Q2 2020 Chromadex Corp Earnings Call
2020 earnings Conference calls.
My name is Josh and I will be the conference operator today.
At this time, all participants or in a listen only mode and as a reminder, at this conference call is being recorded.
This afternoon Chromatics issued a news release announcing the company's financial results for the second quarter of 2020. If you have not review. This information both are available within the Investor Relations section of Chrome indexes website at Www Dot Troma decks dotcom.
I would not like to turn the conference call over to Brianna Garber Vice President of F. P. N day, an Investor Relations. Please go ahead and Miss Greenberg.
Thank you good afternoon, and welcome to <unk> Corporation second quarter, 2020 results and Buster calm with US today are crummett access Chief Executive Officer, Rob freed founder and executive Chairman, Frank Jacks, and Chief Financial Officer, Kevin Fire.
Today's conference call me include forward looking statement, including statements related to Crummett access 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 Nye agenda in new market future financial results business development opportunities.
[noise] future cash needs Crummett X as operating performance in the future and future investor interest that are subject to rest and uncertainties relating to crummett access future business prospects and opportunities as well as anticipated results of operation.
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 resolved.
Because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject tourists and uncertainties <unk>.
Many factors could cause crummett access actual activities or result to defer materially from the activities in results anticipated and forward looking statement.
These risk factors include those contained in Crummett access quarterly report on form 10 cute. Most recently filed with the S. E C, including the effect of the Cove at 19 pandemic on our business results of operations financial condition and cashflows.
Please note that the company is seems 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, searching of the financial information presented in this call references non got financial measured the company's earnings presentation and earnings press release, which were issued this afternoon and are available on the company's website present reconciliation to the appropriate gap measures.
<unk> This conference call us being recorded via webcast. The web cast will be available at the Investor Relations section of our website at Www Dot <unk> dotcom with that it's down my pleasure to turn the call over to our Chief Executive Officer, Rob freed Rob.
Thank you Brianna good afternoon, everyone and thank you for German Shepherd quarter 2020 industrial Paul.
The M. A X at another screen quarter, you told me much sales and $15.3 million.
Okay, we achieved the business school a positive adjusted EBITDA looting total legal expense.
$525000.
Overall selves increased seven per cent sequentially and 38 per cent year over year.
<unk> sales were $11.7 million five per cent increase sequentially 34 per cent increase your over here.
As you know the coronavirus and the economic downturn have created headwinds for many businesses including hours.
R E Commerce business continued to perform well in the <unk> challenging environment.
Ellsworth roughly flat sequentially.
A retail business, including sales to Watson's.
Partners in new International markets has been more impacted by the coronavirus.
But we remain focused on the terrific opportunities ahead.
I was just mentioned adjusted EBITDA, excluding total legal expense was a positive $525000 in the second quarter.
We benefited by our initiative to reduce costs when the coronavirus fifth and objected that it's still goals.
It looks now discuss the three pillars to our business strategy.
To build a global brand to own the science to focus on the fundamentals first first.
The brand.
Global true knowledge and that sales represented 77% of the 15.3 million total net sales and the second quarter.
International sales for true nitrogen represented approximately 35% of total tonight's itself.
This includes sales to Watson's in Hong Kong in Singapore Cross border sales in China, Japan in Europe.
Yeah, So our partners in Australia, New Zealand, the UK in Canada.
It also includes a $1.6 million purchase from Horizons, who donated bottles of true knowledge into the health care workers in Hong Kong hospitals.
Sounds to Watson's, where $1.3 million in the second quarter compared to 1.8 million in the first quarter.
This included initial shipments of teenage and beauty.
Sales and the based business, excluding two nights beauty, we're roughly flat sequentially.
Watson's business continued to be impacted by store closures declines in Chinese tourism and the second quarter.
The two nitrogen was a relative outperformer as their top performing supplement.
In addition, watson's pleased with the early performance true knowledge, and beauty, which launched and 230 stores in April.
In addition, we introduced to nitrogen beauty through cross border sales in China is another test lunch.
E Commerce net sales were $8.1 million and 24 per cent increase year over year.
And slightly below first quarter.
Corona virus and economic downturn negatively impacted R. U S E commerce business in mid March.
We responded in April with new relevant marketing messaging, highlighting the importance of elevating N a D for cellular defense.
And resilience in the face some physiological stress.
These efforts were successful and will be continuing.
We sell cross border in the UK, Japan, Korea, Germany, France, Italy, Spain in China.
Which grew approximately 115% year over year.
We launched on T ball in China in the second quarter.
2019, and expanded distribution to J D Dotcom and K O dotcom this quarter with a successful June 18th midyear shopping festival.
Marketing strategies focused on in channel advertising, an influencer, so as well as earn media.
We have been selling on Amazon UK since June of 2018 and began expanding to other major European markets. Following at so approval.
We received favorable press in Europe, including Hello magazine in the July issue of French Vogue, which covered the growing trend behind N. A D supplementation and mentioned true nitrogen.
Additionally, we are continuing to build our brand with strong global partnerships.
That's mentioned on the first quarter call shipments for new market launches contributed to strong sales <unk>.
Sales from these new launches were down sequentially and the second quarter.
We had reorders from all our new partners and we believe in the long term potential of these markets.
Well briefly recap of each.
In April we launched true knowledge in in over 200, Superdrug UK stores as well as Superdrug dotcom.
Launch plans, where scaled back in sales had been slower to ramp up due to the coronavirus.
