Q3 2020 Chromadex Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Chromadex corporations third quarter 2020 earnings Conference call.
My name is Jody and I will be the conference operator today.
At this time all participants are in a listen only mode and as a reminder, this conference call is being recorded.
This afternoon Chromadex issued a news release announcing the company's financial results for the third quarter 2020.
If you have not reviewed this information both are available within the Investor Relations section.
Indexes website at Www Dot Chromadex dotcom.
I would now like to turn the conference call over to Briana Gerber, Vice President of Aflac, <unk> and Investor Relations. Please go ahead Mrs. Gerber. Thank you good afternoon, and welcome to Chromadex corporations third quarter 2020 results Investor call with US today are Chromadexs as Chief Executive Officer, Rob freed founder and executive.
Chairman bring jocks, and Chief Financial Officer, Kevin Farr.
Today's conference call May include forward looking statements, including statements related to credit exit research and development and clinical trial plans and the timing and results of such trials the.
The timing of future regulatory filings the expansion of the sale of true nitrogen in new markets future financial results business development opportunities future cash needs from an active operating performance in the future and future investor interest that are subject to risks and uncertainties relating to chromadexs its future business probably.
That's an opportunities as well as anticipated results of operations.
Forward looking statements represent only the company's estimates on the date of this conference call that are not intended to give any assurance as to actual future results.
Because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties. Many.
Many factors could cause chromadexs, its actual activities or results to differ materially from the activities and results anticipated in forward looking statements.
These risk factors include those contained in Chromadexs. Its quarterly report on form 10-Q, most recently filed with the FCC, including the effect of Copa 19 pandemic on our business.
Results of operations financial condition and past Bliss.
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.
Reconciliations to the appropriate GAAP measure.
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 Friel Rob.
Thank you briana.
Good afternoon, everyone and thank you for joining our third quarter 2020 industries.
I'm pleased to say that Columbus had another strong quarter financially and strategically.
You, Tom or sales grew by 7% sequentially.
21% year over year.
Sales to watson's, 93% sequentially and 10% year over year.
True knowledge and overall net sales were up 22% year over year.
In addition, we delivered an adjusted EBITDA loss, which we defined as EBITDA, excluding legal expense of only $125000 in the third quarter.
And breakeven year to date, an important achievement for this company.
The science on knowledge and it's been very strong since our last update we announced completed clinical and preclinical research in areas, such as oxygen cardiovascular and immune health kilometer health and most recently on Corona bars.
Frank will go through this research in more detail shortly.
As well as some additional preclinical research showing that knowledge and may have an impact on several of the nine hallmarks of agent, which.
Which are gaining the attention of the scientific and investment communities.
Earlier this year, we committed to advancing collaborative COVID-19 research on knowledge and sharing the findings when appropriate.
I'm very proud to say that we have delivered on this commitment.
And have more studies in the pipeline. This includes our collaboration with the National institutes of allergy and infectious diseases or in a yeah I'd division of the NIH to assess the therapeutic potential of nitrogen in cold good 19 animal models.
And last month we.
We announced results of a controlled clinical study in Turkey.
Showing that in nutritional protocol, which included nicotinamide riboside.
Combination with the therapeutic standard of care.
Reduced recovery time in COVID-19 patients by nearly 30% 9.3 days to 6.6 days.
This study included a 100 patients with mild to moderate cold at night.
Researchers are now enrolling for a phase three clinical trials 300 patients.
We're very proud to support research to find answers to this global pandemic.
We look forward to sharing more results of these endeavors in future updates.
Well I mean, that's also delivered on our launch expectations for true Nigel <unk> Nestle Health Science, one of the world's great food signs commissions.
Last month, Nestle launched Celltrion cellular energy protein based flavored drink mix featuring Tonight.
This is one of three products under the new Celltrion brand, which will help address the effects of age associated cellular decline or a C.D.
Definitely began marketing in August by launching a new unbranded web site M Y E C D dotcom to educate consumers about the C D.
According to that site a C.D. is the time related deterioration in the way our cells function as we age often begins in our forties and accelerates nor sixties.
This partnership with Nestle Health Science to launch Celltrion energy is an exciting opportunity to reach a new base of consumers and introduce them to the cellular health and healthy aging benefits come through.
I'm not sure.
We are proud to be in business with Nestle.
We are encouraged by their commitment to this new product launch.
Two additional accomplishments and our core E Commerce business this quarter were one.
The relaunch of our U.S. true nitrogen dot Com website, which features our full suite of products and improved customer experience and to.
A record breaking labor day promotional event, leveraging our new CRM, which enabled us to customize emails and offers by audience segmentation.
We appointed a new head of marketing earlier. This year was assembled a strong new team with expertise and acquisition retention Creatives in third party marketplace.
Going forward, we see opportunities to optimize each of these areas.
