ChromaDex Corporation (NASDAQ:CDXC) Q2 2020 Earnings Conference Call August 6, 2020 4:30 PM ET

Company Participants

Brianna Gerber – Vice President, FP&A & Investor Relations

Rob Fried – Chief Executive Officer

Frank Jaksch – Founder & Executive Chairman

Kevin Farr – Chief Financial Officer

Conference Call Participants

Jeff Vansen Sinderen – B. Riley

Brian Nagel – Oppenheimer

Mitchell Pinheiro – Sturdivant

JP Mark – Farmhouse Equity Research

Matt Dhane – Tieton Capital Management

Operator

Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation’s Second Quarter 2020 Earnings Conference Call. My name is Josh, 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 second quarter of 2020. If you have not reviewed this information both are available within the Investor Relations section of ChromaDex’s website at www.chromadex.com.

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

Brianna Gerber

Thank you. Good afternoon and welcome to ChromaDex Corporation’s second quarter 2020 results investor call. With us today are ChromaDex’s Chief Executive Officer, Rob Fried; Founder and Executive Chairman, Frank Jaksch; and Chief Financial Officer, Kevin Farr.

Today’s conference call may include forward-looking statements, including statements related to ChromaDex’s research and development and clinical trial plans and the timing and results of such trials; the timing of future regulatory filings; the expansion of the sale of TRU NIAGEN in new markets; future financial results; business development opportunities; future cash needs; ChromaDex’s operating performance in the future and future investor interest that are subject to risks and uncertainties relating to ChromaDex’s future business prospects and opportunities, as well as anticipated results of operations. Forward-looking statements represent only the company’s estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause ChromaDex’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statement. These risk factors include those contained in ChromaDex’s Quarterly Report on Form 10-Q most recently filed with the SEC, including the effect of the COVID-19 pandemic 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 to changes in its expectations.

In addition, certain of the financial information presented in this call, references non-GAAP financial measures. The company’s earnings presentation and earnings press release, which were issued this afternoon and are available on the company’s website present reconciliations to the appropriate GAAP measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com.

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

Rob?

Rob Fried

Thank you, Brianna. Good afternoon everyone, and thank you for joining our second quarter 2020 investor call. ChromaDex had another strong quarter with total net sales of $15.3 million. Also we achieved the business goal of positive adjusted EBITDA, excluding total legal expense of $525,000.

Overall, sales increased 7% sequentially and 38% year-over-year. TRU NIAGEN net sales were $11.7 million, a 5% increase sequentially and a 34% increase year-over-year. As you know the Coronavirus and the economic downturn have created headwinds for many businesses, including ours. Our e-commerce business continued to perform well in this challenging environment, sales were roughly flat sequentially. Our retail business, including sales to Watsons and partners in new international markets has been more impacted by the Coronavirus. But we remain focused on the terrific opportunities ahead.

As just mentioned, adjusted EBITDA excluding total legal expense was a positive $525,000 in the second quarter. We benefited by our initiative to reduce costs when the Coronavirus hit an objective that is still ongoing. Let’s now discuss the three pillars to our business strategy: to build a global brand, to own the science and to focus on the fundamentals. First, the brand. Global TRU NIAGEN, net sales represented 77% of the $15.3 million total net sales in the second quarter. International sales for TRU NIAGEN represented approximately 35% of total TRU NIAGEN sales. This includes sales to Watsons in Hong Kong and Singapore cross-border sales in China, Japan and Europe and sales to our partners in Australia, New Zealand, the UK and Canada. It also includes a $1.6 million purchase from Horizon’s, who donated bottles of TRU NIAGEN to the health-care workers in Hong Kong hospitals.

Sales to Watsons were $1.3 million in the second quarter, compared to $1.8 million in the first quarter. This included initial shipments of TRU NIAGEN beauty, sales in the base business excluding TRU NIAGEN beauty were roughly flat sequentially. Watsons business continued to be impacted by store closures and declines in Chinese tourism in the second quarter. The TRU NIAGEN was a relative outperformer as their top performing supplement. In addition, Watsons is pleased with the early performance of TRU NIAGEN beauty, which launched in 230 stores in April. In addition, we introduced TRU NIAGEN beauty through cross-border sales in China as another test launch.

E-commerce net sales were $8.1 million, a 24% increase year-over-year and slightly below first quarter. The Coronavirus and economic downturn negatively impacted our US e-commerce business in mid-March. We responded in April with new relevant marketing messaging, highlighting the importance of elevating NAD for cellular defense and resilience in the face of physiological stress. These efforts were successful and we’ll be continuing. We sell cross-border in the UK, Japan, Korea, Germany, France, Italy, Spain, and China, which grew approximately 115% year-over-year. We launched on T-mall in China in the second quarter of 2019 and expanded distribution to Jd.com and Kaola.com this quarter, with a successful June 18 mid-year shopping festival. Our marketing strategy is focused on in-channel advertising and influencers, as well as earn media.

We have been selling on Amazon UK, since June of 2018 and began expanding to other major European markets following EFSA approval. We received favorable press in Europe, including HELLO! Magazine and the July issue of French Vogue, which covered the growing trend behind NAD supplementation and mentioned TRU NIAGEN. Additionally, we are continuing to build our brand with strong global partnerships.