To support the lunch crummett accent superdrug continue to collaborate on P. R. An influencer efforts as well as in store in digital promotions.
Do not expect meaningful sales in the UK in 2020.
But we see the U K as a growth market for two nights with the potential to expand into Super drugs full 800 U K stores over time, if the test launches successful.
Re launched true nitrogen online in Australia in March in with one of our proven distributors amount of kind of health limited.
They plan to expand into retail later this year.
This approach follows they're successful rollout of true knowledge in in New Zealand small, but steadily growing market for us <unk>.
<unk> deep knowledge of the local markets as well as the dietary supplement category in our science based product.
We believe Tonight, a genius position for strong growth in Australia, and 2020 and beyond.
Necessarily health science, I shared with us that they plan to begin the marketing efforts to educate consumers on the importance of cellular nutrition very soon.
Our work with Nasty health science will allow them to bring products related to cellular health obtaining true nitrogen to market later this year.
Ultimately the timing will be determined by necessarily.
But we are encouraged by their commitment.
And their effort.
Persona nutrition division of necessarily health science, and leaving personalized vitamins subscription program launched to nudge and on their direct to consumer platform last quarter.
<unk> capsules or offered in personas monthly vitamin packs, along with other high quality science based ingredients recommended by their panel of medical experts.
We believes our partnership wouldn't actually health science, and now persona will help build awareness for Tonight.
Our second quote objective is to own the science.
We're confident in the science behind <unk>, which continues to be studied by leaving institutions in universities around the world <unk>.
Recently signed or 200 material transfer agreement through the Chromatics external research program.
Which has resulted in 60 publish studies to date, including 10 published clinical studies supporting the safety and efficacy of our patented ingredients Niger.
Several new studies had been registered and published since our last update.
Which Frank will summarize momentarily.
All of our science on it or can be found about M. A D dot com, which was relaunch this quarter to provide a better user experience.
In April we announced the first round of results from a combination tissue and in vitro study Uncoded 19.
As a reminder.
There were two key findings from this preclinical study first.
19 introduction to the studied cells caused an 80 per cent reduction in N a D.
And second D. As in fact itself specifically sought out nicotinamide riboside in an attempt to replenish N. A D levels in the face of the viral infection.
We recently announced the results of the second round preclinical research by this group, including our Chief Scientific Officer Doctor, Charles Brown or <unk>.
They found that N R.
Inhibits replication of a form of Corona virus, the virus that causes Cove at 19 infection in Mt sounds.
This suggests that N. R may have an anti viral affect it may support cells in eight immune response to Corona viruses and other viruses.
Of course, human clinical researches still required.
In addition, chromatics entered into a preclinical collaboration with the National Institute of allergy, an infectious diseases and I E. I D. A division of the NIH to assess the therapeutic potential of knowledge and encoded 19 animal models.
This is a logical next steps to assess whether increasing NID levels within our supplementation benefits the inmate immune response, and a cold bid 19 model of mice and hamsters.
This joined study is designed to assess whether NR supplementation prior to infection can reduce progression of the infection either by limiting borrow replication.
Modulate into severe inflammatory response.
We're proud to support the NIH D. As they work to help find answers find answers to this global pandemic.
Ultimately clinical trials will be required to determine whether nitrogen may have any impact or benefit uncoded 19 infection in humans.
We will continue to share the findings of all our collaborative Cove at 19 research when appropriate.
We also continue to build upon and protect our intellectual property, which includes our ongoing a litigation with Elysium health.
The coronavirus outbreak cause extended delays in California, and New York and no trial dates and been set.
In Delaware the patent cases scheduled for trial in September of 2021 with a markman hearing in December of this year.
We've seen Elysium initial claim construction arguments.
And remain as confident as ever in the strength of our license pets.
As I have repeatedly said, we are eager to get to trial and for the fax to be presented to a jury and all three cases.
A third strategic pillar is to focus on fundamentals.
It is our mission to lead by example in this industry and June Frank participated in the panel on Master files for dietary supplements hosted by the American Conference Institute.
Council for responsible nutrition and just this week he joined NIH for two round table discussions.
And all three presentations Frank champion the importance of greater transparency compliance and enforcement.
And the dietary supplement industry to protect consumers.
This is an important topic to all of us.
And is central to our commitment to science and to consumer safety <unk>.
Quality control, there's a big part of that in in June are Longmont, Colorado Lab received it's I S O accreditation.
This latest accreditation recognizes crummett X as consistency.
Meeting the highest international standards and quality control, which has been recognized by prestigious regulatory bodies around the world.
Finally, our chief scientific advisor Doctor Charles Brenner received the 2020 National Scientific Achievement Award from the American Society for Nutrition for his outstanding research.
[noise] field of bioactive compounds for human out.
In summary, we continue to deliver on our strategic objectives and successfully navigate these unprecedented times.
I know there are many listening who believed the true nitrogen is positively impacted your health.
Eager for it to become a household name.
So are we.
We are working hard to spread the word globally.
While staying true to our philosophy of responsible science based marketing and communications.
We clearly have the attention of the scientific community was increasingly studying this amazing molecule and we are investing alongside then to drive important research.
And now I'll pass the call over to our chairman Frank Jacks for the update on scientific research.
Right right.
Thank you Rob.
As he heard Rob say, one of our core objectives is to own the science.
We are committed to remaining a global scientific authority on NR and MVD research. We're also setting the standard for excellence in the industry with her commitment to science safety and quality.