We also continued to build upon and protect our intellectual property, which includes our ongoing litigation against the Museum Hill.
In Delaware. The patent case is scheduled for trial in September of 2021 with the Markman hearing in December of this year with the judge will rule on claims construction arguments.
We remain as confident as ever in the strength of our licensed patents following the lesions unsuccessful attempts to invalidate them.
The P. tab office in U.S. Court of Appeals.
We're also very confident in the other litigation against the leasing.
They never paid the end or the chromadex applied to them.
W.R. Grace, which holds patents on the two known nicotinamide riboside chloride morphologies and sells this ingredient Nigerian exclusively to Chromadex has also sued leaves him for patent infringement.
We are encouraged to see a blue chip manufacturer like W.R. grace protecting intellectual property surrounding.
W.R. Grace is an important partner of ours.
We see a tremendous opportunity to grow the two nitrogen business with them over time.
Well I mean, that's will not be incurring legal fees for that case and it does not impact our litigation against the Louisiana, Although we believe.
It further validates the leaves him egregious behavior.
As I reflect on the quarter.
And the year to date.
I'm extremely proud and grateful.
I'm proud of the entire team at Chromadex, we pivoted quickly when the Corona virus hit the.
Justin marketing messaging advancing the science.
Adjusting to a virtual work environment and reducing costs.
This is reflected in the stability of our operations as.
As well as our strong financial results year to date.
I'm also proud of our science.
And to be part of the conversation around potential solutions to the COVID-19 global pandemic.
This is unique for a dietary supplement company and.
It is thanks to our deep commitment to science.
And our hundreds of research collaborations globally.
We have been able to quickly put together these studies.
We will continue to invest in the science behind Nigel and fiercely protect our intellectual property against Infringers.
Which we believe creates long term value for our shareholders.
And I am grateful to our business partners Watson, Nestle Health Science, and W.R. Grace among many others.
Who believe in Tonight and have committed to building the business with us.
With that I will pass the call over to our chairman Frank Jacks for an update on scientific research.
Thanks, Mike.
Thank you Rob since.
Since our last update peer reviewed publication of research on NR and any de has continued to accelerate in addition, there were two newly registered clinical studies on NR and Chromadex signed nine new research collaborations as part of our Cert program.
There are now 43 ongoing completed or published clinical trials currently registered on clinical trials dot com to investigate the pharmacokinetics and health benefits of NR.
In addition, 11 clinical trials are registered to test and are in combination with other ingredients for a total of 54.
Earlier this year, we committed to advancing research on and are related to COVID-19 and are encouraged that our ingredient is being studies as a potential nutritional solution.
As Rob noted, we recently announced initial results have been open label randomized placebo controlled phase two study, which included 100 COVID-19 positive patients with mild to moderate symptoms.
And were published in met archive pre print server for Health Sciences.
This clinical study was registered in October by Skandi, Biotherapeutics and conducted at the University Health Sciences, Stempel training and research hospital in Turkey.
The objective was to assess the clinical efficacy tolerability and safety of the combination of a nutritional protocol, including nicotinamide Riboside and the local standard of care that includes hydroxy chloroquine compared to a placebo and the local standard of care.
The key findings were the combination treatment reduced average recovery time by 29% compared to the placebo group.
There was an improvement in markers of liver function for a combination of treatment on day 14, compared todays zero as measured by plasma Ltd, STD and LDH.
And adverse events were uncommon benign and self limiting.
According to the investigators conducted the study the phase three trial will be double blinded and include 300 patients at eight clinical sites in Turkey.
We are currently exploring other research opportunities to see how NR, maybe part of the solution to the COVID-19 pandemic.
A second clinical study was registered in August by the National Heart lung and Blood Institute part of the NIH and the University of Washington to assess the mechanisms by which raising blood and heart and the D levels in humans helps mediate changes in mitochondrial function protein and I'd be genetic modification.
And so as well as inflammation.
If the results are positive this would provide evidence to proceed with additional studies of NR as a potential nutritional solution for heart failure patients.
In August we announced the results of a pilot study, which indicated that night and Jim may reduce inflammatory cytokine and stage D heart failure patients.
This marked the 11th published clinical study and the second study focused on the potential cardiovascular benefits of knowledge in humans.
According to the lead researchers by increasing mitochondrial health of peripheral blood mononuclear cells or P.B.M. sees.
In this study patients pro inflammatory cytokine production was reduced.
A key marker studied was aisle six unknown proinflammatory molecule that was adjusted to play an important signaling roll between mitochondrial function in inflammation and P.B.M. sees.
These new findings build upon a growing body of evidence identifying how nitrogen may support cardiovascular health.
Rob mentioned, the nine hallmarks of aging in his remarks, a reference to the landmark article called the nine hallmarks of aging publish seven years ago.
Researchers identified nine cellular and molecular hallmarks of aging that contribute to the aging process and together determine aging many.