As mentioned on the first quarter call, shipments for new market launches contributed to strong sales. Sales from these new launches were down sequentially in the second quarter, we had reorders from all our new partners and we believe in the long-term potential of these markets. I’ll briefly recap each. In April, we launched TRU NIAGEN in over 200 Superdrug UK stores, as well as superdrug.com. Launch plans were scaled back and sales have been slower to ramp up due to the Coronavirus. To support the launch ChromaDex and Superdrug continue to collaborate on PR and influencer efforts, as well as in-store and digital promotions. We do not expect meaningful sales in the UK in 2020. But we see the UK as a growth market for TRU NIAGEN with the potential to expand into Superdrug’s full 800 UK stores over time, if the test launch is successful.

We launched TRU NIAGEN online in Australia in March and with one of our proven distributors, Matakana Health Limited. They plan to expand into retail later this year. This approach follows their successful rollout of TRU NIAGEN in New Zealand, a small but steadily growing market for us. Matakana brings deep knowledge of the local markets, as well as the dietary supplement category and our science-based product. We believe TRU NIAGEN is positioned for strong growth in Australia in 2020 and beyond.

Nestle Health Science has shared with us that they plan to begin the marketing efforts to educate consumers on the importance of cellular nutrition very soon. Our work with Nestle Health Science will allow them to bring products related to cellular health containing TRU NIAGEN to market later this year. Ultimately, the timing will be determined by Nestle. But we are encouraged by their commitment and their effort.

Persona Nutrition, division of Nestle Health Science and a leading personalized vitamin subscription program launched TRU NIAGEN on their direct-to-consumer platform last quarter. TRU NIAGEN capsules are offered in Persona’s monthly vitamin packs along with other high-quality science-based ingredients, recommended by their panel of medical experts. We believe our partnership with Nestle Health Science and now Persona will help build awareness for TRU NIAGEN.

Our second core objective is to own the science. We are confident in the science behind NIAGEN, which continues to be studied by leading institutions and universities around the world. We recently signed our 200th material transfer agreement through the ChromaDex External Research program, which has resulted in 60 published studies to-date including 10 published clinical studies supporting the safety and efficacy of our patented ingredient NIAGEN. Several new studies have been registered and published since our last update, which Frank will summarize momentarily. All of our science on NR can be found on AboutNAD.com, which was re-launched this quarter to provide a better user experience.

In April, we announced the first round of results from a combination tissue and in-vitro study on COVID-19. As a reminder, there were two key findings from this preclinical study. First the COVID-19 introduction to the studied cells caused an 80% reduction in NAD. And second, these infected cells specifically sought out nicotinamide riboside in an attempt to replenish NAD levels in the face of the viral infection. We recently announced the results of the second round of preclinical research by this group, including our Chief Scientific Officer, Dr. Charles Brenner. They found that NR inhibits replication of a form of Coronavirus, the virus that causes COVID-19 infection in mouse cells. This suggests that NR may have an antiviral effect that may support cells innate immune response to Coronaviruses and other viruses. Of course, human clinical research is still required.

In addition, ChromaDex entered into a preclinical collaboration with the National Institute of Allergy and Infectious Disease, NIAID, a division of the NIH to assess the therapeutic potential of NIAGEN in COVID-19 animal models. This is a logical next step to assess whether increasing NAD levels within our supplementation benefits the innate immune response in a COVID-19 model of mice and hamsters. This joint study is designed to assess whether NR supplementation prior to infection and reduce progression of the infection either by limiting viral replication and modulating the severe inflammatory response. We’re proud to support the NIAID as they work to help find answers to this global pandemic.

Ultimately, clinical trials will be required to determine whether NIAGEN may have any impact or benefit on COVID-19 infection in humans. We will continue to share the findings of all our collaborative COVID-19 research when appropriate. We also continue to build upon and protect our intellectual property, which includes our ongoing litigation with Elysium Health. The Coronavirus outbreak has extended delays in California and New York and no trial dates have been set. In Delaware, the patent case is scheduled for trial in September of 2021, with a Markman Hearing in December of this year. We have seen Elysium’s initial claim construction arguments and remain as confident as ever in the strength of our licensed patents. As I have repeatedly said, we are eager to get to trial and for the facts to be presented to a jury in all three cases.

Our third strategic pillar is to focus on fundamentals. It is our mission to lead by example in this industry. In June Frank participated in the panel on master files for dietary supplements hosted by the American Conference Institute and the Council for Responsible Nutrition, and just this week he joined NIH for two round table discussions. In all three presentations, Frank championed the importance of greater transparency, compliance and enforcement in the dietary supplement industry to protect consumers. This is an important topic to all of us and essential to our commitment to science and to consumer safety. Quality control is a big part of that and in June, our Longmont Colorado lab received its ISO accreditation. This latest accreditation recognizes ChromaDex’s consistency, meeting the highest international standards in quality control, which has been recognized by prestigious regulatory bodies around the world.

Finally, our Chief Scientific Advisor, Dr. Charles Brenner received the 2020 National Scientific Achievement Award from the American Society for Nutrition for his outstanding research in the field of bioactive compounds for human health.

In summary, we continue to deliver on our strategic objectives and successfully navigate these unprecedented times. I know there are many listening, who believe that TRU NIAGEN has positively impacted your health and are eager for it to become a household name. So are we? We are working hard to spread the word globally, while staying true to our philosophy of responsible science-based marketing and communications. We clearly have the attention of the scientific community, who is increasingly studying this amazing molecule and we are investing alongside them to drive important research.

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

Frank Jaksch

Thank you, Rob. As you heard Rob say one of our core objectives is to own the science. We are committed to remaining a global scientific authority on NR and NAD research. We are also setting the standard for excellence in the industry with our commitment to science, safety and quality. I was very proud to represent ChromaDex in the dietary supplement industry as an innovative science-based responsible company at the conferences and panels that Rob mentioned earlier.