I was very proud to represent chromatics and the dietary supplement industry has an innovative science based responsible company at the conferences and panels that Rob mentioned earlier.
Since our last call publication of research on N R. A N N E D as continued to accelerate.
There are 42 ongoing completed or published clinical trials currently registered on clinical trials stuck up to investigate the pharmacokinetics and therapeutics affects southern are just as two more than our last update.
And an additional 10 clinical trials are registered to test in our in combination with other ingredients for a total of 52.
We also reached a milestone of 200 sign researched collaborations during the quarter.
Bye approximately five compared to our last update.
As Rob said these collaborations have resulted in 60 publications to date, including 10 published human clinical trials.
We recently announced the results of a preclinical studying investigating the effects of ninth supplementation and mice that has traits or behaviors associated with autism spectrum disorder.
Specifically they studied mail my spent we're missing a Jean that's partially responsible for the production or at least a oxytocin.
Which is essential for feelings of happiness an attachment.
Researchers found that by elevating N E D levels and these mice their social deficits, such as fearful and anxiety like behavior corrected, allowing them to interact normally with other mice.
The study was the first to evaluate nitrogen and and autism mouse model, but it joins a growing body of preclinical data demonstrating that boosting N E. D levels may I have a positive effect on cognitive health.
In addition of preclinical study was published last month and the journal of the translational animal science.
In this study the researchers examined the effects of in OVO or into the egg injection of nicotinamide riboside on pectoral muscle development and gross and checks.
They found that one injected into the yolk the yoke SEC and increased pectoral muscle wait and links by 38% and 22% respectively.
And are also increased with steps and muscle fiber density by a <unk>, 9%, 11%.
45 per cent respectively.
The effects were significantly greater when injected into the yolk versus the egg way.
Stayed in the paper it is unknown, whether the increase in pectoral muscle wait due to be effective N R will affect future chick gross and meet quality.
However, according to the researchers disaffected potentially impact poetry industry yields and product quality.
This is an interesting study <unk> explores the impact of been are on a new addressable market.
Ah briefly touch on the newly registered clinical study that was registered in June.
This study was registered by Mclean Hospital and collaboration with the National Institute on AG.
To study the effects of nitrogen on brain energy metabolism, oxidative stress and cognitive function individual's with mild cognitive impairment and mild old timers disease.
50 participants will be given a thousand milligrams of <unk> over to 12 week period.
Within the intrinsic capacity framework that I introduce last quarter cognition related studies account for roughly 15%.
Of all ongoing research on nitrogen.
As Rob mentioned, we relaunched about any of the dotcom with a goal of making all the science on N R easily accessible.
This new site has an option to filter the research by intrinsic capacity to me.
In summary, chromatics is committed to remaining a leader in the N R. N E D and cellular health conversation.
[noise] continue to defend our intellectual property and running our while exploring the potential of next generation I need you precursors, which are also protected by a strong and growing pattern portfolio.
We're thankful to our investors for putting their trust in this team to deliver on the opportunity in front of us.
With that I'll pass the call to Kevin far Kevin.
Thank you Frank let's look at our financial results for the second quarter of 2020, which reflected continued progress against our key financial objectives as strong underlying business performance.
The underlying business is measured by adjusted EBITDA, Excluding total legal expense achieve breakeven with a second quarter profit of 525000.
This was the point $8 million improvements sequentially, and a 2.6 million improvement year over year.
Compared to the first quarter of 2020, we delivered strong sequential topline growth higher gross margins slightly higher advertising expenses, a percentage of net sales and lower general administrative expenses, primarily driven by lower severance and restructuring charges, which are related to cost savings in it.
<unk> and lower legal expense.
These results reflects strong operational and financial discipline, whichever allowed us to navigate the challenging macroeconomic environment very well.
We ended the quarter with 18 $9 million in cash, including the 5 million common stock raised in the second quarter from existing strategic investors.
Well there was not an immediate need for additional capital. We believe it was prudent given the economic uncertainty.
We have additional flexibility with their 7 million dollar line of credit, which we have not accessed.
In addition, we filed 125 million shelf registration.
The company has no present plans to issue securities under the registration statement.
However, we believe it's prudent to have the shelf registration place as a matter of good corporate governance.
Provides financial flexibility access the capital markets to respond to future financing and business opportunities.
[noise] moving to the second quarter results for the three months ended June 30th 2020, Chrome It extra reported net sales of $15 3 million up seven per cent compared to $14.3 million in the first quarter of 2020.
Over a year net sales were up 38% compared to the second quarter of 2019.
True knowledge of net sales were at 5% sequentially. They grew by 34% year over here with growth driven by U S. E Commerce, a $1.6 million purchase by Horizons, who donated true nitrogen to health care workers at Hong Kong hospitals, and international Cross border launches year over here.
Lots of sales remains solid at 1.3 million and the second quarter, but is expected were down versus the first quarter, which included the initial shipments of true night agent beauty.
We were encouraged by improving trends in consumer take away in the second quarter, Watson's and expect ship into more closely aligned with cell through and the third quarter.
However, with the recent rise and Coalbed 19 cases in Hong Kong this as a risk.
[noise] total nitrogen related to net sales <unk>, 5% sequentially and 40 per cent year over year. This included a small shipment to nestle, which resulted in recognition of a portion of the $4 million upfront payment revenues and the second quarter.
