Q2 2022 Chromadex Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to <unk> Corporation's second quarter 2022 earnings Conference call. My name is Dennis and I will be your conference operator today.

At this time all participants are in a listen only mode and as a reminder, this conference call is being recorded.

This afternoon <unk> issued a news release announcing the company's financial results for the second quarter of 2022.

If you have not reviewed this information both are available within the Investor Relations section of <unk> website at Www Dot chroma Dax Dot com.

I would now like to turn the conference call over to Heather Vanblarcom Senior Vice President of legal and corporate Secretary. Please go ahead, Mrs have embarked barco.

Thank you good afternoon, and welcome to <unk> Corporation second quarter 2022 results Investor call with US today are Crummy, Texas, Chief Executive Officer, Rob Fried Chief Financial Officer, Kevin Farr, Vice President of Finance and Investor Relations Brianna Gerber joining.

For the Q&A portion of the call senior Vice President of scientific and regulatory Affairs Doctor Andrew Shao.

Today's conference call May include forward looking statements, including statements related to <unk> research and development and clinical trial plans and the timing and results of such trials the.

Timing of future regulatory filings.

Spansion and the sale of <unk> in new markets business development opportunities future financial results cash needs <unk> operating performance investor interests and business prospects and opportunities as well as anticipated results of operations.

Forward looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurance as to the actual future results.

Because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties. Many factors could cause crumble <unk> actual activities or results to differ materially from the activities and results anticipated in forward looking statements. These risk factors include those contained in chrome.

<unk> quarterly report on Form 10-Q, most recently filed with the SEC, including the effects of the COVID-19 pandemic as well as inflationary in adverse economic conditions on our business results of operations financial condition and cash flows.

Please note that the company assumes no obligation to update any forward looking statements. After the date of this conference call to conform with the forward looking statements actual results or changes to 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 Companys website present reconciliations to the appropriate GAAP measures.

Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at Www Dot <unk> Dot com.

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

Thanks, Heather and good afternoon to all and thanks for joining us on our Investor call.

The second quarter of 2022 marked an important period of organizational improvement because.

As we adapted to this changing market dynamic and to play and placing an emphasis on fiscal responsibility on efficiency and profitability.

The core E Commerce business continues to grow 10% sequentially.

13% annually.

The overall net sales declined a bit however year over year, primarily due to timing of orders from our partners in Watson Hong Kong. We believe this timing will be made up in upcoming quarters as.

As I mentioned, our core E Commerce channel is delivering consistent growth and becoming increasingly efficient.

Amazon is our fastest growing channel within e-commerce despite.

Despite the challenging macroeconomic backdrop, two nights and has been delivering very strong results there.

As an example, we're very proud to have reached the status of number one best selling vitamin B three supplements. This momentum also supported by nearly double the number of subscribers since the beginning of last year has enabled us to reduce spending in the short term by focusing on campaigns that drive.

The highest conversion as you heard last quarter, we launched a new television campaign for <unk> in late March we and Walmart, we're very encouraged by the significant increases in sell through once our campaign aired.

This improvement came a bit late to impact their spring shelf set plans.

<unk> will continue to be carried but in fewer stores going forward with a focus on the better performing stores and.

On our introductory 100 milligram SKU.

We established that TV advertising works well to drive awareness for true nitrogen, but it is an expensive channel, particularly the linear TV channel.

And this is a challenging macroeconomic environment. So we have paused this campaign.

Our focus on our core E Commerce channel, which delivers consistent growth with measurable return on advertising spend and.

And we are already seeing efficiencies in the third quarter.

We see this difficult market as an opportunity to improve our operations. Our expectation is that we will approach breakeven in the third quarter and deliver positive adjusted EBITDA or cash EBITDA in the fourth quarter of this year.

At the same time, we know that the addressable market for our ingredient <unk> and our brand through nitrogen remains very strong.

This is supported by the science with numerous preclinical studies published this quarter once again support the efficacy of our novel ingredient Nicotinamide Riboside. These.

These include studies investigating the effect of nitrogen and cardiomyopathy neuropathy on inflammation and then myogenesis.

In addition, and importantly.

Preliminary findings from our study supported by the Gates Foundation.

And conducted by our Chief scientific adviser Dr. Charles Brenner.

Were presented at the face said net NAV plus metabolism and signaling conference. This past June .

The study performed in an animal model showed that moms supplemented with nitrogen.

More offspring with improved body composition in brain development significantly outperforming NMS.

We look forward to sharing more once the results are peer reviewed and.

Published and Thats. The science supports the long term prospects for <unk> and <unk> and so does our continued innovation in NAD precursor space.

Which we will share in future updates.

We also made significant strides in our China strategy this quarter, a large and growing market for <unk> supplements.

As many of you know we have a partnership with Sino foreign <unk> Shah of <unk>.

<unk> stayed on health care group in China.

As consumers already understand the benefits of elevating any in.

In China, we can differentiate <unk> as the most trusted and science based brand with a trusted local marketing partner like final form.

While we have been in discussions with Sino farm since late last year, we solidified our relationship in June with the cross border agreement.

This now enables us to progress more quickly toward commercialization, we continue to be impressed with their deep knowledge of the local market as well as commitment to our brand and we look forward to them taking over the management of the cross border operations.

The coming months, we also signed an agreement to establish a joint venture in China to pursue blue had approval for in country sales of Tonight.