Since our last call publication of research on NR and NAD has continued to accelerate. There are 42 ongoing completed or published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and therapeutic effects of NR. This is two more than our last update. An additional 10 clinical trials are registered to test NR in combination with other ingredients for a total of 52. We also reached a milestone of 200 signed research collaborations during the quarter, up by approximately five compared to our last update.

READ ALSO  Nike expected to return to profit as online sales, demand from China pick up

As Rob said these collaborations have resulted in 60 publications to-date, including 10 published human clinical trials. We recently announced the results of a preclinical study investigating the effects of NIAGEN supplementation in mice that has traits or behaviors associated with autism spectrum disorder. Specifically, they studied male mice that were missing a gene that’s partially responsible for the production and release of oxytocin, which is essential for feelings of happiness and attachment. Researchers found that by elevating NAD levels in these mice, their social deficit; such as fearful and anxiety like behavior were corrected, allowing them into interact normally with other mice. The study was the first to evaluate NIAGEN in an autism mouse model, but it joins a growing body of preclinical data, demonstrating that boosting NAD levels may have a positive effect on cognitive health.

In addition, a preclinical study was published last month in the Journal of Translational Animal Science. In this study, the researchers examined the effects of INNOVO or into the egg injection of nicotinamide riboside on pectoral muscle development and growth in chicks. They found that when injected into the yoke, the yoke sac, an increased pectoral muscle weight and length by 38% and 22% respectively. NR also increased width, depth and muscle fiber density by 9%, 11% and 45% respectively. The effects were significantly greater when injected into the yoke versus the egg white. As stated in the paper, it is unknown whether the increase in pectoral muscle weight due to be effective of NR will affect future chick growth and the quality. However, according to the researchers, this affected potentially impact poultry industry yields and product quality. This is an interesting study since it explores the impact of NR on a new addressable market.

I’ll briefly touch on a newly registered clinical study that was registered in June. This study was registered by McLean Hospital in collaboration with the National Institute on Aging to study the effects of NIAGEN on brain energy metabolism, oxidative stress and cognitive function individuals with mild cognitive impairment and mild Alzheimer’s disease. 50 participants will be given a 1,000 milligrams of NIAGEN over the 12-week period. Within the intrinsic capacity framework that I introduced last quarter, cognition-related studies account for roughly 15% of all ongoing research on NIAGEN.

As Rob mentioned, we relaunched AboutNAD.com with the goal of making all the science on NR easily accessible. This new site has an option to filter the research by intrinsic capacity domain. In summary, ChromaDex is committed to remaining a leader in the NR, NAD and cellular health conversation. We will continue to defend our intellectual property around NR, while exploring the potential of next-generation NAD precursors, which are also protected by a strong and growing patent portfolio. We are thankful to our investors for putting their trust in this team to deliver on the opportunity in front of us.

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

Kevin Farr

Thank you, Frank. Let’s look at our financial results for the second quarter of 2020, which reflected continued progress against our key financial objectives and strong underlying business performance. The underlying business is measured by adjusted EBITDA, excluding total legal expense, achieved breakeven with the second quarter profit of $525,000. This was a $0.8 million improvement sequentially and a $2.6 million improvement year-over-year.

Compared to the first quarter of 2020, we delivered strong sequential top line growth, higher gross margins, slightly higher advertising expense as a percentage of net sales, and lower general and administrative expenses primarily driven by lower severance and restructuring charges, which are related to cost savings initiatives and lower legal expense. These results reflect strong operational and financial discipline, which have allowed us to navigate the challenging macroeconomic environment very well. We ended the quarter with $18.9 million in cash, including the $5 million common stock raised in the second quarter from existing strategic investors. While there was not an immediate need for additional capital, we believe it was prudent given the economic uncertainty. We have additional flexibility with our $7 million line of credit, which we have not accessed.

In addition, we filed $125 million shelf registration, the company has no present plans to issue securities under the registration statement. However, we believe it’s prudent to have the shelf registration in place as a matter of good corporate governance. It provides financial flexibility to access the capital markets to respond to future financing and business opportunities.

Moving to the second quarter results, for the three months ended June 30, 2020 ChromaDex reported net sales of $15.3 million, up 7% compared to $14.3 million in the first quarter of 2020. Year-over-year net sales were up 38%, compared to the second quarter of 2019. TRU NIAGEN net sales were up 5% sequentially and grew by 34% year-over-year with growth driven by US e-commerce, a $1.6 million purchase by Horizon’s, who donated TRU NIAGEN to health-care workers at Hong Kong hospitals and international cross-border launches year-over-year.

Watson sales remained solid at $1.3 million in the second quarter but, as expected, were down versus the first quarter, which included the initial shipments of TRU NIAGEN beauty. We are encouraged by improving trends in consumer takeaway in the second quarter Watsons and expect shipping to more closely align with sell-through in the third quarter. However, with the recent rise in COVID-19 cases in Hong Kong, this is a risk.

Total NIAGEN related net sales were up 5% sequentially and 40% year-over-year. This included a small shipment to Nestle, which resulted in recognition of a portion of the $4 million upfront payment in our revenues in the second quarter. We have experienced strong demand for NIAGEN from other customers, but these sales can fluctuate and we expect lower NIAGEN ingredient sales in the second half of the year.

Turning to the rest of the P&L, on a sequential basis our gross margin was up 150 basis points from 57.9% in the first quarter of 2020 to 59.4% in the second quarter of 2020. Year-over-year gross margins increased by 310 basis points to 59.4%, compared to 56.3% in the second quarter of 2019.