We have experienced strong demand for nitrogen from other customers, but these sales can fluctuate and we expect lower <unk> ingredients sales and the second half of the year.
Turning the rest of the piano on a sequential basis or gross Marcia was up 150 basis points from 57, 9% in the first quarter of 2020 to 59 four per cent and the second quarter of 2020.
You are over your gross margins increased by 310 basis points to 59, four person compared to 56 three per cent and the second quarter of 2019.
Product cost savings initiatives, an overall scale in their supply chain drove the improvement and grow splurge as well. We're originally expected supply chain cost savings to be reflected in her gross margins later in the year a portion of this savings was realized in the form of a rebate for prior your efficiency initiatives, which was recorded and the second quarter.
This resolved in the one time benefit of approximately 110 basis points and the second quarter.
We believe product cost savings initiatives as well as favorable mixed from growing through nitrogen consumer product sales represent tailwind gross margins in 2020.
Honest sequential basis or total operating expenses for the second quarter of 2020 was 12 $8 million down 1.4 million compared to the first quarter of 2020.
Selling a marketing expenses were up point $5 million to $5 million in the second quarter of 2020 compared to four $4 million in the first quarter of 2020.
As a percentage of net sales. This expenditure was up 140 basis points and the second quarter of 2020 versus the first quarter of 2020, we continue to monitor daily E Commerce metrics, such as consumer acquisition cost to adjust messaging and spending which is increasingly important and this fluid.
<unk>.
We also invest in P. R to support our lunch events with superdrug in the U K as well as martyr khanda in Australia. During the second quarter as reported G&A expense was down $2 million to six $9 million in the second quarter of 2020 versus eight eight millions of the first quarter of 2020. This include.
One 8 million of legal fees and point $3 million, a severance a restructuring expenses and the current quarter.
Excluding legal fees severance restructuring equity compensation expense second quarter 2020, Gona expense was lower by point $6 million versus first quarter 2020 comparable G&A expense.
Illegal expense was down point 5 million compared to the first quarter of 2020.
The wrong going investments and the Delaware patent infringement case as we prepare for the claims construction Mark I'm hearing in December 2020, and trial on September 2021, we also incurred expenses related discovery and the New York Litigation, We expect legal expense to begin to ramp up in the third quarter drew.
And by the New York in Delaware Litigation.
For the second quarter of 2020 or operating loss was three 7 million versus five $9 million in the first quarter of 2020 net loss of through to a common shareholders for the second quarter of 2020 was $3.7 million or a loss of six cents per sure as compared to a net loss of five $9 million.
Or a loss of 10 cents per share for the first quarter of 2020.
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 gauge the underlying financial performance of our business and the second quarter of 2019, we introduced a new non get measure adjusted EBITDA, excluding total legal expense.
[noise] with extra defines adjusted EBITDA. Excluding total legal expense is net income or loss, which is adjusted for income tax interest depreciation amortization non-cash stock compensation cost bad that expense related to elysium severance and restructuring your expenses and told.
Illegal spending.
We are included a reconciliation to the appropriate gap measures in our earnings really slides as I previously highlighted adjusted EBITDA, excluding total legal expense improve by point $8 million to a profit of point $5 million in the second quarter of 2020 compared to a loss of point $3 million in the first quarter.
2020.
You are over a year, we deliver to 6 million improvement in the second quarter of 2020 versus a two $1 million loss in the second quarter of 2019.
<unk> and the second quarter of 2020 was primarily driven by higher gross margins and higher sales and lower general an administrative expenses.
Moving to the balance sheet and cash flow. We ended the second quarter of 2020 with cash of 18 $9 million up five $3 million versus the first quarter of 2020.
And the second quarter of 2020, or net cashews and operations was one $6 million versus five $2 million in the first quarter of 2020.
The sequential improvement in this quarter was driven by lower than that loss and a reduction and they're working capital investment.
To date, we've successfully navigated the business during the cold bed 19th pandemic managing are working capital at this time, we do not expect any supply chain disruption from coronavirus and have implemented risk assessment strategies to manage that's going forward.
As it relates to our 2024 year outlook, we expect to deliver continued topline growth, including growth and or E commerce business, which experienced temporary slow down and growth and the second quarter due to the macro economic impact of the coronavirus. We continue to expect gross margin expansion due to favorable.
From a rowing ecommerce business the product design changes implemented late 2019, an additional supply chain cost savings initiatives, which we implemented beginning in the first quarter of 2020.
We continue to expect an increase in selling in marketing expensive $3 million to $5 million, including investments and brand awareness and investments and new market launches, including cross border platforms in China.
We expect continued improvement and selling a marketing expenses as a percentage of net sales driven by strong sales from returning customers and scale on our business last week. We continue expect that G. N. A excluding severance a restructuring expenses illegal expense will be up by one to 2 million year over year comparable.
To 2019 Gona expense, excluding the elysium related bad that expense and 2019.
Adjusted EBITDA, excluding total legal expense remains the key metric, we expect a significant improvement for full year 2020 versus full year 2019, but there may be quarter to quarter fluctuations driven by the timing of our marketing campaigns and R&D investments.
We continue to believe that we can achieve cash flow breakeven in 17th 19 million of quarterly revenues, if the litigation ends and legal costs decline.
Totally quarterly operating expenses will likely be higher in the near term driven by higher litigation as a result, we need sales of approximately 19 million and gross margins it slightly better than 60% to achieve this we believe will deliver higher gross margins as we execute on supply chain cost savings initiatives.
