsic capacity is defined by the underlying health of ourselves.
Nutritional solutions, such as NR represent an opportunity domain to help maintain or even improve intrinsic capacity.
We've included this slide in our earnings presentation, illustrating how cellular health supports intrinsic capacity.
Going forward all be presenting the summary of 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 any d. and cellular health conversation as Rob mentioned Doctrove renters preclinical research is ongoing and we will provide updates when appropriate.
With that I'll pass the call over to Kevin Farr, Kevin.
Thank you Frank let's look at her financial results for the first quarter of 2020, which reflected continued progress against our key financial objectives and strong underlying business performance.
Underlying business as measured by adjusted EBITDA, Excluding total legal expense approach breakeven in the first quarter with a loss of 316000.
This was a 1.8 million improvement sequentially, and a 2.4 million improvement year over year.
Compared to the fourth quarter 2019, we delivered strong sequential top line growth higher gross margins significantly lower advertising expense as a percentage than that sales and lower general administrative expenses, primarily driven by the absence of at least in related bad debt expense in the current quarter parts.
So the 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 dollar common stock raise from existing strategic investors.
Well 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 it 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 or 7 million committed line of credit.
A line of credit provides additional financial flexibility.
Moving to the first quarter results for the three months ended March 30, Onest 2020, Chrome index 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 the first quarter of 2019.
Two Nigel net sales were up 10% sequentially. They grew by 50% year over year with diversified growth across U.S. ecommerce Watson's in 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 take away in the first quarter due to store closures in the wake of the Corona virus.
As the economy began to reopen in March these trends improve but have yet return to prior levels.
As Rob mentioned, we also shipped or new product true Nigel beauty in the quarter, which align with Watson's late April launch.
We expect to continue to impact on sales did watson's in the second quarter due to the Corona virus.
Total nitrogen related net sales were up 8% sequentially and 53% year over year, we've experienced strong demand for nitrogen from our customers.
Turning to rest the piano on a sequential basis, our gross margin was up 90 basis points from 57.0 person in the fourth quarter, 2019% to 57.9% in the first quarter of 2020.
Year over year gross margins increased by 520 basis points, the 57.9 per cent compared to 52.8% in the first quarter of 2019.
As a reminder, last year recorded a 250 basis point charge related to wind down, although purple corn ingredient sales.
Lot of cost savings initiative, and overall scale in our supply chain drove the improvement in gross margins. We believe both factors as well as favorable mix from growing true nitrogen 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 the full write off of our leaves the receivables.
Or selling and marketing expenses were down 1.7 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 continued progress improving marketing efficiency their true nitrogen 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 just messaging in spending which is increasingly important in this fluid environment.
As reported Gionee expense was down 1.3 million to $8.8 million in the first quarter of 2020 versus 10.1 billion in the fourth quarter of 2019.
This included 2.4 million, a legal fees and 1.0 million up severance and restructuring expenses in the current quarter, excluding legal fees severance restructuring equity compensation expense first quarter 2020, Gionee expense was lower by point 1 million versus the fourth quarter of 2019 comparable gionee expense.
Which also excluded it leaves them 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 into New York Litigation sequentially, That's where I was delayed in California case due to the suspension of all jury trials caused by the Corona virus for the same reason deposition discovery was delayed.
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 Mark Im hearing in December 2020 in 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 2019, which included the 2.2 million bad debt write off.
The net loss attributable common shareholders for the first quarter of 2020 was 5.9 million or a loss of 10 cents per share as compared to the net loss of 8.9 million or a loss of 15 cents per share for the fourth quarter of 2019.
The fourth quarter of 2019 net loss per share included the four cents per share bad debt expense.
As we said we believe it's important to focus on sequential trends in their 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.
Your next defines adjusted EBITDA, excluding total legal expense as net income or loss, which is adjusted for income tax interest depreciation amortization noncash 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're excluding total legal spending from adjusted EBITDA since we expected decline significantly after the matters are concluded.
In the fourth quarter 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 than the first quarter and completed negotiations it part of our end and 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 these cost savings initiatives.
As a prudent in this uncertain economic environment will continue to evaluate our cost structure and see additional opportunities in our supply chain.