Many listening may be familiar with some of these such as cellular senescence tell him or attrition stem cell exhaustion and of course mitochondrial dysfunction, our strategic focus.
I'll briefly highlight two important preclinical studies that were published in October which are related to the nine hallmarks of aging stem cell exhaustion and tell 'em meretricious.
First a mouse study published in nature immunology found that an hour improved T cell function, which is a component of new cancer Immunotherapies.
T cells are immune cells test with recognizing that eliminating affected damaged or cancerous cells.
This research built upon a previous preclinical study that found in our couldn't improve cancer treatment by preventing chemotherapeutics induced stem cell depletion, including T cells.
We know mitochondrial function is essential to the function of the energy expensive cells, including stem cells and immune cells.
The results of these recent preclinical studies suggest that an hour.
Can support these cells. However, further research is required to verify this problem.
Our Permian cell function in turn May play a key role in a wide array of diseases, including many forms of cancer.
Stem cell exhaustion as explained in the nine hallmarks of aging is the age related deficiency of stem cells, which.
Which contribute to many of the physical problems associated with aging, including a weak immune system.
As such well early this is an interesting area of research for NR.
Second a preclinical study from the National Institute of aging at NIH published in the European Molecular Biology organization Journal found that replenishing any de within our alleviated telomere damage, providing a protective effect to DNA es cells replicate.
Telomere attrition or shortening there's another than nine all marks of aging, which refers to the gradual loss of protective caps of chromosomes.
It is well accepted the telomeres play a significant role in aging and attrition has been linked to many age related health conditions.
These promising findings suggest that any D repletion within our May play a role in maintaining healthy telomere function. However, additional research as needed.
In summary, we are committed to remaining a global scientific authority on N.R., and D.D. research and being an innovative science based responsible company.
The growing body of clinical research supports the potential for sales of our patented and need de boosting ingredient NIAGEN and our consumer product true nitrogen.
I look forward to sharing more in future updates.
With that I'll pass the call to Kevin Farr, Kevin.
Thank you Frank.
We continue to focus on operational and financial discipline on our path to achieving cash flow breakeven.
This discipline is again evident in our third quarter 2020 financial results, which reflect continued progress against our key financial objectives and strong underlying business performance.
The underlying business as measured by adjusted EBITDA. Excluding total legal expense was a loss of 125000 in the third quarter, essentially breakeven and a 1.7 million improvement year over year compare.
Compared to the second quarter of 2020, we delivered slightly lower net sales driven by a tough comparison with the 1.6 horizons purchase last quarter.
Sequentially and year over year growth in our core true knowledge and consumer product sales higher gross margins higher advertising expense as a percentage of net sales and lower general and administrative expense.
I'll begin my review of the sequential piano results and then discuss the year over year trends for the three months ended September Thirtyth Twentytwenty Chromadex reported net sales of 14.2 million down 7% compared to 15.3 million in the second quarter of 2020.
So as I said included a 1.6 million purchase from our shareholder Horizon ventures, who donated true nijman bottles to health care workers in Hong Kong hospitals during the height of the pandemic.
True Digest sales were up 2% sequentially or mid teens, excluding the horizons purchase importantly, this growth was driven by our ecommerce and watson's businesses, which were up 7% and 93% respectively compared to the prior quarter.
Sales to Watson's were 2.5 million in the third quarter roughly double the 1.3 million of sales in the second quarter with sequential growth in both true nitrogen and true knowledge and beauty brands converse.
Conversely, and as expected we experienced headwinds from our nitrogen ingredient business in the third quarter and we continue to expect lower nitrogen sales in the second half of the year.
Gross margin was up 20 basis points from 59.4% second quarter of 2020% to 59.6% in the third quarter of 2020.
As a reminder, last quarter. We included a 110 basis points from a rebate related prior year supply chain efficiency initiatives. So the underlying improvement was stronger.
Product cost savings initiatives favorable mix and overall scale and our supply chain drove the improvement in gross margins.
Total operating expenses for the third quarter of 2020 were 12.7 million down 1.1 million compared to the second quarter of 2020.
Selling and marketing expense was <unk> point Threemillion to 5.2 million in the third quarter of 2020 compared to 5 million in the second quarter of 2020, consistent with our expectations as a percentage of net sales. This expenditure was up 440 basis points in the third quarter of 2020 versus the second.
In quarter of 2020, we.
We continue to monitor it daily E commerce metrics, such as customer acquisition cost to adjust messaging in spending at the same time, we increased spending this quarter consistent with our full year financial outlook.
So many investments this quarter were focused on brand building, which was a higher customer acquisition cost in the short term, but it's important for increasing awareness and for long term customer retention.
As reported DNA expense was down 1.3 million to 6.5 million in the third quarter of 2020 versus $6.9 million in the second quarter of 2026.