This will open an even larger addressable markets to accelerate growth over time.

Another strategic market for two nights in South Korea, but.

But we recently signed a definitive agreement with Dennis our healthcare marketing partner in the country, whose focus is on cosmetics and dietary supplements.

Lastly, in the broader Asia Pacific market, our new partnership with HMH is progressing quite nicely.

They recently launched their first exclusive product with nitrogen the Swiss beauty activator.

Australia and they have plans to launch this as well as other products targeted at the unique benefits.

Areas in China Cross border as well as other markets.

As a reminder, the Swiss brand as the leading brand in China Cross border platforms, and we remain optimistic about the prospects with HMH.

We're very excited to enter a new period of corporate development.

We continue to grow the <unk> brand broadening our revenue base geographically through partnerships and our strong recurring revenue base of well informed users.

Actively seeking the best science based supplements aid and improving their overall health and wellbeing.

Part of this transition.

And being a growing startup to $70 million global revenue run rate for Q nitrogen theres been a stepwise series of leadership changes designed to assist <unk> in its next phase of corporate lifecycle development.

This includes meaningful changes to our board of directors as well as our executive leadership team.

In April we added two outstanding female executives and Cowen and Christine Patrick to our board of directors.

And as a financial expert and our new chair of our audit Committee.

And Kristen the new chair of our non Gov Committee.

Brings extensive marketing expertise most recently at <unk> and previously at Pepsi.

And just this week, we welcomed how much abaza CEO of well health.

It is a successful health care Internet entrepreneur Who's company is focused on consolidating is modernized and primary health care facilities and practices in Canada.

These three great executives are injecting new perspectives and energy into our board and we are very grateful that they have decided to join us and our executive team has also undergone gone some changes as many of you know our cofounder Frank Jacks.

He has stepped away from his executive duties to pursue a new entrepreneurial venture and a complementary space of synthetic biology, but he will remain as chairman of our board.

We also have a new head of the legal department other than block.

Who is joining us on this call today.

Sure.

Hi, there its been assistant general counsel of complex for almost nine years.

He is an extremely talented executive who has extensive knowledge of complex in over two decades of experience in the industry.

I am quite confident you will manage our legal affairs, our litigation and our overall legal expense.

Quite prudently.

And finally, Kevin Farr is stepping down as Chief Financial Officer.

<unk> has long been respected in the ingredient and dietary supplement industries.

One of the most respected scientific and regulatory affairs companies.

Under Kevin's supervision, our finance and operations have become equally and universally respected.

We thank you for sharing his years of experience as CFO at Mattel and experience of price Waterhouse prior to that.

And for helping us to proudly become the professional organization that we are today.

We now look forward to working with Brianna Gerber was recently promoted to interim CFO .

<unk> has over 20 years of diverse experiences in investment management and finance at the capital group at Mattel and of course right here are very complex.

Rihanna will be and is a key leader in our efforts to continue to improve the organization as we adapt to this changing market dynamic and to place an emphasis on fiscal responsibility on efficiency and unprofitability.

Over the last four years I've been quite impressed by her leadership broad business acumen, and our passion to constantly deliver positive results.

Very excited to be working with her.

In summary.

I am quite bullish on what is taking place with complex on the internal changes on the key pillars, we have put in place for our China strategy and globally.

And for our upcoming scientific developments.

I would now like to return the call to Kevin and Briana, who will run through the quarter's financials, and then onto Q&A and closing remarks, Kevin Marianna. Thank.

Thank you Rob good afternoon.

It's a pleasure to speak to you today.

It's been an honor to be CFO at <unk> for the past five years since our pivot five years ago, we have grown <unk> into a global $60 million brand with a global footprint and diversified channel strategy expanded gross margins from around 48% to over 60% and achieved.

Cash flow breakeven in our underlying business, excluding total legal expense with a focus on achieving this including total legal expense in the fourth quarter of this year.

One announced my transition from CFO consultant, providing services over the next few months to ensure a smooth transition.

Also want to congratulate Brianna Gerber head of finance and Investor Relations on the promotion to interim Chief Financial Officer as many of you know Briana has been my most trusted finance partner for the better part of a decade as she moved with me from Mitel to join Chrome IDEXX.

Over the last four years <unk> has evolved as she assumed more responsibilities in almost all aspects of the business, which has prepared her to send to the CFO role over the last year. We've made significant progress on building a global brand optimizing our marketing messages and testing targeted advertising camp.

<unk> focus on specific benefits of true nitrogen since aging means different things to different people.

We believe these activities provide a strong foundation that will accelerate our revenue growth rate as well as improve our profitability over time. Finally, I'm also proud of the strong teams that we've built across the company in just a short few years.

With that I'll hand, it over to Brianna, who will comment on the quarter's results as well as put into context, our strategies going forward before we dive into the details Rihanna.

Thank you Kevin Let me first say that I'm grateful for the opportunity to serve as interim CFO on behalf of <unk> shareholders. We have a novel ingredients that can unlock a very large addressable market of consumers do you want to address the root cause of aging and I believe we have the right team in place to capture this opportunity.

Ali.

As interim CFO my immediate objective is to look at all areas of our cost structure with an emphasis on becoming a leaner and more focused organization beginning in the third quarter.

We recognize this attention to operational efficiency is critical in the current economic environment.