Is there previously highlighted adjusted EBITDA, excluding total legal expense improved by 1.8 million to a loss of point 3 million in the first quarter 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 2021st is lost at 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.
The first quarter of 2020, our net cash used in operation was a negative 5.2 million versus a negative point sixmillion in the fourth quarter of 2019.
Consistent with our expectation 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 Twentytwenty compared to a 3.9 million source of cash in the fourth quarter of 2019.
I used to cash in the first quarter was laid to increase in accounts receivable and a decrease in accounts payable largely due to lower Nigel ingredient purchases.
Today, we have successfully navigate the business during the kroner virus pandemic.
At this time, we do not expect any supply chain disruptions from Corona virus. It have implemented risk assessment strategies to manage this going forward as it relates the revenues the cobot 19 situation remains fluid and difficult to predict.
Against this backdrop, we're 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 topline growth driven by our U.S. ecommerce business launches a new international markets such as the UK in Australia and launches a new platforms, such as persona nutrition attrition as we've said.
We anticipated lower growth rate from the 47% in 2019 due to a larger revenue base the impact to the Corona virus and the impact of divesting our spirits regulatory consulting business, which accounted for roughly 700000 of 2019 net sales.
As Rob mentioned, we see the Corona virus, having impact a watson's in the second quarter. There has also been a modest impact or H.C.P. business for some sales are tied to trade shows which had been canceled.
Cobot 19 million also impact or international market launches at retail, but these are incremental opportunities relative to 2019, it's too early to determine the impact of the Corona virus on our ecommerce sales.
Tumors are likely to balance concerns about employment overall macroeconomic weakness with their desire to invest and their health with supplements like true Nigel.
Based on the trends today, we're planning for continued growth in this business in Twentytwenty.
We continue expect gross margin expansion do the favorable mix from are growing ecommerce 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 three 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 expect the gene a excluding severance and restructuring expenses legal expense will be up by one to 2 million year over year comparable to 2019 GE in a expense excluding deal easy unrelated bad debt expense in 2019.
We're excluding legal expense from our outlooks as to the trials have not been reschedule and there may be further discovering other delays in our other matters do the uncertainty caused by Covidien 19th.
There were some restructuring expense is included in reportage DNA.
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 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 in gross margin that slightly better than 60% to achieve this we believe it would deliver higher gross margins as we execute on her supply chain cost savings initiatives.
In short the overall framework is unchanged and we'll continue to manage all levels of the piano to deliver on this important objective operator, we're now ready to take questions.
Thank you if you'd like to ask the question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please the penalty if you will pause for just a moment I'm proud to you and your roster.
Your first question comes from Jeff Van Sinderen from B. Riley Your line is open.
Oh hi, everyone.
Just a follow up on the growth rate just wondering what are you contemplating in terms of the topline growth rate. This year I guess trying to get a sense of what you're thinking as regarding your order of magnitude versus the growth rate last year.
Kevin.
Yes.
So we're not all in the same room right now so ER.
Kevin answer that question.
Okay, I'm, sorry, Jeff with regard to our outlook, we think that a it's not going to grow as much as the 47% or.
Last year, and I think it's not growing.
Versus last year because of the base is higher as well as the.
[laughter].
The.
The sale the sales are expected for the full year two.
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 is gonna be slightly lower than what we had indicated in the first quarter.
Okay. That's helpful. And then maybe if you guys could delve into more on how your marketing is shifting our evolving for the covered period. What are the milestones I guess, we should think about in terms of of getting to kind of the the place you want to be with marketing.
I can tell you how we're shifting our messaging I'm not sure how to.
Did you milestones for that.
<unk>.
As you've noticed we don't market beyond the published data.
And there's some published data on the impact of viruses on in a D and now we have some additional data specifically relating to corona buyers.
But there is limited data.
On the impact of Corona buyer of the impact of nitrogen on Corona virus, especially in.
Human study.
We are working on it and as the data comes out.
We will communicate that data anything that's pre clinical can be marketed to healthcare practitioners that 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.
Well, we are [laughter], we are not tone deaf about what the market is looking for the market wants to understand how true nitrogen could impact their risk for viruses in general and Corona virus specifically.