This included 1.9 million of legal fees and point $2 million of severance and restructuring expense in the current quarter.
Excluding legal fees severance and restructuring in equity compensation expense third quarter 2020, Gionee expense was lower by point 1 million versus the second quarter 2020 comparable DNA expense legal.
Legal expense was <unk> point 1 million compared to the second quarter of 2020.
No trial dates have been set in California, do the krona buyers or ongoing investments in the Delaware patent infringement case as we prepared for the claims construction Markman hearing in December 2020, and trial in September 2021.
We also incurred expenses related to ongoing discovery in the New York Litigation.
Well overall legal expense was lower than expected. This quarter. We expect these to ramp up in the fourth quarter driven by the New York in Delaware Litigations.
Third quarter of 2020, our operating loss was 4.2 million versus 3.7 million in the second quarter of 2020.
The net loss attributable common stockholders for the third quarter of 2020 was 4.2 million or a loss of seven cents per share as compared to a loss of 3.7 million or a loss of six cents per share for the second quarter of 2020.
Moving to our year over year financial results total net sales were up 18% year over year compared to the third quarter of 2019 with 22% growth in true knowledge and 21% growth in E commerce, and 10% growth in Watson's being the key highlights Rosemarie.
Gross margins increased by 360 basis points to 59.6% compared to 56% in the third quarter of 2019 marketing.
Marketing efficiency as measured by selling and marketing expense as a percentage that sales improved by 150 basis points.
General administration expense was lower by 1.4 million due to savings from organizational realignment initiatives and lower legal expense finally.
Finally, our operating loss improved by 2.7 million year over year, driven by efficiencies across all areas of the piano.
You would help investors better gauge the underlying financial performance of our business and progress towards cash flow breakeven in the second quarter of 2019, we introduced a new non-GAAP measure adjusted EBITDA, excluding total legal expense.
From index 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 expenses bad debt expense related to Louisiana, severance and restructuring expenses and total legal spend.
We have included a reconciliation to the appropriate GAAP measure in our earnings release slides they're.
As I previously highlighted adjusted EBITDA, excluding total legal expense was a loss of $1.1 million in the third quarter of 2020 compared to a profit of point 5 billion in the second quarter of 2020.
Total year over year, we delivered a 1.7 million improvement in the third quarter of 2020 versus a loss of 1.9 million in the third quarter 2019.
Furthermore, this metric has improved from an average quarterly loss of approximately 4 million in 2018, and $2 million and 2019 to breakeven in 2020 year to date as we put important foundational processes and systems in place.
Moving to the balance sheet and cash flow, we ended the quarter with 15.5 million in cash and have not accessed our $7 million committed line of credit.
In the third quarter of 2020, our net cash used in operations was 3.8 million versus 1.6 million in the second quarter of 2020.
Difference this quarter was primarily driven by higher working capital investments.
To date, we have successfully navigated the business during the Corona virus pandemic managing our working capital at this time, we do not expect any supply chain disruptions from the krona virus and have implemented risk assessment strategies to manage this moving forward.
As it relates to our 2020 full year our outlook is unchanged from our second quarter, we expect to deliver continued topline growth including growth in our E. Commerce business. We continue to expect gross margin expansion due to a favorable mix from our growing ecommerce business the product design changes implemented in late two.
It was 19 and additional supply chain cost savings initiatives, which we implemented beginning in the first quarter of 2020, we.
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, including our cross border platforms in China.
We expect continued improvement in selling and marketing expense as a percentage of net sales driven by strong sales from returning customers at scale on our business. Lastly, we continue to expect the Jena, excluding severance and restructuring expense and legal expense will be up by $1 million to $2 million year over year comparable 2019.
<unk> expense, excluding fuel easier related bad debt expense in 2019.
Adjusted EBITDA, excluding total legal expense remains a key metric we expect a significant improvement for full year 2020 versus full year 2019, but as we said there may be quarter to quarter fluctuations driven by timing of their marketing campaigns and R&D investments. We continue to believe we can achieve cash flow.
Even at $17 million to $19 million of quarterly revenues, if the litigation and legal costs decline.
Total operating expenses will likely be higher in the near term driven by higher litigation expense as a result, we need to achieve sales of approximately 19 million and gross margins that is slightly better than 60% to achieve this we believe we will deliver higher gross margins as we execute on supply chain cost saving initiatives.
And are on track as we exit 2020.
This remains an important objective for the company, we've made significant progress and we will continue to manage all levers of the piano to deliver on this commitment.
Before we conclude let me briefly touch on the economics of the Nestle Health Science supply and license agreement.
As Rob mentioned definitely recently launched their celltrion cellular energy product with true knowledge and online in the U.S.. We wanted to update you on the accounting for the supply and nitrogen related royalties any upfront exclusivity fee and product launch fees. As a reminder, there were certain commercial milestone payments tied to the sale.