We've already adjusted immediate levers such as media spend from July and reduced R&D spend on projects without a clear ROI for large commercial opportunity.

Im encouraged by the executive team's commitment to this important initiative and look forward to leading the company through this transition.

In the past Kevin has discussed adjusted EBITDA, including total legal expense as a proxy for cash flow prior to working capital investments.

We expect to approach breakeven in the third quarter and are targeting cash flow breakeven or better on this basis in the fourth quarter of 2020.

With that let's turn to the second quarter financials.

<unk> reported total net sales of $16 7 million down 5% year over year with strong gross margin of 60%.

Importantly, our e-commerce business continued to grow with 13% growth year over year, and 10% growth sequentially in the second quarter.

As a reminder, the prior year period included Amazon Prime day, which falls in the third quarter. This year, so underlying sales were even stronger.

Overall sales were down due to two primary drivers.

First the timing impact of sales to Watson due to COVID-19, and second the initial shelf stocking to support our Walmart launch and the second quarter of 2021, both of which create a challenging prior year comparisons.

Adjusting for the Walmart impact alone our net sales would have been roughly flat year over year.

As Rob said, given the current macroeconomic environment. The company has pivoted to spend on distribution channels and marketing campaigns with the highest short term return on investment and a strong focus on conversion beginning in the second half of 2022.

We are optimizing advertising spend within these channels targeting consumers, who are more likely to convert based on their purchasing patterns and demographic profile and.

And we are exploring tools, we can leverage to become even more sophisticated targeting going forward.

At the same time, we have decided to pause our television campaign, which well effective as a much more expensive marketing approach in the short term.

For context, we invested just over $1 million in TV in the second quarter.

This television campaign with originally launched to support brand awareness at Walmart. So we anticipated that our E Commerce channel with also benefit which are dead.

As Kevin noted last quarter, we saw increases in organic searches and new website visitors growth in new customers on our own site as well as strong sales trends on Amazon.

Well Walmart was encouraged by the sell through trends immediately following the T V launched they'd already planned to reduce our spring shelf that puts you in Ireland.

As a result, the 300 milligram 30, count skew will no longer be carried in stores and the 100 milligram 30 introductory skew will be fault in our stars.

This is a healthy reset for the brands to focus on the better performing stores.

Beyond Walmart, we recognize that a brand like ours requires continuous consumer engagement and education.

Extends to our BTB partnerships, where we are increasingly looking to learn from each other and adapt content to their local markets. We recognize that many of these partnerships have been slower to ramp than we anticipated consistent with our emphasis on efficient spend we are focused on maximizing sales with our existing partners as we add important new strategic partners like sign off on them.

To optimize our Omnichannel global distribution strategy.

Moving to the P&L details.

Total net sales in the second quarter of 2022 were down 5% year over year compared to the second quarter of 2021 with a 6% decrease in <unk> driven by a 13% growth in ecommerce offset by a 47% decline in combined Watson's another VW sales as previously discussed.

Gross margins decreased by 110 basis points to 60% compared to 61, 1% in the second quarter of 2021 the.

The decline was primarily driven by a loss of scale due to lower net sales coupled with input cost inflation and increased head count and our supply chain to support future growth.

We also had a small impact from lockdown funds at Walmart.

Optimize our star and SKU mix for Tonight.

We are very proud of the work by our supply chain team to achieve a consistent strong gross margin of 60% and a challenging inflationary environment.

Selling and marketing expense as a percentage of net sales increased to 47, 9% compared to 35, 2% in the second quarter of 2021.

Our investment in television advertising was the driver of the increase but as mentioned we have paused. This top of funnel spending which will improve the trend in the second half.

We're also experiencing higher costs for new customer acquisition, driven by broader industry trends year over year.

As reported general administrative expense was lower by $2 million, primarily due to lower legal expense of $2 4 million, partially offset by increased investments in technology and increased staffing in key functional areas to support growth.

We expect legal expense to further decline going forward and continue to expect full year 2022 legal expense to be under $7 million.

For the second quarter of 2022, our operating loss was $6 4 million versus $5 6 million in the second quarter of 2021, the net loss attributable to common stockholders for the second quarter of 2022 was $6 4 million or a loss of nine cents per share as compared to a net loss of $5 6 million or a loss of eight cents per share.

For the second quarter of 2021.

Finally, our adjusted EBITDA, including legal expense was a loss of $4 6 million compared to a loss of $3 5 million in the prior year.

Moving to the balance sheet and cash flow our balance sheet remains strong we ended the quarter was $17 $1 million in cash.

In the second quarter of 2022, our net cash used in operations was $3 8 million versus $7 9 million use of cash in the second quarter of 2021.

The difference year over year was primarily driven by lower trade receivables due to timing of payments from customers as well as other changes in working capital, including inventory investments and timing of payments to our vendors.

As a reminder, the second quarter. Both periods include the payout of a bonus to employees related to prior year of company performance.

As it relates to our 2022 full year outlook as I mentioned, we believe our decision to focus on more efficient channels and make tough decisions related to our cost structure will enable us to be cash flow breakeven or better in the fourth quarter of 2022 and approach this call in the third quarter.

Our updated net sales outlook is high single digit growth.

E Commerce remains strong the reduction from 15% to 20% previously is primarily driven by lower growth from combined new and existing partners. Due to continued COVID-19 headwinds internationally as well as a slower ramp up with new partners.