So we didn't make a pivot we did slightly adjust or add to our messaging.
And show.
That sell defense and in a D and nitrogen our related we are showing a positive benefit to that shifts in messaging.
But until we have some published information scientific studies, we're not going to be able to make the full.
Message clear.
Okay, and then if I could squeeze in one more just on unnecessarily.
Anything else you can share in terms of the rollout strategy there maybe anything in terms of the color what marketing might look like their initial launch.
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 Corona buyers.
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.
Ah, but it's a slow rollout you shouldn't have an expectation of anything larger dramatic initially.
They're testing it they have very high hopes long term.
But they don't have high expectations in the short term.
Okay understood. Thanks for taking my questions in continuing success.
Thanks anytime.
Your next question comes from Brian Nagel from Oppenheimer. Your line is open.
Hi, This is William Dossett, asking on behalf of Brian Nagel, Thanks for taking our question.
First there's.
Hello.
There's two main topics that we want to talk about first given the strong expansion recently and gross margin could you discuss the sustainability of that in the longer term and secondly, I do you have an expected content table in determining whether true nitrogen could become more of a factor in the fight against overnight scene.
And at what point increment ex begin to put more marketing spend behind tree nitrogen. Thank you.
Kevin know why did you take the first one Franklin and you do so sure.
Okay. Yeah, I think we think that the gross margin improvements that are sustainable and we think theres 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 a it's going to continue to move in the direction that it's been moving is because of the fact that we've got a tailwind from a true nitrogen.
Then if you see growth in our DCP DTC business, which has margins of over 60% you should see it to continue to move in that direction than has been doing that for you know since we launched the a true Nigel 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 realize savings for the fourth quarter of 2019.
In September of 19, we launched the 300 Meg 90 count.
One bottle configuration that reduce product packaging and shipping costs. We've also implemented a 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 strategic sourcing process.
But established strong partnerships and new in the existing CMO Sir.
So essentially pad for Cmos that a blend encapsulate bottle and label product.
And with regard it as we had a competitive strategic sourcing.
A process and in a in there we realize significant savings than that cost and you should see those costs flowed through in the second half for the year as well as the majority of them in 2021.
Frank.
Yep.
So on on your second question there the yeah.
There's been quite a bit of research over the past you know a few months or so that's that's published essentially showing a decline of any D or any de under attack in Corona virus and.
We know now Mechanistically why that's happening in a lot of that goes back to its the same story, we've been saying I'm as a product since the beginning any de comes under attack with age. It comes under attack in this case a in a kroner virus infection, so and we know mechanistically, how that's happening and that's essentially the infected.
So once it's in fact, it is essentially responding to the replication of the R&D. That's in that sell in that process of the cell defending itself is utilizing any D.
And it's also knocking down the virus is a attacking the supply of any do you find knocking down the supply of any D.
So it's very similar to the aging story, it's just happening in days rather than in years, but.
So what we have to do now and Rob to answer this in the other previous question is that what we have to do as we have to do studies confirming the link between nicotinamide riboside visibility to essentially rescue were raise any de once it's getting when it's getting knocked down in that krona virus sell so those studies are still ongoing one thing current we don't need to to show.
So as we know and it's all of you that have been following this we don't have to prove that NR can raise any d.. We know what 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 an idea levels, what we need to do here in connecting the dots.
It's just showing that in this particular model that.
We can successfully use nicotinamide riboside or nitrogen to to rescue and 80 supply in Corona virus and then by doing those studies and we brought like Rob said there are few of them that are underway. We are 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 about the product do you want to anything Tetra only that the last piece of the question was when are we going to increase our marketing.
So right William.
Yeah.
Yes, that's right.
Thank you.
So as you know chromadex is very sensitive to the top line 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 see when we find a vein that works.
So.
We find that we've improved over time, our retention is very strong across people, who biotrue nitrogen tend to continue to buy true nitrogen, particularly those who have taken it for more than a couple of months.
So for example on this call right now our presumably several dozen people who are true nitrogen customers.
If you are an owner of the Chromadex stock I hope that you appreciate what a special product through nitrogen is and are taking two nigel.
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.