Agent that nestle as they launch in new markets.
The aggregate payment is up to $6 million, the chrome index, which will be payable as the product launch milestones are achieved.
But to collect the 1 million of cash related the U.S. launch in the fourth quarter.
Apply nitrogen and related royalties will be recognized upon the shipment of nitrogen before.
The 4 million upfront exclusivity payment and the product launch fees provide for material rights related to this exclusivity over the term of the contract between.
The term is through 2036, when the last patent issued to our exclusive manufacturer related that the crystalline forms of and our chloride expires yep.
The upfront exclusivity for you launched fees would be deferred revenue deferred revenue will be recognized based on the shipments in the current quarter relative to our estimated quantities over the term of the agreement.
We were required to revise our estimates on a quarterly basis and true up revenue recognized as necessary.
On the upfront fee and milestone payments, most revenues will be driven by ingredients sales and royalty payments from Nestle and 2020 and beyond.
Well, we continue to expect the contribution to be small in 2020, and 2021, there's meaningful long term potential to create significant revenues and profits from our business partnership with Nestle.
In addition, definitely we raise awareness a true nitrogen through its marketing programs and continued global expansion of distribution in the years to come we're proud of our strategic partnership with a well respected food science company like Nestle.
In summary, we remain committed to delivering profitable growth and achieved an important milestone profitable adjusted EBITDA, excluding total legal expense year to date.
I'm very proud of the entire chrome index team's execution and financial discipline.
Operator, we're now ready to take questions.
As a reminder to ask a question you want me to press Star one on your telephone.
Withdraw your question press, the pound or hash key.
Please limit yourself to one question and one follow up question.
Please standby, we compiled acuity roster.
Our first question comes from the line of Jeffrey Cohen of Ladenburg. Please go ahead. Your line is open.
Hi, Thank you for taking the questions.
I'm not I'm just curious I know you mentioned additional potential partnership opportunities in the past and being in communication with some other partners I'm. Just wondering have any of those moved that closer towards a firmer agreement following nestle's launch celltrion.
Yes, we have been in discussions with several blue chip companies and and some have moved forward, but none are imminent there.
Ongoing discussions.
Okay, very good and I guess my my follow up is more towards marketing do you have any insight upon nestle's target consumer and what kind of overlap is there between what your head of marketing the demographic, they're working on and what Nestle and who definitely is targeting.
Well nestle's product as you know is a protein based.
Product and it's a powder product and it's a complement to their suite of products that are targeting the anti aging market.
Obviously true nitrogen as well as south trend is enhanced anti aging products. So there is some overlap in the target market.
We think their target audiences that older than ours, there's overlap into celltrion product with their existing boost product not just.
Complimentary to the boost product.
But we don't really know yet the details of their target audience or their primary consumer at this point because it's new.
We'll be calibrated with them and sharing information with them as we go along.
Okay. Thank you I'll take the rest of my questions offline.
Thanks.
Our next question comes from the line of Brian Nagel of Oppenheimer. Please go ahead. Your line is open.
Hi, good afternoon.
Thanks for taking my question guys.
Regulations on continued nice progress here.
So the first question I have just with regard to sales.
And Kevin you spoke a lot about the difficult comparison with last year, which disrupted the sales trend a bit here in the third quarter, but okay I'm doing the math right or you could exclude that it still seemed as though the pace of sales slowed somewhat further from from Q2. So I guess the question I have is am I right, but also.
So probably more important is just you know to what extent I think we talked about this last quarter too to what extent is the the covert crisis, you know continuing to weigh somewhat upon on sales of the true nitrogen products here in the U.S. and elsewhere and maybe any so any commentary on how on the sequential trends. We think how he is as cobot has started to baby abate. Some places have you seen sales rebound.
Yes, I think with regard to the the organic growth. This quarter I think it is it is it is lower but it's you know on a sequential basis, because as you know the onetime purchase that we had in the second quarter. If you take that out from a total company perspective, we grew at 3%.
If you look at it from a true nitrogen perspective actually grew high teens.
Teens for us. So there was some good organic growth in the quarter that was masked by the $1.6 million purchase that we were comparing to in the second quarter. The Cove is a thing is hard to to a.
More or less calculate we think at retail is obviously when you look at Watson's and the rate that we're growing last year.
And they were up 2% year to date this year.
But last year they were growing at a much greater rate. So we know what's impacting or retail operations. We also know that is impacting the new markets that we launched in 2000.
20.
But its overall, it's hard hard to tell you.
Looking forward, we expect to continue to grow but the environment is volatile.
On a sequential basis, our ecommerce business remains the core growth engine.
And if you look at our year to date results due to legacy beaded be businesses that I mentioned, the micro economic impact to krona virus in the horizon venture purpose purchases, there's been some volatility quarter to quarter, but when you look at it a year to date you see the company has grown 30 to pursue.