Product cost savings initiatives and overall scale in our supply chain drove the improvement in gross margins. While, our originally expected supply chain cost savings to be reflected in our gross margins later in the year, a portion of this savings was realized in the form of a rebate for prior year efficiency initiatives, which was recorded in the second quarter. This resulted in a one-time benefit of approximately 110 basis points in the second quarter.

We believe product cost savings initiatives, as well as favorable mix from growing TRU NIAGEN consumer product sales, represent a tailwind to gross margins in 2020. On a sequential basis, our total operating expenses for the second quarter of 2020 was $12.8 million, down $1.4 million, compared to the first quarter of 2020. Our selling and marketing expenses were up $0.5 million to $5 million in the second quarter of 2020, compared to $4.4 million in the first quarter of 2020.

As a percentage of net sales this expenditure was up 140 basis points in the second quarter of 2020 versus the first quarter of 2020. We continue to monitor daily e-commerce metrics, such as consumer acquisition cost to adjust messaging and spending, which is increasingly important in this fluid environment. We also invest in PR to support our launch events with Superdrug in the UK, as well as Matakana in Australia during the second quarter.

As reported, G&A expense was down $2 million to $6.9 million in the second quarter of 2020 versus $8.8 million in the first quarter of 2020. This included $1.8 million of legal fees and $0.3 million of severance and restructuring expenses in the current quarter. Excluding legal fees, severance, restructuring and equity compensation expense, second quarter 2020 G&A expense was lower by $0.6 million versus first quarter 2020 comparable G&A expense. Legal expense was down $0.5 million, compared to the first quarter of 2020.

Through our ongoing investments in the Delaware patent infringement case as we prepare for the claims construction, Markman Hearing in December 2020 and trial in September 2021. We also incurred expenses related to Discovery in the New York litigation. We expect legal expense to begin to ramp up in the third quarter, driven by the New York and Delaware litigation.

For the second quarter of 2020, our operating loss was $3.7 million versus $5.9 million in the first quarter of 2020. The net loss attributable to a common shareholder for the second quarter of 2020 was $3.7 million or a loss of $0.06 per share, as compared to a net loss of $5.9 million or a loss of $0.10 per share for the first quarter of 2020. As we said, we believe it’s important to focus on sequential trends in our business to demonstrate progress towards cash flow breakeven.

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

As I previously highlighted, adjusted EBITDA, excluding total legal expense improved by $0.8 million to a profit of $0.5 million in the second quarter of 2020, compared to a loss of $0.3 million in the first quarter of 2020. Year-over-year, we delivered $2.6 million improvement in the second quarter of 2020 versus $2.1 million loss in the second quarter of 2019. The improvement in the second quarter of 2020 was primarily driven by higher gross margins and higher sales and lower general and administrative expenses.

Moving to the balance sheet and cash flow, we ended the second quarter of 2020 with cash of $18.9 million, up $5.3 million versus the first quarter of 2020. In the second quarter of 2020, our net cash used in operations was $1.6 million versus $5.2 million in the first quarter of 2020. The sequential improvement in this quarter was driven by a lower net loss and a reduction in our working capital investment.

To date, we’ve successfully navigated the business during the COVID-19 pandemic managing our working capital. At this time, we do not expect any supply chain disruption from Coronavirus and have implemented risk assessment strategies to manage this going forward. As it relates to our 2020 full-year outlook, we expect to deliver continued top-line growth, including growth in our e-commerce business, which experienced temporary slowdown in growth in the second quarter due to the macroeconomic impact of the Coronavirus. We continue to expect gross margin expansion, due to favorable mix from our growing e-commerce business, the product design changes implemented late 2019 and additional supply chain cost savings initiatives, which we implemented beginning in the first quarter of 2020.

We continue to expect an increase in selling and marketing expense of $3 million to $5 million, including investments in brand awareness and investments in new market launches, including cross-border platforms in China. We expect continued improvement in selling and marketing expenses as a percentage of net sales, driven by strong sales from returning customers and scale on our business.

Lastly, we continue to expect that G&A excluding severance and restructuring expenses and legal expense will be up by $1 million to $2 million year-over-year comparable to 2019 G&A expense excluding the Elysium-related bad debt expense in 2019. Adjusted EBITDA, excluding total legal expense remains a key metric. We expect a significant improvement for full-year 2020 versus full-year 2019, but there may be quarter-to-quarter fluctuations, driven by the timing of our marketing campaigns and R&D investments. We continue to believe that we can achieve cash flow breakeven in $17 million to $19 million of quarterly revenues if the litigation ends and legal costs decline.

Total quarterly operating expenses will likely be higher in the near-term, driven by higher litigation. As a result we need sales of approximately $19 million and gross margins at slightly better than 60% to achieve this. We believe we’ll deliver higher gross margins as we execute on supply chain cost savings initiatives. We’ll continue to manage all levers of the P&L to deliver on this important objective.

In summary, we continue to deliver consistent top line growth, while demonstrating operational and financial discipline. I’m very proud of how the entire ChromaDex team is executed in this challenging macroeconomic environment.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jeff Vansen Sinderen with B. Riley & Co. Please go ahead.

Jeff Vansen Sinderen

First, let me say congratulations on the strong results, especially with the pandemic background. Can you speak a little more about the project with Fauci’s lab? How that came about, maybe you can touch on your thinking around cellular strength and cellular protection, and potential immunity enhancement from TRU NIAGEN. And I guess what other studies are you watching most closely that are currently ongoing?