Essentially word of mouth will breakout.
As I said before we're able to share preclinical data with health care practitioners and we're working hard to communicate with health care practitioners. We also have a very large and growing customer base.
We hope that those health care practitioners, and our large and growing customer base feel compelled to share the information the special information about true nitrogen and how it could be helpful. Not just with Corona virus, but with cellular stress in general.
But today with Corona virus, rather than put the company in a position where we have to make a claim too soon.
Okay. That's very helpful. Thank you.
Your next question comes from Mitch Pinheiro from started that's your line is open.
Hi, good afternoon.
So Rob I wanted ask Steve you sort of I think you said, maybe I names Kevin.
Where you're still not sure yeah.
You know kind of virus.
Circumstances will be beneficial.
To your results this year [noise].
But.
Yeah as you look at the second quarter. It's itself you know then it sounds like.
You know.
Sort of the news and the science.
Is certainly hitting home and I would I would think that I can you talk about maybe any.
Any difference in sales rate.
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 do you know your retention strong and those that that.
Used to nitrogen are fairly loyal to us for all the science that we read but can you tell is there anything anything any any any nuances to your sales relative to the front a virus.
Circumstances.
We do see that when the Corona virus, Hey 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 in a bit of a return from watson's in Hong Kong.
The same basically happened here when Corona virus here the attention of the general public shifted away from aging.
Two corona buyers 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 true nitrogen 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're 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 immune 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 gonna be a net positive or in a negative.
Ken can can sales you know that.
Customers of Watson's in Hong Kong.
If they obviously couldn't get to the stores did you see a shift the E commerce.
In those assets.
Yes, Hong Kong online sales increased.
Yeah.
And when you're looking to be when I'm looking at Q1 results was there any.
Is there any channel fill in Q1 related to the UK.
We're australia or any other new market.
Hi, Kevin can you help and that yeah, Ken you know given the nature of the other business there wasn't a ship in with regard to heal filling a store shelves, it's more online business isn't in Australia.
Okay is both online and it's also in stores and the in stores is at 200 stores. So there was a minor amount with respect to the U.K., but basically there was no big upfront purchase is putting their warehouses, it's more or less what they need to test in the UK. So overall not.
Not a big impact you know the launches in total the new launches were about $700000 for the quarter.
And was most of the driver over the growth rate in the quarter.
And that is an opportunity I think for the let resolutely year, but to grow that business since the incremental business over 2019, but again, it's hard to predict.
Based upon the current economic environment.
And we'll.
Is the is the revenue breakdown your Watson's line is that where the UK.
Revenue will go where we're going to the other international line item.
It'll it'll go and the other international line item.
Okay.
And then I'm just finally.
How long do these corona virus studies take.
It's in a matter of a couple weeks you.
No I mean, the studies done and now you have to get get published what sort of the typical.
Cadence on that.
Well it depends on the type of study you're doing but you know corona virus infection studies because it it doesn't last that long in any model, whether it's an animal or human. So the studies themselves are not long term studies. There. They are in days, it's just a matter of getting the studies staged completed.
Data reported.
So each one is a little different sell models are different than animal models are different than trying to get human studies going so in human studies there.
Our a little different than the traditional sort of standard double blind placebo controlled study because you're not doing a study where your infecting people you have to actually introduced the study it introduce it into a place where they're receiving patients and then you have to dose patients that are already coming in in fact it.
So it's a little bit more challenging on that and because it's more of an observation will study then I would say a true double blind placebo studies so.
But the 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 than the amount of time it takes.
Yeah, and there are other complications as well for example is difficult to replicate corona virus in animals.
So there aren't many places that have succeeded at replicating the human Corona virus, and mats or rice or mice and rats or other.
Or other animals for that.
And then Theres also funding funding issues. Some places have funding in place on people required funding.
And then there's sometimes a contractual issues like a intellectual property property issue. So.
There are reasons why these things take awhile separate from the actual study itself.
Okay.
Thank you very much.
Your next question comes from ROM sell Silver rise you from H.C. Wainwright. Your line is open.
But I didn't bother dialing in for example, Roger Thanks for taking my question I just wanted to start of the California. Okay. I know that you mentioned that the trial of then what's going on maybe you can add any color on that and then what was the outcome of the Chromadex Its conference with the court on May four.