On a total company basis, when you look at true nitrogen is growing 34% our ecommerce business has grown 28% and as I mentioned earlier Watson's grown 2%.
So you know good growth when you look at it in an aggregate basis over the first nine months, but there has been volatility Brian.
Yeah. That's right. This is Rob I would add to that that the core of the nucleus of the operation at this point is your direct to consumer true nitrogen business.
And I think if you compare first quarter second quarter second quarter third quarter, you could see that the actual rate of growth is increasing.
Mhm.
Okay. That's perfect and then for my follow up it's like you talked about this in the prepared comments, but the phase two study.
Turkey.
Was excited quite excited we spent lots I'm talking about that but just to show.
I guess questions or whatever I wish you as investors here, what should we be thinking about the timing of.
We're just grossbard with phase three and when we will get some pretty good communication on what this could potentially mean for corporate actually true Nigel.
Well the the the phase two trial actually went went relatively quickly and the phase three trial is already moving relatively quickly. So I don't think from a study timing standpoint, I mean, it's it's a short period, where there are dosing patients. So it's it's really the question is around enrollment how fast can they enrolled 300 page.
So it's not like it lingers for months in terms of the dosing.
From a dosing perspective, so that.
That's that's moving relatively quickly.
And I think look the with everything you can see that's going on in the world right now or at least the kroner virus, it's accelerating their work the wrong way right now.
I think Ron virus is going to be around for a while and we're going to have a you know having additional data is going to give us another bite at the Apple here I mean, having a phase three trial beyond that one confirming hopefully keep our fingers crossed confirming that the result that we gotten that first study is going to go a long way.
Yes, let me just ask one more.
On the heels of that so Kevin you know you get.
I know, there's a lot of unknowns here with this problem.
This goes well how would we think about the the financial benefit to crops Chromadex, where we're how we're how we've got four with a bottle so to say.
Well I think you know hopefully is going to increase sales the rate of sales growth.
And then obviously from a you know I think we've proven the model and as we get more scale, we should be profitable quicker and that's kind of the bottom line.
What we can specifically do with this information when it gets published is marketed directly to the health care practitioner market medical community in general hospitals pharmacies physicians.
Yeah, it ought to be part of standard of care for people, who are symptomatic Cove and positive.
And this will enable us to communicate better that should ladder up to increase sales overall.
Got it.
Thank you very much the next person ask questions. Thanks, Brian.
Our next question comes from the line of Jeff Van Sinderen of B. Riley FBR. Please go ahead. Your line is open.
Great. Thanks for taking my question first let me say congratulations on the progress on all fronts.
Thanks can you can you speak more about how you're thinking about evolving marketing for unity versus anti aging as covance spikes again, I know there has been some shifting around on that.
Right. It's a very good question, you know managing messaging and marketing.
As a healthcare company during cold that is sort of like shifting from zone defense to man to man.
Because the market moves around as the news moves around.
And as you know, we had positioned ourselves as anti aging and fitness products, principally and then we.
Added immunity once we started releasing these covance studies and that was effective for us in the second quarter and continue to be effective for us in the third quarter, but what we also observed during the third quarter was a bit of coated fatigue.
And we saw that certain of the messages, especially those that were related to sell defense as it were.
We're not converting as well.
So we have pivoted again, and we've begun to add back some of the anti aging and fitness messaging that was so successful private prior to call that hitting and we see we see that converting as well.
So it's it's it's challenging but we are equipped to manage it and in the meantime, the more studies, we release showing the power and the efficacy of two knives and the wider the market and the market potential as it is.
Okay, Great and then can we shift to international for a moment I'm just wondering about your near term expectations for the UK and Australia, a true nitrogen beauty I know you mentioned that Watson.
I guess you know anything else you can talk about at this point that's on the horizon as were thinking about international going forward.
As you know we are in 200 Super drug stores in the UK, we sell cross border into you.
We sell cross border into China, We saw cross border into Japan, we are selling online in New Zealand, and Australia, and starting to appear uncertain retail outlets in Australia, we sell in certain retail outlets in Canada, and we sell online and in Canada as well.
We see opportunity for growth in virtually all of these areas, particularly as the research continues to rollout.
But the coated thing has had an impact on retail, particularly outside the U.S. and the foot traffic in the UK has been.
Very impacted the timing of our releases superdrug coincided with code that they closed a bunch of stores and it's still somewhat small so the online business is looking strong and growing but the actual retail business seems.
To be waiting for people to come back.
We think that there's an opportunity for growth there, but at this point as long as Cove. It is still going to be around that it's you know, they're implementing even strict stricter lockdowns in parts of the u., including including the UK, our emphasis will be much more on online marketing and online sales Fortunately were equipped to do that.
Okay, great. Thanks for taking my questions and best of luck for the rest of the quarter.
Thanks, Jeff.