We will continue to manage all over as of the P&L to deliver on this important objective.
In summary, we continues liver consistent topline growth will demonstrating operational and financial discipline.
I'm very proud of how the entire chromatics team is executed endless challenging macroeconomic environment.
Alright here, we are now ready to take questions.
At this time I would like to remind everyone in order to ask a question. Please <unk> then the number one on your telephone keypad.
Question. Please press the pound King.
The first question comes from Jeff fence.
Please go ahead.
First let me say congratulations on the strong results, especially with the the pandemic background.
Can you speak a little more about the project without cheese lab, how that came about maybe you can touch on your thinking around showing their strength and cellular protection and potential immunity enhancement from <unk> and and I guess, what other studies are you watching most closely that are that are currently ongoing.
Yeah. So I'll begin the answer to that and then and then I'll pass it over to Frank to contribute as well.
Before I do.
Want to quickly.
Say that there's a website called raising nade dot com, which compiled and submitted a very impressive list of investor questions.
And we want.
You didn't know that we've read the mall and some are fairly technical we plan to answer many of these questions and post our answers on the.
Investor website, an hour IR website.
In response to your question.
On the South she lab they saw.
The initial data that was published on bio archives that showed that there was an 80% decline in N. A D. When the Koran Corona virus attached to the south.
And they found that very interesting obviously there.
Really interested in this cytokines storm and how the reduction in Iowa, six inflammation Margaret might impact cytokines storm.
There's a connection between a one of the original co founders of.
<unk>.
And a member of that Vouchee team and the Colorado lab.
In fact, I'm Gonna pass over to Frank right now if you want to elaborate on that a little bit more.
Yeah. So the researcher who's Who's doing this study had in fact been on sort of looking at energy metabolism, and mitochondrion as as a contributor to coronavirus.
And.
Did sort of pick up on like Robin mentioned on the bio archive. The initial publication to the bio archived study that showed the decline of any D and the ability to potentially rescue that as.
As a way of helping out and that's exactly what they're gonna be studying and sort of a two stage mouse <unk>, it's a mouse model and a hamster model.
Mice can't naturally be become infected by coronavirus. So they have to actually produce specific mice that can be infected.
And they were successfully able to do that and now we're gonna be looking at that model is one of the model's so that the mice will be dosed <unk>.
Prior to becoming infected so we'll get to see the effect. It has on mice that we're we're dosing before and.
Before they got infected and then see what the impact is afterwards as well on the hamster model hamsters in fact do become infected without having any modifications to do so.
So.
Thesis is that it's essentially going to happen to a significant impact on repairing the indeedy and having an impact on not only controlling the the virus itself, meaning replication of the virus.
But also survivability and recovery of the animals, and that's really sort of corvette did you have any other specific questions on that or.
No. That's that's really helpful. And then I guess I wanted to get your sense of which studies, which other studies I mean, that's a terrific study, but which other studies you're most focused on.
Well, let me first let me say.
A number of important conversations happening between chrome it acts and other research entities that we have not yet announced and are still exploring at this point in time, but.
But we are excited about the possibilities.
Okay.
That's all right and then maybe.
Go ahead, just one other comment on that does that look I think it's good that we're gonna have.
A mouse model or an animal models study in place prior to evaluating other studies as well I think it's it's responsible way of <unk>.
I'm looking at it as well.
Absolutely.
And then if we could just turned two nationally for a moment.
Any more color you can give us an sort of an update of your work with nationally how that's evolving and then I guess, what we should look for with necessarily as a partner. This year you touched on that a little bit.
So we speak was necessarily frequently and we're very excited about what they're doing and they're very excited about nitrogen and their business plans, but they like everybody else have been impacted by.
Corona virus. So they initially plan to begin their marketing in June and they moved it to July the products launch in September then late September. It's now at the beginning of August in the market and launch hasn't commenced although they assure us that it's imminent, we expect it to be imminent and the product lunch is obviously going to be <unk>.
Lightly delayed we don't think it'll be significantly delayed.
But they're thinking long term and they're thinking in a significant way.
And they have many facets of their organization working on it and we think they've got a good idea for how they want to pursue it.
But at this point in time, it's really up to Nestle.
When they do it and how they do it we like what they're doing and we like what they see but we don't really know much beyond that.
Okay. That's helpful. And then if I could just squeeze one more in on your marketing plans I know you've you've evolved those.
Maybe you can just touch on how your your I guess changing those four second half.
Anti aging versus cellular protection.
What we should anticipate near term.
Alright, So let me answer that question this way.
The market for dietary supplements has been quite interesting over the last few months.
Sales of immunity based dietary supplements have been doing extremely well.
Sales are dietary supplements that are not immune based have not been doing well.
Another interesting phenomenon is E commerce in general has been doing extremely well retail in general is experiencing headwinds.
So what that means for true nitrogen and <unk> is sort of a mixed bag. We are predominantly in ecommerce company.
But our international strategy has had significant retail components as well.
True nitrogen is known well known as in Anti-aging supplement in over the last year also has a fitness supplement.
But not as an immune based.
Dietary supplement.
Having said that we understand the science behind nicotinamide Riboside extremely well.
We understand that there is likely to be a benefit.
Two cellular health when a virus attaches to itself.
So that hasn't been part of the positioning in the marketing previously, but we need immediately began to do research and studies. Initially preclinical is Frank said first dish and animal than human clinical.