Okay.
Could you ask could you ask the first question one more time about the California Court case.
Yeah sure. So the question, but maybe you can provide some additional color on the trial that was Oh spawned on that part of the outcome of the Chromadex is conference with the court on May four.
The as you know the trial date was initially supposed to be the first half of last year than it got moved to October.
Then in January it was scheduled for May 12, and now then the Corona virus hitting that got pushed back a there's 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 a set of fund finally set a date.
That's been a frustration for us.
The fact, most of the facts or many of the facts of now come out into the public record anyone who bothers to read the public record can see that the facts are fairly clear.
Were eager for those facts to come out in trial.
We find that amazing frankly at this point with all the facts that have come out that there are investors a 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 we'll hear the facts and we're confident in the judge and the decision that they will make.
Okay. The name, but May 4th conference relating to California was just an exchange of Ah documentation at this point in June we will determine what the next trial date is for California.
And as you know we've got a trial dates scheduled for September of 2021.
On the patent case, which is the largest of all of these cases.
And as you also know around the court of Appeals recently rejected.
Lesions attempt to.
Ah overturn the P. PTAB decision from last year on the O. eight six patents so.
Their physician looks very weak with regard to these patents. These patents looks extremely strong we're confident in these patents not quite sure what their argument might be we've had some indication of that but we're not completely sure. It's it seems like a pretty clear case of infringement on the patents so were eager.
I have that day in Florida as well.
Okay understood and then there's a new jacquet isn't likely to be any further extension to the discovery period.
Oh this is going to the last one.
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 they're 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 a 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 decided 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.
Understood and then shifting gears to the Asian in Austin relation market.
How any of these territory started to experience the recovering the make up the amendment of the Cold 19 pandemic do you expect I hope the rebound in consumer demand it too much money in particular are you anticipating suspension of the positive impact from Australia glad to reopen.
Okay I just wanted to make sure I understand the question. Ron you are asking if as if and when coded dies down do we anticipate an increase a surge in demand.
Do you expect no TV bond in consumer demand.
In consumer do what do we expect an increase in consumer demand as coated dies down yeah.
We are seeing increased traffic in those stores and it's it appears as though the demand from the on the consumer level is restoring.
Mhm.
Kind of comment on I'm not Gonna studies that are being conducted and then is the plan to focus on use of nitrogen to my agenda of an immune system boosting supplement or is it to conduct a full blown actual clinical investigation.
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 Corona virus, but you're right I mean in reality it ratchets to the claims that we can so we can make which are going to be more around general immune.
Soon functions so.
We're trying to focus on on those studies right now to demonstrate at least in this case will have a good idea mechanistically of exactly how nicotinamide riboside by preparing an idea is going that impact a specific challenge Corona virus, that's happening in the world right now ultimately that ratchets to an immune support claim and you know.
I believe that fundamentally that there's going to be a demand for immune support related products on going well pass. This this goes out I mean, it's.
Yeah, 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 is the data is going to show is that an 80 plays a central role into healthy immune system.
And that's going to be not only immediate I think it's going to be a long lasting effect.
Hi, My one from me how does the shift to online sales and E commerce progressing isn't in line with your expectation and what might you be kept going forward to accelerate this in the coming quarter. Thank you.
Okay, I'm sorry, the connection isn't that great. So I wasn't able to here. The first part of the question I know it was about ecommerce. Good can you ask one more time. Please yeah, yeah, I'm, sorry, I'm. So how does the shift to online sales and E commerce progressing.
This is in line with your expectation.
And what made you execute going forward to accelerate this in coming quarters.
Well the shift again as you know really three years ago.
And ER and as you can see there's been steady and consistent growth on the and the ecommerce business every quarter for three years now.
Or the.
The retention has been good the customer acquisition costs, so 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 earned 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 they need to that needs to be very data oriented quantitative oriented, but also needs to be very inspired and creative.
And we are pretty strong team and we keep getting better and we keep improving in 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 our plan, 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 very very good job of 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're 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 as a model for how company should operate in this industry.