We expect approximately 60% gross margins slightly lower selling and marketing expense in absolute dollars year over year.

Approximately $1 million increase in R&D, and approximately $6 million to $7 million decrease in G&A.

Relative to our prior outlook. This reflects more conservative investments in marketing as well as R&D with the focus on near term ROI and a reduction in executive head count and Janet.

We have provided details on the key P&L metrics in our earnings press release, along with the slide presentation.

In summary, I'm excited for the next chapter of criminal acts.

We have work to do but I'm confident we can achieve positive adjusted EBITDA.

Additionally, we have learned so much about our consumers over the last five years and can build on this foundation going forward.

By Segmenting, our Chennai agenda, Biogen consumers into different cohort groups e-commerce analytics as well as insights from our partners. We can orient, our marketing content communication R&D and business development pipeline to strategically target. The market. We look forward to sharing more about how we are optimizing the business to align with this consumer oriented vision and pizza.

Operator, we are now ready to take questions.

Okay.

And at this time I would like to remind everyone in order to ask a question simply press star one on your telephone keypad.

Your first question is from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon.

Hey, Brian Hey, Brian Okay.

Congratulations brianna Kevin Congratulations thank you so much.

And the others.

So a few questions here first off with respect to Walmart.

Maybe could you could you size the size what's happening for us here so.

Kind of shifting number of stores and I think I think you said youre, so youre going to Walmart now, it's always a 100 milligram product explained.

Youre not going to solve it.

300 milligram products, so maybe if that's the case.

And then to what extent is this shift the shift in Walmart.

How do we think about the near term financial implications about how big a piece of your.

Reduction in guidance is Walmart.

And then the other question I have on this system.

You talked about Walmart.

With the TV advertisement.

Pull back with TV advertising somehow tied to this is shifting and Walmart.

So briana I'll answer the second one first and I'll, let you answer the first question second.

Okay.

Yes.

Hi, Brian .

Two different locations. So there is a tad bit of a delay.

So the.

The primary reason for the pull back on the TV campaign and by the way.

We're pulling back on linear TV, there's still going to be streaming TV linear TV, which is.

Much more expensive and much more difficult to measure and much more top of the funnel extensive and thats. The primary reason.

We have a nice clean balance sheet, but we burn some cash we want to stop burning cash. We know that this is not a good time to be burning cash we have a great product. We have a great revenue base, we have a great operation. The idea here is to be lean and creative and profitable.

On top of the funnel very very high most expensive top of the funnel marketing is linear TV.

So that's the primary reason, but secondarily, yes, there was some impact there.

We did get the TV AD out and we did see dramatic improvement in the performance across the board are all metrics not just sales at Walmart, but.

Google searches traffic to our website sales and other places I mean, it shows that it was an effect of that and the media buy was effective as well, but it's very expensive and it's something that you have to maintain.

It's not like other forms of.

Marketing like digital media marketing, where you can go in and out and measure real time performance.

And return on AD spend and customer acquisition costs, and then make short term adjustments TV is much more difficult than that.

Because Walmart did want to pull back from <unk>.

Approximately 3800 stores to approximately 2000 stores I believe.

And because we're selling a lower priced product.

When you do the math it just seemed like the return was not going to be there as much. So that the secondary reason why we decided to pull back on linear TV spending for the time being.

Okay. So brianna.

Handoff the the first part of the question.

Sure Brian It wasn't a big part of our change in the top line outlook.

So Walmart was not a big change for reference we said that last year as initial shelf stocking was about $1 million.

If you look at our net sales that we report.

Mark will be in the other b to B. It was about $1 8 million in Q2 last year was about $1 million. This year. So again, Walmart a key driver of that the bigger driver year over year as we said, though is Watson.

And again, Rob commented on the store count reduction for the 100 milligram SKU and then it won't be carry for the 300 milligram, but the key here is that the stores that their focus on this was a bit of an experiment in a wide footprint at Walmart.

Now, they're refocusing on the stores that are performing better and a SKU that probably hits the price point Mark. So we do view it as a healthy reset and again not a key piece of the change to our financial outlook.

That's very helpful. If I could squeeze in one more just.

Sure I guess just bigger picture.

Demand perspective, so you talk about it.

Every consumer company I speak with are followed was talking about just some extended more challenging macro backdrop largely brought on by the inflationary pressures on the consumer so.

You look at your business are you seeing more from that standpoint are you seeing more pressure on kind of a tracking that new customer to chromebooks or are you seeing a higher churn rate with customers that are already using the product.

Actually that's an interesting question I don't know the answer is unique but we are seeing.

Sort of an almost an extraordinary increase in new to brand.

However, we are seeing an increase in churn.

Okay.

And one of the reasons why we're seeing.

Truly dramatic increases in the number of new customers coming to.

Coming to Chromebooks via the E Commerce channel, but part of the reason is because we did offer this 100 milligram.

Thank you.

So it is a much less expensive SKU.

But we all know that the science behind <unk> and I am sure at this point, you know, Brian and everybody else is listening knows that.

This really does show that the 1000 milligrams is where most of the studies or have.

Been conducted and show the dramatic statistically significant results.

Most of us at Cromer, let's take 1000 milligrams, but thats pretty expensive.