To verify what we instinctively believe.
We understand the mechanisms well enough to believe that there's a therapeutic and perhaps prophylactic benefit we need to prove that scientifically.
There is plenty of science for us to say things like sell defense cellular health cellular protection.
So what we did is in addition to launching these studies is we pivoted a bit away from fitness and Anti-aging per se and more towards this idea of sell resilience and sell that defense in south strength.
At the end of the day, we still see this is an anti-aging dietary supplement, but we see sub cohort groups that are important.
That speak to fitness speak to speak to immunity and perhaps speak to other.
Cohort groups as well and presently a lot of our time and attention is on this concept of sell defense cellular resilience and sell health, what we've seen does that messages working.
So we plan to continue of course, we don't know nobody really knows what the future of Corona virus is going to be worldwide and in the market in our in our markets. There was a point in time, where it looked like it was drawing to a conclusion then we see a resurgence now we see resurgence in certain markets, it's hard to know.
It's difficult to now, but we think in the long run it's likely that people in general are gonna be sensitive to this idea of immunity health cellular health and viruses and that is likely to be part of our narrative for a long time to come.
Okay. That's helpful. Thanks for taking my questions and best of luck.
Thank you thanks, Jeff.
Your next question comes from Brian Nangle with Oppenheimer. Please go ahead.
Hi, good afternoon.
Hi, Thank you for your for answering my questions.
So my first question.
I think I've got a a follow up to that.
That last question.
So.
And Kevin you broke discussion kercher comments, just some of the headwinds two <unk> sales given the.
Coke with 19 crisis in the United States and elsewhere. So my question is maybe just more elaborate on what kind of what is that is it is there a function of your stores I guess, just mostly what procedure stores being closed you said your function of maybe just.
Beginning to general economic malaise were what consumers are trimeter budgets.
As.
As these headwinds have started to abate.
Here in United States and elsewhere have you start have you seen.
Improving demand trend for <unk>.
Yes, we have seen in improving demand trend for <unk>.
Domestically and abroad.
In the middle of the quarter, we saw significant improvement in Watson sell through.
I think may and June we're strong stronger and continued.
To show strength.
So we're confident that.
That watson's.
Coming back so to speak yes, initially the downturn was simply because of a store closures and lack of foot traffic as opposed to lack of consumer demand.
Now Hong Kong very recently.
Has seen something up a resurgence.
We still are highly confident in the performance of the Hong Kong sales, but there is obviously some uncertainty there.
Same as true is R. U S E Commerce business, we saw in March fairly dramatic and fairly immediate impact.
But.
We were able to recover in the middle of the quarter and finished fairly strong. So we have confidence that we're going to still see continued growth and the basic ecommerce business as well as watson's in the future.
Okay, and then my follow up question.
This with regard to marketing.
Those of Us will follow.
<unk> you're very closely.
Watching the science and all these these studies well.
What is it is there a is there a what do you what what are you waiting for what do you need to wait for from I guess from the science from the studies.
In order to give you the.
Conviction or leeway to lean more into marketing about some of these other potential benefits of true night since.
A couple of it.
Well, it's a good question.
We take great pride in the fact that we are a fundamentally sound operation and conservative and the way we approach on business and.
And that's two on the financial side on the operating side and on the marketing side, we have great pride in the relationships that we have with the regulatory bodies with the FTA with D. FTC with international regulatory bodies and we have we have we have those relationships in large part because of the way we approach it.
And the U S.
You can't mention a disease or any type. If you are not an approved drug so the best you're going to do with the dietary supplement or or a food as a structure function claim.
And in order to make a structure function claim you need a published clinical study.
Generally more than one.
Now we are we see what goes on in the business, we see what the other dietary supplement companies.
Heck, so I'm actually even steal the ingredients and don't even pay for it.
So I'm actually pretend that the sciences theirs or that they have patents when they don't.
But often people lean into these health claims when the sciences in there to support it in there just hoping that the FTAA or the FTC is not going to go after them.
We're very careful and we understand that by being careful by licensing patents and paying royalties and by being conservative and the way we approach it and by letting published studies.
Precede claims that we make that there is it takes more time.
And that we understand that there are investors that are frustrated because they don't want to take more time. They wanted to happen today. They believe in the ingredients. They don't understand why other ingredients are making claims on television and sales are growing quicker, it's just not our way.
We're doing it one step at a time brick by brick and appropriate way in building an organization that is built to last and that's just the way, we're going about doing it quarter by quarter year by year.
We wish there was a quick way to do it we don't see it.
Okay.
I appreciate what color.
Thank you very much.
Thanks, Brian Thanks, Brian.
Your next question comes some Jeffrey Cohen. Please provide your company name and ask you questions.
Hi, This is actually destiny on for Jeff.
I want to echo that congratulations on a nice quarter. My question is really more around the health care practitioners are you able to have any.
Right into how they're coping with various restrictions Nathan placed on them.
And do you think that there are some customers that may be getting through them that have transitioned into the E. Commerce channel in order to continually have nitrogen yeah receive an island.
Yeah, I think that's a very interesting question.
One can market.
[noise] aggressively to health care practitioners then to consumers.
Health care practitioners, you can present preclinical studies animal studies to them to show the supporting data.
And then there is confidence that they would still that data and then translated to the end consumer and are responsible way.
So our connection's to health care practitioners is extremely important and we see that as a very.
Strategic and growing part of our business.