Rob Fried

Yes, I’ll begin the answer to that and then I’ll pass it over to Frank to contribute as well. Before I do, I want to quickly say that there is a website called raisingnad.com, which compiled and submitted a very impressive list of investor questions. And we want you to know that we’ve read them all and some are fairly technical. We plan to answer many of these questions and post our answers on the Investor website – in our IR website. In response to your question on the Fauci lab, they saw the initial data that was published on BioArchive that showed that there was an 80% decline in NAD when the Coronavirus attached to the cell. And they found that very interesting. Obviously, they’re particularly interested in the cytokine storm and how the reduction in IL-6 inflammation marker might impact cytokine storm. There’s a connection between one of the original co-founders of ChromaDex and a member of that Fauci team in the Colorado lab. In fact, I’m going to pass it over to Frank right now, if you want to elaborate on that a little bit more.

READ ALSO  Yandex Shares Hit Record High as Analysts Cheer $5.5Bln Tinkoff Deal

Frank Jaksch

Yes, so the researcher, who is doing the study had in fact been on sort of looking at energy metabolism in mitochondria as a contributor to Coronavirus. And did sort of pickup on the – like Rob had mentioned, on the BioArchive, the initial publication of the BioArchive study that showed the decline of NAD and the ability to potentially rescue that as a way of helping out. And that’s exactly what they’re going to be studying in sort of a two-stage mouse – it’s a mouse model and a hamster model. Mice can’t naturally be become infected by Coronavirus, so they have to actually produce specific mice that can be infected and they were successfully able to do that and now we’re going to be looking at that model is one of the models, so that the mice will be dosed prior to becoming infected. So, we’ll get to see the effect it has on mice that we’re dosing before – and before they got infected and then see what the impact is afterwards as well.

On the hamster model, hamsters, in fact do become infected without having any modifications to do so. So their thesis is that, it’s essentially going to have a significant impact on repairing the NAD and having an impact on not only controlling the virus itself, meaning replication of the virus, but also survivability and recovery of the animals. And that’s really sort of the core of it.

Do you have any other specific questions on that or?

Jeff Vansen Sinderen

No, that’s really helpful. And then I guess, I wanted to get your sense of which studies – which other studies, I mean, that’s a terrific study, but which other studies you’re most focused on?

Rob Fried

Well, let me – first, let me say, there are a number of important conversations happening between ChromaDex and other research entities that we have not yet announced, and are still exploring at this point in time. But we are excited about the possibilities.

Jeff Vansen Sinderen

Okay, that’s helpful. And then maybe – go ahead.

Frank Jaksch

Just one other comment on that is that, look, I think it’s a good that we’re going to have a mouse model or an animal model study in place prior to evaluating other studies as well, I think it’s a responsible way of looking at it as well.

Jeff Vansen Sinderen

Absolutely. And then, if we could just turn to Nestle for a moment, any more color you can give us on sort of an update if you work with Nestle? How that’s evolving? And then, I guess what we should look for with Nestle as a partner this year, I know, you touched on that a little bit?

Rob Fried

So we speak with Nestle frequently, and we’re very excited about what they’re doing and they’re very excited about NIAGEN and their business plans. But they like everybody else have been impacted by Coronavirus. So they initially planned to begin their marketing in June and they moved it to July, the product launch in September, then late September, it’s now at the beginning of August and the marketing launch hasn’t commenced, although they assure us that it’s imminent. We expect it to be imminent and the product launch is obviously going to be slightly delayed, we don’t think it will be significantly delayed. But they’re thinking long-term and they’re thinking in a significant way and they have many facets of their organization working on it and we think they’re – they’ve got a good idea for how they want to pursue it. But at this point in time it’s really up to Nestle, when they do it and how they do it. We like what they’re doing and we like what they see, but we don’t really know much beyond that.

Jeff Vansen Sinderen

Okay, that’s helpful. And then if I could just squeeze one more in on your marketing plans. I know, you’ve evolved those. Maybe you can just touch on how your – I guess changing those for second half around anti-aging versus cellular protection and what we should anticipate near-term?

Rob Fried

Right, so let me answer that question this way. The market for dietary supplements has been quite interesting over the last few months. Sales of immunity based dietary supplements have been doing extremely well. Sales of dietary supplement that are not immune based have not been doing well. Another interesting phenomenon is e-commerce in general has been doing extremely well, retail in general is experiencing headwinds. So what that means for TRU NIAGEN and ChromaDex is sort of a mixed bag. We are predominantly an e-commerce company, but our international strategy has had significant retail component as well.

TRU NIAGEN is known – well-known as an anti-aging supplement and over the last year also as a fitness supplement, but not as an immune based dietary supplement. Having said that, we understand the science behind nicotinamide riboside extremely well. We understand that there is likely to be a benefit to a cellular health when a virus attaches to a cell. So that hasn’t been part of the positioning and the marketing previously, but we immediately began to do research and studies initially preclinical, as Frank said first dish, then animal, then human clinical, to verify what we instinctively believe. We understand the mechanisms well enough to believe that there is a therapeutic and perhaps prophylactic benefit. We need to prove that scientifically.

There is plenty of science for us to say things like cell defense, cellular health, cellular protection. So what we did is in addition to launching these studies, is we pivoted a bit away from fitness and anti-aging per se and more towards this idea of cell resilience and cell defense and cell strength. At the end of the day, we still see this as an anti-aging dietary supplement, but we see sub-cohort groups that are important, that speak to fitness, speak to immunity and perhaps speak to other cohort groups as well. And presently, a lot of our time and attention is on this concept of cell defense, cellular resilience and cell health. What we’ve seen is that message is working. So we plan to continue.