So if you take 100 milligrams, we do have research that shows that there is a <unk>.

Dose response, you do have an elevation of your <unk> level.

But it might not be as easy to notice in your and your general health or lifestyle.

So there is a higher churn rate.

Those people.

That's probably the lower dose.

The answer to the question is yes, no we are not having headwinds on new to brand.

But yes, we are seeing a higher.

Higher churn rates.

Hey, Robert.

Quickly.

Brian just to accentuate that are new and returning customers. Both grew sequentially in the quarter, So I'd Echo and reiterate what Rob said and you're about to the outlook question. Our expectation is even with the lower spend our ecommerce growth in this business grew about 13% in the first half.

Should be able to grow at a similar rate, albeit slightly lower with the reduction in media spend in the second half. So again, that's not what we're experiencing our business on the E. Commerce side. The reduction outlook is more about slower ramp with new partners continued international partner headwinds with Covid that we thought by now would be starting to abate.

Alright, Thank you very much everyone.

Thanks, Brian .

Your next question is from the line of Mitch Pinheiro with sort of an <unk> company. Please go ahead.

Hey.

Good afternoon.

Hey, Yeah, Hey, Ian quite congrats to Kevin and Briana so.

Look forward to working with you more closely Breanna and thank you for all your time Kevin.

Yeah, Thanks, Mitch I appreciate it.

Thank you Matt so.

I guess first question, so listen we've seen four consecutive quarters of slower e-commerce growth, it's grown but we're just seeing that it's ticking down.

From as high as 31% growth there was an obviously an anomaly there back in 'twenty, one, but it's falling and.

Meanwhile, it doesn't seem to match.

The growth of the science and and even even just.

The media I don't say media awareness, but certainly.

The.

Scientific publications, and we're seeing more of that.

Why.

I would have expected it to be a little stronger than 13% growth I realized Amazon Prime that was I appreciate you calling that out but.

Yeah.

Is this.

Is this really just something that you can kind of turn on with more effective.

E Commerce.

Marketing advertising and.

And why.

You can barely just mentioned with ecommerce maybe slowing a little bit in the second half.

That's partly due to the lower TV so.

With TV is not effective Ben.

Why wouldn't it be driving the second half.

Did you what was the last thing you just said if TV is not effective did you say.

TD is not effective why why would we be expecting.

Having that.

Negative impact to the second half sales.

Okay, maybe I don't think we said.

You mind, if I answer that.

Not at all.

Thank you.

I don't know that we said that TV was not effective I think.

I think in fact, the data that we looked at showed that it was effective.

But it's very expensive and you'd have to sustain the investment in TV for.

For quite a while and it really does cost a significant amount of money, but we did see benefits across the board from that TV campaign of all of the metrics.

We measure.

Okay.

The other thing I wanted to point out is that the Amazon Prime numbers are.

That week is fairly it's a fairly significant week.

No.

The numbers can be fairly dramatic.

In some cases several times the average that you do on a single day.

So it could really dramatically skew the percentage growth in any given.

Quarter.

But in answer to your question.

No.

The sales of the E Commerce channel.

Our directly a function of your customer acquisition cost and of your retention.

We are seeing.

Very strong reductions in our customer acquisition costs over the last several months, which is very very encouraging.

But partly because we've been selling a lower SKU and partly because of the economy. We are seeing a slight increase in churn and cancellations.

So, but the good news about that is that something that you can address but not extensively.

There are ways to manage.

Churn and cancellations without having to buy TV.

So I do believe that the growth rates for the E Commerce channel and eventually will decrease and get back to some of the levels that you've seen in the past.

But we've given guidance for the next couple of quarters, where we're expecting to spend significantly less in digital marketing. So we're giving what we consider to be realistic and perhaps conservative projections, where we will still see comparable type growth, but at a much reduced investing.

And marketing.

So go ahead did you want to add to that.

Yeah, just one more point on that niche, we said similar growth.

The 13% in the first half, but as Rob said pretty significant reductions in spend is not just TV. We really are focusing on even the digital media and trying to optimize that some of our campaigns within Amazon within social search and get more efficient. So we think we can achieve again a similar.

Growth with lower spend in it might be a touch lighter but.

Nothing more than that.

And you also obviously.

Yes.

I would imagine every quarter youre adjusting your digital spend it seems like to be.

Is that a moving target for you.

As to what is resonating or.

Why.

Is there some is there something inherent either in the product or in.

In the messaging that debt needs to what needs to be optimized.

Further than what you've been doing.

Well, that's a very good question.

So part of the beauty of digital marketing and E. Commerce marketing you said you could really identify specific cohort groups.

And different cohort groups respond to slightly different messaging.

For example in our case.

Generally it's people looking for a solution to a metabolic agent generally.

And so our general customer base tend to be older.

They are fairly evenly distributed between men and women may be a slight tilt towards women.

But it's generally evenly distributed but they tend to be people, who are concerned with the way their body is aging.

But the way the body ages can differ from person to person and indeed with all the science that's coming out on <unk>, we're seeing very very specific benefits towards some indications certain specific indications for example.

We announced the study that was published last quarter on Parkinson's.

Some for some people aging as cognitive for some people it's energy for some people it's sleep for some people, it's muscle or heart.

It's very so what you can do with digital marketing, though is you can tailor our message towards a cohort group that is for example, more specifically interested in cognition.