Both in the sports community as well as the direct health care practitioner community Nutritionists nurse practitioners chiropractor's and physicians themselves and yes, we do believe that many consumers start.
Are introduced by to true nitrogen through their health care practitioner somehow care practitioners or actually resellers of the product themselves. They they actually purchase wholesale.
<unk> from Chrome addiction, then resell it to their patients. Some just recommended but we do see that many of these consumers then become direct to consumer ecommerce customers have hours.
Okay very interesting I appreciate that and then I heard a brief mention of some R&D investments I'm just wondering if there is some high level.
Color you can give us on what you're working on.
Our R&D investments cross.
Many spectrum stairs are there are supply chain ingredient manufacturing investments, we're we're constantly reducing costs and I think we've done a very very good job working with some of our partners to increase our gross margins and improve the manufacturing processes. They're also investments in research so that we can.
Make stronger Fuller claims, but also have a deeper knowledge of this incredible molecule and this incredible ingredient.
And then there are also product investments. We're we're trying to find other ways to offer nicotinamide riboside to the consumer whether it's a powder or a food or a beverage.
Or even various formulations that we think wood.
<unk> in combination with other ingredients that might benefit of particular <unk>.
Submarket marketing group and all of these latter up to R&D investments for the company.
Okay. Thank you.
And then Frank you've been pretty busy.
At different conferences and it round tables I'm. Just curious is there anything I'm coming up that we should be aware of as well.
Well I mean, I'd say that there seems to be a lot more there's been a lot more news lately about the FTA and various aspects of the regulations and that's largely what.
The round table that I participated in this week for NIH as well as.
The event that Rob spoke about as well, we're largely about FTA related regulations.
And the need for the FDA to enforce are better enforce those regulations for those that are in fact being responsible.
So I would say that my I'm definitely gonna be spending time.
The drama and the fact that the FTA needs to do their job to enforce regulations within the space better than they have been.
And as long as we need to keep beating the drama and that we're going to.
Yeah, I think it's an important topic not just for chromatics, but it's also a good one could support the whole industry.
Alrighty got it thank you for taking the questions.
Thank you. Thank you.
Can we do ask that you. Please limit yourself to one question and one follow up. Your next question comes from Mitch Panero fifth Denton <unk>. Please go ahead.
Yeah, Hi.
Good afternoon.
So.
Sort of following up on like.
You're cautious approach to particularly what you can say in marketing.
When.
When do you think you'll have the ability to more directly address.
Viruses and.
And related.
Aspects too.
<unk>.
I mean, there's this are we talking.
Is this.
Two years out six months out I mean, just curious when do you think it would be realistic to be able to address it more directly.
Well of course, when you conduct a human clinical study, there's no way to know for sure. What the results are going to be the preclinical studies or an indication of what you might expect but when you do a clinical study. There's so many other variables that are harder to control that it's hard to know and until you complete a study with the results that you were hoping for Ya.
Can't make a strong claim.
So it could be a few months.
Theoretically possible that it could be weeks, it's not likely but it's theoretically possible I don't think it would be as much as a year, but it's even possible that it could be it depends on when these studies or completed and what the results.
Okay, Yeah, just hard.
<unk> to.
Sell a product.
Without being able to tell people.
Why they need to take it I mean, it directly instead of.
Beating around the Bush so it's.
Just sort of important.
Spect him to the marketing.
Speaking of marketing.
It's a market is going to be up three to 5 million for the year.
It was up a million dollars in the first half so that suggests.
An acceleration and the second half.
What what gives you the confidence CIC E Commerce was was flat and the quarter.
Sequentially that is what gives you the confidence that.
It's the right thing to do in this.
To to accelerate marketing.
Well as I said it was flat it was flat in the second quarter versus the first quarter, but the first half of the.
Second quarter was down significantly and then it recovered so we're looking at trends here.
And we're seeing strengths, we're seeing seeing significant rebounding here and so we're seeing growth. That's one reason and another reason as we know what the product is and we know what the retention is and we know the customers that.
That begin to become true nitrogen customers, especially those that stick with it for a couple of months tend to stay for a very very long time. So.
There are many many metrics that we look at and the E. Commerce business that suggest this business is going to be around and growing for a long time to come in any one quarter anything can happen.
You could have events like the corona virus that might be disruptive for a quarter or two but we see and believes that long term. This is a very significant business and will continue to grow.
And I guess just to follow up in my final question is just.
Any color you can provide is too.
E Commerce channel.
Yeah.
New customer growth sequentially.
Weaker or was there with retention rates different lower.
Any color would be helpful.
And the beginning of the quarter, we saw for the first time an actual.
Reduction in retention rates.
Like in March.
And we saw some headwinds in new customer acquisition, but then by the end of the quarter, we saw that turnaround and retention rates are turned to the right to the good rates that we've been used too and then new customer acquisition improved as well.
Okay. Thank you.
Sure. Thanks Bitch.
Your next question comes from J P. Mark with farmhouse equity research. Please go ahead.
Hi, good afternoon, and congratulations also on positive adjusted EBITDA.
So regarding that measure actually and you're talking about getting too positive EBITA overall legalist, obviously, the big thing sitting there.
And what I heard was that it sounds like it was down sequentially, but it may ramp back up a little bit as you go into another phase and is that correct.
Yes, that's correct, we expect it to increase in the third quarter due to the litigation in Delaware and the litigation in New York.
And then by the end of the by the end of next year do you believe that that it goes away.