Of course, we don’t know, nobody really knows what the future of Coronavirus is going to be worldwide and, in the market, – and our markets. There was a point in time where it looked like it was drawing to a conclusion, then we see a resurgence. Now, we see a resurgence in certain markets, it’s hard to know, it’s difficult to know, but we think in the long run it’s likely that the people in general are going to be sensitive to this idea of immunity health, cellular health and viruses. And that is likely to be part of our narrative for a long time to come.

Jeff Vansen Sinderen

Okay, that’s helpful. Thanks for taking my questions and best of luck.

Frank Jaksch

Thank you.

Rob Fried

Thanks, Jeff.

Operator

Your next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel

Hi, good afternoon.

Rob Fried

Hey, Brian.

Brian Nagel

Thank you for taking my questions. So my first question, I think, a bit of a follow-up to that last question. So Rob and Kevin, you both discussed in your prepared comments just some of the headwinds to TRU NIAGEN sales, given the COVID-19 crisis in the United States and elsewhere. So my question is, maybe just more elaborate on what – kind of what is that headwind? Is it a function of your stores? I guess, this will be mostly overseas, your stores being closed. Is it a function of, maybe just beginnings of general economic malaise where consumers are trimming their budgets? And then as these headwinds have started to abate here in United States and elsewhere, have you start – have you seen an improving demand trend for TRU NIAGEN?

Rob Fried

Yes, we have seen an improving demand trend for TRU NIAGEN domestically and abroad. In the middle of the quarter, we saw significant improvement in Watsons sell-through, I think May and June were strong – stronger and continued to show strength. So we’re confident that, that Watsons is coming back, so to speak. Yes, initially the downturn was simply because of store closures and lack of foot traffic as opposed to lack of consumer demand. Now Hong Kong, very recently has seen something of a resurgence, we still are highly confident in the performance of the Hong Kong sales, but there is obviously some uncertainty there. Same is true with our US e-commerce business, we saw in March, fairly dramatic and fairly immediate impact, but we were able to recover in the middle of the quarter and finished fairly strong. So we have confidence that we’re going to still see continued growth in the basic e-commerce business as well as Watsons in the future.

Brian Nagel

Okay. And then, my follow-up question this with regard to marketing. To those of us who follow ChromaDex and TRU NIAGEN very closely, watching the science and all these studies well. What is – is there a – what are you waiting for? What do you need to wait from – I guess, from the science, from the studies in order to give you the conviction or leeway to lean more into marketing about some of these other potential benefits of TRU NIAGEN as a supplement?

Rob Fried

Well, it’s a good question. We take great pride in the fact that we are a fundamentally sound operation and conservative in the way we approach our business. And that’s true on the financial side, on the operating side and on the marketing side. We have great pride in the relationships that we have with the regulatory bodies, with the FDA, with the FTC, with international regulatory bodies. And we have those relationships in large part, because of the way we approach it. In the US, you can’t mention a disease of any type, if you are not an approved drug. So the best you’re going to do with the dietary supplement or food is a structure function claim. And in order to make a structure function claim, you need to publish clinical study, generally more than one.

Now, we are – we see what goes on in the business, we see what other dietary supplement companies, some actually even steal the ingredient and don’t even pay for it, some actually pretend that the science is theirs or that they have patents when they don’t. But often people lean into these health claims when the sciences isn’t there to support it and they’re just hoping that the FDA or the FTC is not going to go after them. We’re very careful and we understand that by being careful by licensing patents and paying royalties and by being conservative in the way we approach it and by letting published studies precede claims that we make that there is – it takes more time.

And that we understand that there are investors they are frustrated, because they don’t want to take more time, they wanted to happen today. They believe in the ingredient, they don’t understand why other ingredients are making claims on television and sales are growing quicker. It’s just not our way. We’re doing it one step at a time brick-by-brick in appropriate way and building an organization that is built to last. And that’s just the way we’re going about doing it quarter-by-quarter, year-by-year. We wish there was a quicker way to do it, we don’t see it.

Brian Nagel

I appreciate all the color. Thank you very much.

Rob Fried

Thanks, Brian.

Frank Jaksch

Thanks, Brian.

Operator

Your next question comes from Jeffrey Cohen. Please provide your company name and ask your question.

Unidentified Analyst

Hi, this is actually Destiny [ph] on for Jeff. I want to echo the congratulations on a nice quarter. My question is really more around the health care practitioners. Are you able to have any insight into how they’re coping with various restrictions that may have been placed on them? And do you think that there are some customers that maybe were getting NIAGEN through them that have transitioned into this e-commerce channel in order to continually have NIAGEN, to be able to receive NIAGEN?

Rob Fried

Yes, I think that’s a very interesting question. One can market more aggressively to health care practitioners then to consumers. Health care practitioners, you can present preclinical studies, animal studies to them to show the supporting data, and then there is confidence that they would distill that data and then translate it to the end consumer in a responsible way. So our connections to health care practitioners is extremely important and we see that as a very strategic and growing part of our business, both in the sports community as well as the direct health care practitioner community, nutritionists, nurse practitioners, chiropractors and physicians themselves.

And yes, we do believe that many consumers start are introduced by TRU NIAGEN through their health care practitioner, some health care practitioners are actually resellers of the product themselves. They actually purchase wholesale bottles from ChromaDex and then resell it to their patients. Some just recommend it. But we do see that many of these consumers then become direct to consumer, e-commerce customers of ours.

Unidentified Analyst

Okay. Very interesting. I appreciate that. And then I heard a brief mention of some R&D investments. I’m just wondering if there is some high-level color you can give us on what you’re working on?