And remembering where their keys are.

Some people aging means I can't find my teeth.

So that is specifically says to them.

We might have a solution to that problem cognition health brain health, you get a much higher conversion rate.

So well manage e-commerce really does have multiple messages and it's targeting different cohort groups that are that are responding to those different messages and then Europe.

You are finding what they called a look alike lookalike audiences. Once you find a cohort group that's look that responds to a particular message you then widening the funnel and target and others that are similar to them and so the optimization process could go on really forever and where we're at as a business.

Tens of millions of dollars of sales online, we can do many times that by continuing to optimize and pursue that channel.

And I'll just compliment the team for their work on Amazon our landing pages, highlighting some of those benefit areas is really set a great foundation for us as we've tested and learned in you have to invest to test and now we're dialing that in based on our learnings.

Okay.

One more question on on your.

Your.

Your request to reach.

Cash flow breakeven does that carry into 2023.

Sort of the run rate.

You achieved in the fourth quarter do you think is 2023, you're going to be a positive cash flow year for you.

Yes that carries into 2023.

Okay.

Alright, well thank you for the questions.

Thank you Mitch.

Your next question is from the line of Ron <unk> with HC Wainwright. Please go ahead.

Okay.

Thank you very much for taking my questions. Just three very quick ones. Firstly I was wondering if you feel at this point that you have already established at which price points. You expect you might see meaningful demand destruction in other words.

Do you know precisely where and again this may be dependent primarily on the SKU, but do you know precisely where.

That demand.

Inelasticity is.

And how can we expect you might be able to take advantage of that from a sales growth perspective, as well as margin improvement perspective going forward. Secondly, I was wondering if you could provide some color on how quickly you anticipate seeing meaningful impact from the <unk>.

I know farm collaboration.

With regard to potential revenue coming from the China region and if this is more something that we should be looking to see show up in the numbers next year and lastly, if you could comment at all on this progress status or current status of your relationship with necessarily health Sciences. Thank you.

Thank you for those three questions.

So let me go in reverse order.

As you know Robin we've discussed in the past.

Naturally this is a very sophisticated science based operation and they are also the number one dietary supplement company in the world.

One of their leading researchers Carlos can't though is also one of the leading researchers.

Researchers in the World in fact, we recently published a study about the combination of NR and NR H another.

Precursor that for which <unk> has patents.

Licensed.

Showing that the combination was actually more effective than just NR alone.

<unk> alone is still the most effective way to elevate NID.

The relationship with nationally it go.

It is quite deep.

We speak to them to their scientists there are business people.

They are very interested in.

Nicotinamide riboside as they have and have expressed interest in the past and we've shared that we had discussions with them about expanding the relationship with them, but we have not.

Arrived at an understanding of what that would look like they have many brands we have our own brand.

But the necessary relationship has not yielded other than the $5 million that they paid for the right.

It has not yielded a tremendous amount of ingredient purchases by nationally, but I do think that the possibility remains at some point.

That relationship could get extended there's interest on both sides.

With regard to the first question, which is price elasticity.

That's a very very good question because.

Yes.

What we've observed is.

Our primary.

I would just say something collective about our customer base.

They're very smart.

It's a very educated group, it's a very successful group they have a high average income extremely high education level.

And the number one reason that people purchased <unk> because it was recommended to them from a friend and that trends could be a doctor or an educated friend or nutrition as certain advisor or something like that.

So the elasticity with our existing customer base is pretty low like we believe we can raise the price.

And it wouldn't have much of an impact on our existing customer base. However.

However, what we've learned over the last.

Really six months or even slightly long more since the Walmart launch and the launch of our 100 milligram product.

Amazon is that there is a much much bigger and broader market that has much greater elasticity.

Perhaps as a lower income and a.

Less educated audience group, but also interested in the way their bodies age.

That's interested in a lower price point.

Further than that we also have data to suggest that there might even be a much higher cohort group that would be interested in paying significantly more for an even higher dose or a combination product. So it's not a simple answer there are different segments of the market that have different levels of.

Elasticity and of course, our goal is to make nicotinamide riboside available not just all people, but pets as well because we think it has a dramatic improvement on on the body's help particularly as it ages.

So we do think that we could accommodate with our existing customer base, a slight increase but there is arguments to be made that there are other cohort groups that would dramatically expand growth in our addressable market. If we went much lower.

Like we are seeing as the 100 milligram, but also some evidence that there is a tighter smaller group if we went much higher.

I don't remember now too.

Maybe I can just finish that one off rather and then Ron can you repeat if that's okay.

On the rising inflation.

Great.

Okay.

My last question.

Great. Thanks.

We have a delay I'll, let us jump to final fine.

Okay.

Yes.

The second question was it was about the Sino foreign relationship we.

We expect Sino formed to take over complete management.

Our cross border business.

In in the fall.

So we expect them to launch a campaign in connection with them taking over that operation.

But I don't expect the numbers to be significant until next year.

Yeah.

Okay.

Yeah.

Okay.

Yeah.

Okay.

Okay.

Does that answer your questions.

Okay, I think Dennis I think Ron may be on mute.

Okay.

Hello.

I think we'll move on to <unk>. So let's go the next one please dennis thanks.

The next question is from the line of Sean Mcgowan with Roth Capital. Please go ahead.

Thank you I appreciate the.