All one way or the other correct.
Yeah, it's hard to predict illegal spending in terms of magnitude and timing, but I think that the case that is the most important cases of Delaware case that is scheduled for September of next year. So we're hopeful as we get to that case is Rob so that we want to get to trial.
That case would result in legal spending too moderate after that case.
Okay, Great and then my last question is about gross margin.
The press release talks about an improvement of 110 basis points.
That was related to part of your initiatives. It recognized this quarter I also heard that it sounds like gross margin is still improving so even though you got this one time benefit.
Are you still sort of optimistic that you get to 60% plus gross margins over the next few quarters is that sort of is that the plan.
Yeah, I think from the timing perspective, we haven't really said the timing, but I think we worked on a design change that we implemented in the fourth quarter of 2019.
Taken the configuration of our three months supply from three bottles. The one bottle that resulted in lower bottle cost smaller packaging and lowers shipping costs. So as we go through the first through the third quarter, that's that will be an improvement versus last year, because we launched into the fourth and then we also did some some <unk>.
Work in the first quarter of this year, which we expected to hit in the second half of the year. Some of that has come through in the second quarter, but we would see.
Benefits in the.
And the third and fourth quarter, and then I think with regard to our savings programs. We have also highlighted that.
We expect about $2 million a savings based upon what we've implemented already and most of that would show up in 2021.
Okay, great. Thank you.
Thank you very much.
Your next question comes from bedroom Selvarasa, you with HC Wainwright. Please go ahead.
Afternoon. This is Matt speaking on behalf of from Alright, Sweet Wainwright, Thanks for taking my questions.
<unk>.
You have you how long does the Fta's regulation of Neutraceuticals evolved recently and how has that impacted U.
Hi, This is Frank.
Wouldn't say that it's evolved recently, it's the same basic regulations that were put into place based on Deshea in 1994.
Those are implemented over the course of time between 1994 and then.
But the core of those regulations really around good manufacturing practices and the second one is around N V eyes.
And.
The enforcement the biggest issue isn't necessarily the.
The regulations themselves, it's really like I was seeing before it's really more about the enforcement of the regulations and how those are enforced as irresponsible company, meaning how chromatics operates like Rob is said multiple times on the call today.
We're responsible company that spends money and follows the rules that the F. D. As laid out there are a lot of companies that don't do that.
And the problem is that sometimes the companies that are spending the money don't necessarily get the benefits that they should buy in fact, following the regulations that way that they should be.
So I would say it's more of enforcement then really about structure the regulations.
That answers your question.
Okay, Yeah, it makes sense.
And the second question relates to this fascinating study that was published today in the press release recently about the social deficits and what is.
The researchers if you know this planning on replicating this and female mice. Two in addition to the mail.
That's a good question I don't know if there were plans.
I think that they specifically studied the mail mouse model because it was probably easier to replicate it.
Don't know if they plan to take it pass that.
And a female mouse model and.
I think it would be more hopeful for us is that like a lot of like Rob had mentioned that we've passed or.
200.
Collaborative study and a lot of the collaborative study instead of started and studies like this.
Transition from successful.
Ah.
Studies mouse model type studies into human clinical trials so.
<unk> be hopeful that somebody would want to investigate this further in some form clinical trial.
Maybe more so than even looking at.
<unk> mouth mouse model work.
Yeah. Thank you very much that'd be fantastic and thanks for taking my questions.
Sure.
Thank you I can come from Matt gain please provide your company and ask you questions.
Hi, This is Matt Dane from tightening capital management.
Wanted to delve a little deeper into the Cove at 19 studies or or Corona virus studies that had been referenced on the call.
<unk>, you've obviously reference the.
Couple of animals takes up came out as well as that Smith.
To the NIH lab there.
Curious how much efforts are work is being done around humans and doing studies and human is that something that's developing are people looking at it and I don't know how much would be just a formal study versus.
Something otherwise.
Such a rapidly evolving and and.
Crazy situation not working right now.
We haven't announced any human studies, yet, but we are having discussions with numerous.
Researchers.
Is there anything that's being done informally that you're aware of that.
Whether it's in a hospital situation or or things like that where people are are doing research or looking into things that might be publishable or or assist.
We know of various things that are taking place, but none that have.
That we've announced publicly or discussed.
Okay. Okay wanted to also ask about sales out of China, you announced that you added the two additional partners here this quarter.
On top of your prior associations was curious what you're seeing how to China.
How that markets developing for you.
Yeah, any color that'd be great.
Yeah, it's definitely growing there is a searching interest there and so we see it as a as an opportunity and we intend to invest more in it.
Is it material at this point in time rough.
I wouldn't say it's material yet remember, we still don't have blue had approval to sell in China, it's still across border business.
But but.
But we are we work on it every day.
Okay do you have any sense at all when you may get the Blue had approval.
No we can't give any indication of when that will happen.
Things are changing their fairly rapidly.
They only within the last year establish their rules for getting Blue had approval.
But there is a great deal of interest.
Okay sounds good well thank you.
Sure.
Man.
Thanks, Matt.
That is all the time, we have for questions I'll turn the call back to Brianna Gerbert for closing remark.
Thank you Josh there'll be a replay of this call beginning at 430 P. M Pacific time today. The replay number is one 805 858367 in the conference I D is 1563949, thank you everyone for joining us.
Today and for your continued support of crime attacks.
This concludes today's conference call you may know disconnect.
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