And our next question comes from comes from the line of Ram Selvaraju of H.C. Wainwright. Please go ahead. Your line is open.
Thanks, so much for taking my questions. Firstly wanted to ask about how you expect gross margins to trend going forward and if you think there's likely to be significant sizeable improvement potential in the coming quarters and if so when could we approach potential steady state is that likely to be in the low sixtys mid sixtys.
Maybe even higher than that let's give us some background on that please.
Yes, well I think we're just we continue to work on their supply chain and we're getting better mix has been something that's been helping us I think also our product design changes that we did last year effective in the fourth quarter and going from three bottles for our 90 count dosage for three months to one bottle and so.
Smaller packaging is and lower shipping costs.
Or an opportunity you know we have you know I think secured and implemented or things that are going to or initiatives that are going to deliver 2 million dollar run rate next year. So you should see sequential improvements in our.
Gross margins are I'd say you know, we think we can get to the low Sixtys you know I can see line of sight into that and it's something that you always continue to work on and and obviously I think scale will help us to as we.
Continue to grow and get to a higher level that caused you to another benefit.
And I mean in the context of that can you comment on you know as Nestle continues to scale with Celltrion, what kind of impact that is likely to have on the gross margin evolution.
Well it should help but I think when we look at it from a 2000 2021 perspective, we don't see it as being a big number for us. So that's more like 2022.
And that will help us scale and.
Also you know with regard to that selling of nitrogen, we do get a royalty from than that which is somewhere between low single digits as they launch to high single digits as that business gets bigger and bigger.
Okay, then just very quickly on the COVID-19 program in.
In the context of the phase three Frank could you comment on what standard of care currently persist in Turkey, and what the control is supposed to be in this phase three program and also you know when you talk I think both you and Rob talked about the potential utility of.
The drug in the context of symptomatic overnight.
What specifically.
When you talk about symptomatic overnight out pacing.
Yeah order could potentially qualify and would you consider potentially.
Potentially being a therapeutic deployed only in the outpatient setting or you know specifically within the context.
So the first part of your question there.
Let me take the last part first I guess is the best way. So the we're only looking at mild.
So patients that have tested positive, but are only exhibiting mild symptoms.
Oh, so people that are not not going to enter the hospital or require hospitalization. So that's the main bulk of the people that were looking to put into the trial that was exactly what we did in the first phase two study as well.
So.
Yeah, that's that's definitely helpful. But when you say mild symptoms, you're not looking specifically at respiratory symptom right.
Well I wouldn't say that they may be looking at some respiratory but obviously they are not going to be looking at people that that would you know from a pulse oximetry standpoint would be like in a bad way right. So.
Looking for people that are on the fringe of that but not not that not have to be hospitalized.
Okay. No. That's very helpful. And then with respect to the standard of care and the control.
No standard of care standard of care in Turkey, and we've had this conversation with others as well, but standard of care in Turkey is hydroxy courtland so.
We would love to be able to design the study without the standard of care. However, that's not an option we have to follow with the standard of care in Turkey is in the U.S hydroxy chloroquins. So both arms both them and the in the in this phase three study it will be a.
A double blind placebo control. The first study was an open label if you're if you remember but.
But both arms do have to have standard care. So we have to have hydroxy core in both arms.
That's just the nature of the beast of dealing with with Turkey, but.
In the first study that was also it was the same but we did see obviously a clear difference between both arms, which had hydroxy Clark wins, the arm with with the new tree cocktail plus nitrogen.
Showed a significant improvement of recovery.
And that was a clear difference between the two so we don't believe the hydroxy chloroquine plays a role and that's what we believe at least at this point.
I would love to be able to do an arm without that to further show that but.
That's kind of where it says does that answer your question.
Yeah. So I think further to that when we talk about mild symptoms and the fact that you know hydrochloric when is the standard of care in Turkey can you comment at all on other medications that are specifically being excluded in this trial. For example are you permitted use of steroids like dexamethasone.
I don't know I don't know if we have any specific exclusions that I can recall in this in the trial design.
So it's possible I mean, we did the phase three study is moving into a it's an eight sites studies so.
It's possible that other things could be administered as part of the study it depending upon that the the site location.
What about run deficit here.
I don't think there's a whole lot of Ram disappear in Turkey to be honest with you.
I don't think that's going to be a major factor because of the fact that there's not a whole lot of supply there.
Okay very helpful. Thank you.
Thanks Ryan.
And our next question comes from the line of Mitchell, If an era of Sterne event and company. Please go ahead. Your line is open.
Hi, good afternoon.
And then.
[laughter].
As seen on E Commerce business can you talk about sort.
Sort of a break down in this quarter, whether sequentially or year over year, how new customers.
Oh comprise of the with the new customer growth was the total recurring revenue.
How that performed in the last quarter.
<unk>.
Well the bulk of our revenue is from returning customers.
The retention rate, which we haven't yet provided is is very very strong.