I have to ask the questions here a couple of them.

One.

Not sure who that would be best to answer this but the.

Kind of pulling back from the TV spending will there be other channels that.

Boost in spending or is it are you just looking targeting a reduction in overall marketing spending.

Yes.

I don't expect a boost in spending.

And any other channel, but I do expect the boost in certain other.

Activity in certain other channels.

Probably.

One big important.

Source of business for US is the health care practitioner.

Market.

Where we sell a version of <unk> called <unk> pro to physicians.

Nutritionists health care practitioners in general and we could see a boost in activity in our marketing activity in that channel.

And concurrent with that would perhaps be.

The spa.

<unk> channel professional sports teams College sports teams.

And then we might increase our overall, maybe not channel, but marketing activity to the partners that we have.

The E Commerce business is a very solid.

<unk> business that keeps growing steadily.

But the <unk> business, where we supply the ingredients to partners or are we supplier to retailers or distributors.

Sometimes they could use some support.

They don't understand the science quite as well or.

Perhaps less.

Aggressive.

So.

We might support our business partners a bit more in our marketing activities and of course, all word of mouth, social media Influencer type of activity will.

We'll be increasing activity there okay.

And just to emphasize that doesn't mean spend necessarily what Rob I think is saying is its allocation of time and resources and really making sure. Our head of sales business development marketing are really aligned in supporting and optimizing our existing partnerships and when we have new partners coming on board. They are just as excited as we are about the science.

The content.

Their channels.

I took it that way thanks for clarifying.

Second question does the fact that you were able to put up 60% margins with the kind of sales coming in a little bit softer does that suggest that it could have been could be in the future.

Significantly higher than kind of low sixties like are you seeing positive variances in the supply chain.

Our app that gives you optimism for an even higher level of gross margin when we do see sales growth kind of reaccelerate.

Brian I'll, let you answer that.

Sure.

Sean scale lots of scale year over year and sequentially was a piece of it.

We are seeing the inflationary impact on our supply chain overhead rising wages also hiring to support growth for future growth and input costs. So what I would say is we feel good about our approximately 60%. That's our full your outlook longer term, yes, I think theres always an opportunity for the gross margins to go up.

And we look at cost savings programs every year and ways that we can also make our internal operations more efficient. So I do think that there is an opportunity longer term.

Okay. Thanks, and then I just wanted to ask Rob to clarify something I think you said it early in the call.

Regarding and you touched on it again timing of Watson sales are you.

Would you suggest that maybe you will get that back and then some or just that youll get back to where you would've been anyway like in other words those sales lost or.

Could we get kept them back but at a later point.

We think we'll get them back this year.

Okay.

Yes, Sean if you look at the third quarter should be higher than the second but more weighted to the fourth as we said in the past because of the timing of their promotional selling period, so shipping to them aligning with their sell through that's 11 11 and 12 12.

So the third quarter might be more like an average of historical sales with the highest fourth quarter got it.

Great.

Last comment is just <unk>.

Kevin a pleasure working with you for 16 years at Mattel in five years.

Hopefully.

Perhaps one of the drivers and beyond I look forward to working closely with you here at <unk>.

Thanks, Sean Thank you Sean.

Your next question is from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Hi, This is actually destiny on for Jeff.

Congratulations briana and Kevin you'll be missed.

It does thank you.

Sure you're welcome.

Most of my questions have been answered, which is Austin I just wanted to.

Get a little more insight onto your commentary.

Round R&D I heard you say, you're going to reduce your spend a bit and focus on.

<unk> with the near term ROI. So I'm wondering if you can maybe elaborate to the extent you can and.

Could we expect the launch of something similar to like the immune products to kind of target maybe some of those other demographics.

That you've been that you discussed as you kind of widen that funnel.

I don't have an expectation of launching in the near term and other products like the immune product, which is a formulation product.

We do have partners that are launching formulation products like HMH.

But I don't expect the true Nigel branded formulation product as a third.

SKU.

In the near future.

The comment you made about ROI.

That was be honest comment about R&D and being selective about our R&D investments. So there is a measurable ROI.

I can after I make the comment I'll defer to be honest it clarifies that specific statement I can just tell you generally about R&D.

Is that it's very rare for a dietary supplement company.

To develop novel ingredients the way, we do and to conduct the level of research that we do.

Uh huh.

We have not only nicotinamide riboside, but we have other precursors as well as I mentioned before in our H in <unk>.

And these are important ingredients that we're learning more about and a lot about and we do not monetize our commercialized in any way right now.

And it is important for us to not just our own this knowledge and control of these molecules, but to turn them into business for our shareholders.

We intend to do that.

So I will let Brian answer the specific quest.

Question of ROI and R&D investment.

Sure, it's actually Rob Piggy backing on the NAD precursor development as you know destiny, we've built a very large portfolio around NR and other NAD precursors. So we've also said not just in the short term ROI, but large commercial opportunity and things that are strategic so we're just prioritizing within that.

We have been moving everything forward.

S is important but we're just pulling back on Sun and prioritizing others. As one example, and then also within our <unk> program. We look at the projects that we might be co funding again. Most of these were just supplying the ingredient, but if there are any of that we're co funding, but there's a market opportunity for that.

Okay got it and that does it for US we'll take the rest of your questions offline. Thank you.

Thanks Destiny.

Your next question is from the line.