Rob Fried

Our R&D investments are across many spectrums, there is – there are supply chain, ingredient manufacturing investments where we’re constantly reducing cost and I think we’ve done a very, very good job working with some of our partners to increase our gross margins and improve the manufacturing processes. There are also investments in research, so that we can make stronger, fuller claims, but also have a deeper knowledge of this incredible molecule and this incredible ingredient. And then there are also product investments where we’re trying to find other ways to offer nicotinamide riboside to the consumer, whether it’s a powder or a food or a beverage or even various formulations that we think would – NIAGEN in combination with other ingredients that might benefit a particular sub-market, marketing group. And all of these ladder up to R&D investments for the company.

READ ALSO  Services trade enjoys big boost from expo

Unidentified Analyst

Okay, thank you. And then, Frank, you’ve been pretty busy at different conferences and at round tables. I’m just curious, is there anything coming up that we should be aware of as well?

Frank Jaksch

Well, I mean, I would say that there seems to be a lot more – there’s been a lot more news lately about the FDA and various aspects of the regulations and that’s largely what the roundtable that I participated in this week for NIH, as well as the event that Rob spoke about as well. We’re largely about FDA related regulations and the need for the FDA to enforce or better enforce those regulations for those that are in fact being responsible. So I would say that my – I’m definitely going to be spending time, beating the drum on the fact that the FDA needs to do their job to enforce regulations within the space better than they have been. And as long as we need to keep beating the drum on that, we’re going to. I think it’s an important topic, not just for ChromaDex, but it’s also a good one to support the whole industry.

Unidentified Analyst

Alrighty [ph]. Got it, thank you for taking the questions.

Rob Fried

Thank you.

Frank Jaksch

Thank you.

Operator

[Operator Instructions] Your next question comes from Mitch Pinheiro with Sturdivant & Co. Please go ahead.

Mitchell Pinheiro

Yes. Hi good afternoon. So, you know, sort of, following up on like your cautious approach to what you can say in marketing. When do you think you’ll have the ability to more directly address viruses and related aspects to NAD? I mean, is this – are we talking – is this a year out, two years out, six months out. I mean, I’m just curious, when do you think it’d be realistic to be able to address it more directly?

Rob Fried

Well, of course when you conduct a human clinical study there is no way to know for sure what the results are going to be. The preclinical studies are an indication of what you might expect, but when you do a clinical study there are so many other variables that are harder to control, it’s hard to know and until you complete the study with the results that you are hoping for, you really can’t make a strong claim. So it could be a few months, it’s theoretically possible that it could be weeks, it’s not likely, but it’s theoretically possible. I don’t think it would be as much as a year, but it’s even possible that it could be. It depends on when these studies are completed and what the results say.

Mitchell Pinheiro

Okay. Yes, just hard – it’s just difficult to sell a product without being able to tell people why they need to take it. I mean, directly instead of beating around the bush. So it’s a sort of important aspect to the marketing. Speaking of marketing, the market is going to be up $3 million to $5 million for the year, it was up $1 million in the first half, so that suggests an acceleration in the second half. What gives you the confidence? I mean, I see e-commerce was flat in the quarter sequentially, that is. What gives you the confidence that, it’s the right thing to do in this – to accelerate marketing?

Rob Fried

Well, as I said, it was flat. It was flat in the second quarter versus the first quarter. But the first half of the second quarter was down significantly and then it recovered. So we’re looking at trends here. And we’re seeing strength, we’re seeing significant rebounding here and so we’re seeing growth, that’s one reason. And another reason is, we know what the product is, and we know what the retention is and we know that customers that begin to become TRU NIAGEN customers, especially those that stick with it for a couple of months, tend to stay for a very, very long time. So there are many, many metrics that we look at in the e-commerce business, that suggests this business is going to be around and growing for a long time to come. In any one quarter, anything could happen. You could have events like the Coronavirus that might be disruptive for a quarter or two. But we see and believe that long-term this is a very significant business and we’ll continue to grow.

Mitchell Pinheiro

And I guess just a follow-up and my final question is just any color you can provide as to in the e-commerce channel? Was new customer growth sequentially weaker or was there – was retention rates different lower? Any color would be helpful.

Rob Fried

In the beginning of the quarter, we saw for the first time an actual reduction in retention rates in the – very like in March and we saw some headwinds in new customer acquisition, but then by the end of the quarter, we saw that turnaround and retention rates return to the very – to the good rates that we’ve been used to, and then new customer acquisitions improved as well.

Mitchell Pinheiro

Okay, thank you.

Rob Fried

Sure.

Frank Jaksch

Thanks, Mitch.

Operator

Your next question comes from JP Mark with Farmhouse Equity Research. Please go ahead.

JP Mark

Hi, good afternoon and congratulations also on positive adjusted EBITDA.

Rob Fried

Thank you.

JP Mark

So regarding that measure actually, and you talked about getting to positive EBITDA overall, legal is obviously the big thing that’s sitting there. And what I heard was that it sounds like it was down sequentially, but it may ramp back up a little bit as you go into another phase, is that correct?

Rob Fried

Yes, that’s correct. We expect it to increase in the third quarter due to the litigation in Delaware and the litigation in New York.

JP Mark

And then, by the end of next year, do you believe that, that goes away? I mean, it gets resolved one way or the other, correct?

Rob Fried

Yes, it’s hard to predict the legal spending in terms of magnitude and timing, but I think that the case. That is the most important case is the Delaware case. That is scheduled for September of next year, so we’re hopeful as we get to that case. And as Rob said, we want to get to trial that, that case would result in legal spending to moderate after that case.