And so we are confident in the base when people start to take true nitrogen, particularly after they take it for a month or two.
Very few stop taking.
The.
The growth of new customers, though has slowed.
And we have noticed that the number of new customers that weve added for versus a year ago has has has declined and so that's an opportunity for us to grow further.
And.
And when you look at sort of I guess your customer acquisition costs.
As they focus more on new customer or do you is there any element.
In the recurring revenue customer.
That you're spending on now.
I'm, sorry, Mitch could you try one more time I'm not sure I understood the question.
Yes, so what he said I'll just ask it differently I mean, just be talking about customer acquisition costs.
And how they compare to in you know in your I guess internal data.
Yes to a year ago or could that sequentially.
And whether your I know you talked about you spent some money on branded awareness more than sort of a you know a call to action marketing.
Can you talk about that in the context of your customer acquisition.
<unk>.
Well, we did invest more in nonperformance marketing in the third quarter.
Satellite media tour as it was much more PR attempts there were more interviews more what you might call overall brand marketing, which is not conversion related directly related. So therefore, our customer acquisition costs were higher in the third quarter.
Additionally, we did some experimenting in some new messaging as I said, it's a fluid situation with Covidien, we're noticing from month to month, some dramatic changes in audience response.
You know at the beginning of the year, we we appointed a new head of marketing and that new head of marketing.
Then put a team together.
To work with her we also implemented some very strong fundamental long term marketing and.
Initiatives for example, we have a much more robust cohort data analytical system in place. So we have a deeper understanding of who the customers are and how they behave how they interact with US. We also have a much deeper understanding of.
Our website customers versus Amazon customers.
And who they are and what their interests are.
Additionally, we recorded the entire website relaunch the entire website, which also now enables us to track behavior for visitors to the website. So we have a much stay.
Stronger and deeper understanding of our relationship with our consumers.
But right in the middle of that process, we got hit with this the pandemic and and it's sort of forced us to put some of these fundamental initiatives aside and actually but be more reactive right. Now we are restoring some of those fundamental policies and programs in place. So my expectation is that the.
E Commerce business is going to become much more efficient and much and grow in a much more dramatic way.
In the coming quarters.
Okay and then that's.
That's helpful and then.
As you look at your various other sub segments health care practitioners sports fitness any comments with regard to how they're they've they did in the quarter.
I'm not sure if we disclose how they did versus previous quarters improved versus last year, I know that well I guess you know.
Sorry go ahead.
What do you think in terms of color I mean are you see increases in health care practitioner or have.
I have had sports teams continues to grow any color would be.
Yes, there are many more athletes in sports teams that are regularly purchasing true nitrogen from from Chromadex. We also have a much larger base of health care practitioners that regularly purchase from US one complication is some of them shut down their offices during the call that period. So they are not carrying the.
Inventory in the same way so that was a headwind uncoated, but there is a much much higher level of interest and interaction from the health care community in the sports community in general for true nitrogen.
We are investing in a stronger infrastructure internally in both of those specific specific areas.
And we are adding experienced high high high grade personnel to specifically focus on both of those things. So my ex we are we do see high growth potential in both sports and health care practitioner and we're going to increase our our focus in both of those areas in the coming quarters.
Okay.
Thank you for your time.
Thanks Mitch.
Thanks, so much.
And our last question comes from the line of JP Mark a farmhouse equity. Please go ahead. Your line is open.
Hi, good afternoon, Thanks for taking my call sure.
So a couple of very quick questions here about the marketing and redesigning the website first of all I think it's a it's a good redesign I think it definitely is an improvement and I wondered whether you are doing different versions for different countries or is it just one.
Every country.
We intend to do different versions for different countries, but we haven't yet.
Okay, and when do you think you might roll that out any idea.
Next year sometime.
Yes next you definitely next year not this quarter.
Yes, and then second question Rob It says on the website that you can it has a list of the podcast that you've done I just had a complete list or are there other ones that are that you've done that are not listed here and the news on the news tab there.
Lately I've been doing quite a few so I'm not sure. If it's a complete list I don't know, but perhaps if if you email briana. She can update you yeah. Nobody only has four I think I think yeah, yeah, Okay, and I'd say that that.
Okay, well I will tell you that the more podcasts you do in my opinion, the better I think it's a it speaks well it used to be called for the company I think it's fantastic marketing for the company, so and if there's any way to continue that I would highly encourage it. So anyway. Just my comment that again. Thank you for taking my questions and wish you continued success.
Any time, thank you for the questions.
Yes.
At this time, we do not have any further time for questions I will turn the call back over to Briana Gerber for closing remarks.
Thank you Jody there will be a replay of this call beginning at 430 P.M. Pacific time today. The replay number is one 850 58367 and the conference I'd 4699759. Thank you everyone for joining us today and for your continued support of kind of that.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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