Do you have then some darrin with B Riley. Please go ahead.

Okay.

Yes, hi.

Thanks for taking my questions first I want to wish Kevin well.

Maybe you can just update us on plans I know we've had we've talked about this before in the past but.

Plans to introduce another increase.

Increasing product and maybe timeline around that.

Our new product.

Thank you.

And we have.

As you know invested quite a bit in that process.

There really isn't a company in the world that understands the way Chrome and X does there are a lot of companies that pretend to.

Or try to steal the product.

But there's really only one company that actually has this kind of patent portfolio and the level of scientific expertise.

Some of that's in these other molecules like NAR and NIH.

We are going we are developing plans to commercialize them, but we have not announced them and we haven't yet given a timeline to have only said that it is important.

And then it is we recognize that it's important.

I think it's what's implied when we say we're investing in R&D with an ROI do we need to we need to do more than just learn about these molecules, we need to commercialize them, but at this time, we're not providing specific timelines of our strategies.

Okay fair enough.

So just kind of stepping back from this I mean.

That I think you have a terrific product and amazing science behind it.

However, our revenue growth has been decelerating since 2018 guidance implies further deceleration of topline growth can you maybe give us a better sense of your plan to Reaccelerate revenue growth what are the specific elements of that plan.

Drivers are needed.

To underpin that plan.

And maybe over what timeframe, you're thinking about re accelerating growth.

So one thing that's important to look at it is that there's.

There's a there's a BD business development business to business business here in a direct to consumer business here two different ones.

The direct to consumer business has steadily grown in that period that you're talking about.

I don't know that we've had many quarters, where we did more than 10% sequential growth as we did this quarter.

And as we pointed out it excluded that Amazon Prime.

Really weak, which is can be very very significant week. So.

E Commerce business has been consistent and steady and is really coming off of a very very strong second quarter and it's our expectation that that will continue it's the beta besides that.

Less predictable deals like Walmart or watson's or some of the other companies like nestle to whom we supply the ingredients to.

Sometimes they are steady and consistent sometimes they're a little bit lumpy. The obviously the Watson deal has been an extraordinary success for us.

Some of the a couple of these ingredient partnerships have also been terrific successes in some of the others have been sort of hits and misses.

But I could see us doing.

A few more of those types of deals where we supply the ingredient carefully.

Two partners that market aggressively and help support the messaging.

In that case, the brand would be nitrogen not true nitrogen.

But I think part of the growth.

Is too.

Spread the marketing commitment amongst a few other companies not just us.

To get the word out.

I also think that some of these international expansion opportunities.

Opportunities are pretty significant I mean, it's.

You don't I don't want to count the money until we receive it but we do have very very high hopes for our relationship in our relationships in.

In China.

No.

Commission to study.

Last quarter estimating the size of the market in China.

We think the <unk> market in China is.

More than $700 million.

The current market.

Of ingredients that are inferior tonight.

But our selling like they are nitrogen.

And it's just many many many people telling the story and that's one of the reasons why we partnered with <unk>.

We sign off on them.

Yes.

And then there are other opportunities with this with the molecule itself.

It's not just the steady increase in awareness and growth of our e-commerce channels and perhaps.

Other perhaps retail channels, but it's also there are other ways to provide nitrogen.

Consumers not just dietary supplements their foods.

And perhaps at some point drug indications.

And in other ways to deliver it.

Okay.

So we are exploring those and we understand that that value is here at this company when you control molecules like we have with the.

Amount of science behind it and the efficacy that we're showing in the amount of research there.

Just selling it as a dietary supplement is probably limiting it it's probably much bigger than that.

And you know many of the indications that we've already seen positive either preclinical and in some cases actually clinical studies.

Youre seeing cop gains you're seeing COVID-19, you've seen Parkinson's youre seeing neuropathy, you seen AOS neurological and general muscle health I mean, there are many indications.

Nicotinamide Riboside, Mike provide some sort of therapeutic or prophylactic value or some complementary.

Value to an existing drug.

These are significant growth opportunities down the road for us.

While we continue to develop.

This core business of an e-commerce based dietary supplement business that targets agent using NAV.

And developed product line of <unk> specific dietary supplements.

Yes.

Alright.

Thanks, and best of luck.

Thanks, a lot thanks, Jeff.

Just as an added point too to that last point.

I've mentioned the.

I've mentioned the importance of the intellectual.

Property and the science behind Nicotinamide Riboside.

And there are companies, who have challenged our intellectual property and or who have made claims as though their product replicates.

<unk> elevation the way <unk> does.

We did there was a ruling from the patent office today of one of these companies that has challenged.

The patents the 807 patents that we possess on nicotinamide riboside.

And that was the challenge was made by a company called Thorn in the patent office ruled against corn, just today and in favor of <unk> and 807 patents, which we consider to be an important decision an important ruling for further solidifying.

The intellectual property that <unk> possesses.

Yeah.

Yes.

This concludes the Q&A portion of today's call I would like to turn the call back to Heather Vanblarcom for any closing remarks.

Thank you Dennis they will be a replay of this call beginning at 430 P. M Pacific time today. The replay number is one 807 002030 and the conference I D.

<unk> 616 to eight thank you everyone for joining us today and for your continued support of <unk>.

This does conclude today's call you may now disconnect.

Please wait the conference will begin shortly.

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