We see ourselves scientifically as a biotech company.
But our product happens to be a consumer product company and <unk> 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 India I ends from the FDA and we get regulatory approval and we patent our products and we conduct studies and we invest in research and we're 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 Internet.
Making false claims about any men and women as it comes but product that doesn't have in India, 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 a patent holders like Dartmouth. We are at a disadvantage. If other companies are just going to infringe on the patents and not take those royalties or not conduct those signs 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.
And we've done 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 an operating the business in a very very strong fundamentally sound way and then we keep steadily growing steadily improving.
Honestly yep. Thank you so much about taking my question.
Sure anytime.
Our last question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is open.
Hi, Bob for Calvin her review.
Yeah. Good good thanks Jess.
Just a couple of quick ones for me. So could you talk a little bit aboard a the true knowledge in beauty product and.
With the hundred mix or greater how do you see a play go with the population the geography, which your marketing. It would you expect it this would be largely in combination with anymore.
In addition to anymore or yeah product unto itself.
Well the product has been launched in stores in Hong Kong and Watson stores in Hong Kong and it is a combination product. There is a formulation there and ANRR is the hero product nitrogen is the euro product and there are three other products as well that our beauty relates.
Our this product was requested by Watson's a year and a half ago. We spent a a quite a bit of time, a Frank did in particular figuring out what ingredients, we were going to combine with Nigeria, we had to make sure that it was stable and that we could manufacturer.
Watson's believe very strongly that this was a product that their market would embrace.
Obviously that no one anticipated the Corona virus, which we launched the product right in the Middle Love It.
But it didn't get launched we did produce it and we did ship it to them and I'm happy to say that they had we are very very pleased with the early results.
Okay got it and then I'm, sorry could you comment a little bit on this a starter you were talking about universe, you I was curious cardiovascular effects.
You know for top your head what specific or cardiac conditions that they measured in the study.
That study was specifically related to a certain one specific cardiovascular benefit and Hum along I'm trying to pull it here for you.
It was anti Arrhythmic effect. So originally it was basically mainly focused on arrhythmia is what it was focused on.
Okay measured before during and after issue.
Exactly right.
Okay got it and then lastly from me you spent some time talking about this intrinsic capacity and somebody who Oh lawyers and what you're looking at its just something that.
Do you think will penetrate into the payers in the United States overtime.
Oh, I I'd say, it's a little early to say.
I mean deep the work that side of the world, They're trying to there's there's a focused trying to essentially get aging classified as a disease right and.
World Health organization, a lot of the other guys are really trying to start to finding what healthy aging really is now the world Health organization has come out very clearly in it as stated that Sally or a healthy aging is something or aging itself is actually something that happens at the cellular level.
And that's that's a great because all the data in the science really is been going they're making their decision on what that means are based on the data where the science is going in science is showing that aging is really something that ultimately happens within the sell.
And so you have to find strategies for mitigating the damage or repairing the damage or impacting the way that sells or damaged as we age.
And that's where the sciences going today, that's where the published science is showing right now I mean, there's been there are companies starting to pop up that focus on the nine hallmarks of age and all of them ratchet to sell either function or but ways of improving or or stop 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, whereas it started starts with that molecular and then the cellular function and that's of course, that's where we're at we're in we're in the middle of trying to find a way of helping the does it.
Yes, we can have repairing and in our case, the one thing that nicotinamide riboside or nitrogen does best as its the if you want to improve any de function, that's that becomes dysregulated from from aging or or age related damage.
Then I engine is the best way to improve any D.
And now what we need to do in studies is connect the dots between by using in our new using nitrogen to improve.
Any de levels that we can show that it ultimately connects to things specifically that fall under these these models that are starting to come out like this intrinsic capacity concept, but it is a seller <unk> it really talks to cellular health.
Okay got it but those are for me thanks for taking the questions.
Thank you.
Thanks, Jeff.
I would now like to kind of call over to Briana Gerber for closing remarks.
Thank you Julien they will be a replay of this call beginning at 430 PM Pacific time today. The replay number is one 805 80 58367 and the conference I'd. It's eight to five nine 009. Thank you everyone for joining us.
Okay and for your continued support of crime it acts.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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