JP Mark

Okay, great. And then my last question is about gross margin. The press release talks about an improvement of 110 basis points that was related to prior year initiatives and recognized in this quarter. I also heard that it sounds like gross margin is still improving, so even though you’ve got this one-time benefit, you’re – are you still sort of optimistic that you get to 60%-plus gross margins over the next few quarters. Is that sort of the – is that the plan?

Kevin Farr

Yes, I think from a timing perspective, we haven’t really set the timing, but I think we worked on a design change that we implemented in the fourth quarter of 2019. That was taken to configuration of our three-month supply from three bottles to one bottle. That resulted in lower bottle cost, smaller packaging and lower shipping costs. So as we go through the first through the third quarter, that’s – that will be an improvement versus last year, because we launched it in the fourth. And then we also did some work in the first quarter of this year, which we expected to hit in the second half of the year, some of that has come through in the second quarter, but we would see benefits in the third and fourth quarter. And then I think with regard to our savings programs, we have also highlighted that we expect about $2 million of savings based upon what we’ve implemented already and most of that would show up in 2021.

JP Mark

Okay, great. Thank you. Thank you very much.

Operator

Your next question comes from Raghuram Selvaraju with H.C. Wainwright. Please go ahead.

Unidentified Analyst

Good afternoon. This is Mark [ph] speaking on behalf of Raghuram, H.C. Wainwright. Thanks for taking my questions. So I have two. The first is in your view, how does the FDA’s regulation of nutraceuticals evolved recently? And how has that impacted you?

Frank Jaksch

Hi, this is Frank. I wouldn’t say that it’s evolved recently, it’s the same basic regulations that were put into place based on Duchene in 1994 those have implemented over the course of time between 1994 and then. But, you know, the core of those regulations really around good manufacturing practices and the second one is around NDIs. And the enforcement – the biggest issue wasn’t necessarily the regulations themselves. It’s really – like I was saying before, it’s really more about the enforcement of the regulations and how those are enforced. As a responsible company meaning how ChromaDex operates like Rob has said multiple times on the call today. We’re a responsible company that spends money and follows the rules that the FDA has laid out. There are a lot of companies that don’t do that. And the problem is that sometimes the companies that are spending the money don’t necessarily get the benefit that they should by – in fact, following the regulations the way they should be. So I would say it’s more of enforcement then really about structure, the regulations. That answers your question.

Unidentified Analyst

Okay. Yes, makes sense. And the second question relates to this fascinating study that was published in a press release recently about the social deficits in autism. Were the researchers, if you know this, planning on replicating this in female mice too, in addition to the male?

Frank Jaksch

I’m – that’s a good question. I don’t know if there were plans. I think that they specifically studied the male mouse model, because it was probably easier to replicate it. I don’t know if they plan to take it past that in the female mouse model, and I think it would be more hopeful for us is that like a lot of – like Rob had mentioned that we passed our 200th collaborative study. And a lot of the collaborative studies that have started in studies like this have transitioned from successful preclinical studies, mouse model type studies into human clinical trials. So be hopeful that somebody would want to investigate this further in some form a clinical trial, maybe more so than even looking at additional mouse model.

Unidentified Analyst

Thank you very much. That would be fantastic. And thanks for taking the questions.

Rob Fried

Sure.

Frank Jaksch

Thank you.

Operator

Your next question comes from Matt Dhane. Please provide your company and ask your question.

Matt Dhane

Hi, this is Matt Dhane from Tieton Capital Management. Wanted to delve a little deeper into the COVID-19 studies or Coronavirus studies that have been referenced on the call. You’ve obviously referenced the couple animal studies that came out, as well as smoothed onto the NIH lab there. I’m curious how much efforts or work is being done around humans and doing studies. In human is that something that’s developing? Are people looking at it? And I don’t know how much would be just a formal study versus something otherwise, since this is such a rapidly evolving and crazy situation that we’re in right now?

Rob Fried

We haven’t announced any human studies yet, but we are having discussions with numerous researchers.

Matt Dhane

Is there anything that’s being done informally that you’re aware of that, whether it’s in a hospital situation or things like that, where people are doing research or looking into things that might be publishable or assist?

Rob Fried

We know of various things that are taking place, but none that have – that we’ve announced publicly or discussed.

Matt Dhane

Okay. I wanted to also ask about sales out of China. You announced that you added the two additional partners here this quarter on top of your prior associations. I was curious what you’re seeing out of China, how that market is developing for you? And, yes, any color there would be great.

Rob Fried

Yes, it’s definitely growing. There is a surging interest there, and so we see it as an opportunity and we intend to invest more in it.

Matt Dhane

Is it material at this point in time, Rob?

Rob Fried

I wouldn’t say it’s material yet. Remember, we still don’t have blue-hat approval to sell in China. It’s still a cross-border business. But we are – we work on it every day.

Matt Dhane

Okay. Do you have any sense at all when you make it the blue-hat approval?

Rob Fried

No, we can’t give any indication of when that will happen. Things are changing there fairly rapidly. They only, within the last year, established their rules for getting blue-hat approval. But there is a great deal of interest.

Matt Dhane

Okay, sounds good. Well, thank you.

Rob Fried

Sure.

Frank Jaksch

Thanks, Matt.

Kevin Farr

Thanks, Matt.

Operator

That is all the time we have for questions. I’ll turn the call back to Brianna Gerber for closing remarks.

Brianna Gerber

Thank you, Josh. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1800-585-8367 and the conference ID is 1563949. Thank you everyone for joining us today and for your continued support of ChromaDex.

Operator

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



Via SeekingAlpha.com