Niagen Bioscience, Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's First Quarter 2020 Earnings Conference Call. My name is Julia and I’ll be the conference operator today. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. This afternoon, ChromaDex issued a news release announcing the Company’s financial results for the first quarter 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.

Thank you. Good afternoon, and welcome to ChromaDex Corporation's first 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 statements. These risk factors include those contained in ChromaDex's quarterly reports on Form 10-Q, most recently filed with the SEC. 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?

Thank you, Brianna. Good afternoon, everyone, and thank you for joining our first quarter 2020 investor call. I hope everyone listening is navigating well these troubling times. ChromaDex had another strong quarter with total net sales of $14.3 million. Overall sales increased 10% sequentially and 43% year-over-year. Tru Niagen net sales were $11.1 million, a 10% increase sequentially and a 50% increase year-over-year. Sales of Watsons were down slightly compared to the prior quarter due to the impact of the coronavirus and the protests on retail traffic in Hong Kong stores. Importantly, our efforts in reducing costs continued to show positive results as adjusted EBITDA excluding total legal costs was a net loss of $316,000. ChromaDex reacted swiftly when the coronavirus hit. We already understood that there is an impact on NAD when viruses are present. We immediately initiated preclinical research in the area in the first quarter led by our Chief Scientific Advisor Dr. Charles Brenner. And as you may have noticed, after Brenner published promising results in the initial preclinical study last month, further research is required and further research is underway. Additionally, we adjusted our marketing messaging in the first quarter to include the impact that lifestyle, viral, and age-related stressors have on our NAD levels and our cellular health. This, in addition to our existing messages of cellular energy, cellular repair, and aging. And finally we stepped up our ongoing efforts to streamline costs. With regard to the overall outlook for the year it is still not clear if COVID-19 will be positive or negative for our business. We are currently expecting a reduction in our top line growth, but improvement in the bottom line results relative to the outlook presented last quarter. This includes some recent changes to our organization as well as some ongoing initiatives across our supply chain. Kevin will provide additional context when he discusses our financial outlook for the year. Let's now get to the three pillars of our business strategy: build a global brand, to own the science, and to focus on the fundamentals. First, the brand. As mentioned, global Tru Niagen net sales were $11.1 million in the quarter, a 10% increase sequentially and a 50% increase year-over-year. Tru Niagen represented 78% of the $14.3 million in the quarter. International sales for Tru Niagen represented approximately 29% in the first quarter. This includes sales to Watsons in Hong Kong and Singapore, and also cross-border sales in China, Japan, Europe and sales to our partners in Australia, New Zealand, the UK and Canada. Sales to Watsons were $1.8 million in the first quarter, a slight decrease versus the previous quarter. Lower sales in the base business in the first quarter were largely offset by shipments for Tru Niagen Beauty which launched in stores in late April. Tru Niagen Beauty builds on the success of the Tru Niagen brand as an award-winning and best-selling health product among Watsons Hong Kong loyalty members, as well as a driver of their healthcare category. Tru Niagen Beauty will allow us to reach new demographics seeking our science-based solutions for their beauty routines. We're pleased to extend our product portfolio with a strong partner like Watsons. At this time, there are no plans to extend Tru Niagen Beauty beyond the region. E-commerce net sales were $8.2 million, a 4% increase sequentially and a 39% increase year-over-year. Sales from returning customers in the U.S. continued to outpace new customer sales. In addition, we have cross-border sales in the UK, Japan, Korea, Germany, France and China which grew 179% year-over-year, currently expanding distribution to include two of China's largest online retailers, Kaola and JD.com in the second quarter. These platforms will complement our existing Tmall presence in China. We also added two European cross-border markets in the first quarter following EFSA approval in France and Germany. Additionally, we're continuing to build our brand with strong global partnerships. We shipped initial orders to Australia, the UK and Persona Nutrition in the first quarter, expanding our partnerships with Matakana, Superdrug in the UK, a division of the A.S. Watson Group, and Nestlé Health Science, respectively. In late April, we announced that our UK partner is Superdrug, a leading health and beauty retailer with over 800 stores in the UK and a member of the A.S. Watson Group. This represents our entry into the European market and we're proud to expand our partnership with the A.S. Watson Group. As mentioned last quarter, the initial launch is a small test launch in 200 Superdrug stores across the UK as well as superdrug.com. We very much applaud the efforts of Superdrug and Watsons for keeping essential items such as Tru Niagen available to customers worldwide during this unprecedented time. We've built upon our relationship with Matakana to include exclusive distribution rights in Australia in online and retail sales channels. Matakana is an established dietary supplement manufacturer and distributor with more than 90 lines of organic and superfood products. Tru Niagen complements Matakana's existing portfolio of products and their broad distribution as well as knowledge of our science-based product. This positions the brand for strong growth in Australia. We are partnering with them on a number of influencer, social media, and owned-media initiatives to drive awareness and sales in the market. We are very much looking forward to Nestlé Health Science Tru Niagen products later this year which will emphasize the importance of cellular nutrition. As I previously said, the initial test launch will be in loose powder format and Nestlé plans to begin initial marketing efforts next month. Persona Nutrition, a division of Nestlé Health Science, launched Tru Niagen in the first quarter. Persona is a leader in the fast-growing area of personalized nutrition and we believe it is a growth opportunity for Tru Niagen and one that also helps build the brand. Our second pillar is to own the science. We are confident in the science behind Niagen and are actively tracking the increasing volume of research on the molecule that is currently underway. Several new studies have been registered and published since our last update. Frank will summarize in a moment. Recently we announced the first round of results of a combination tissue and in vitro study led by Dr. Charles Brenner, our Chief Scientific Officer, and one of the world's foremost experts in NAD research, as well as Dr. Stanley Perlman, one of the leading experts on coronavirus. Dr. Brenner's preclinical studies showed two key findings: one, a COVID-19 introduction to the studied cells caused greater than three-fold reduction in NAD; and two, these infected cells specifically sort out nicotinamide riboside, Niagen, in an attempt to replenish NAD levels in the face of the viral infection. We expect additional research from Dr. Brenner to be made public soon. The next phase of his preclinical research will explore whether introducing nicotinamide riboside or Niagen may support cells' innate immune response to coronaviruses and other viruses. We will publicly share the findings of this research when appropriate. We are also exploring additional preclinical research on nicotinamide riboside or Niagen and COVID-19 through our industry-leading ChromaDex External Research program. We also continue to build upon and protect our intellectual property which includes our ongoing litigation against Elysium Health. A May 12 trial date in California litigation was postponed due to court closures in the wake of the coronavirus outbreak. We recently submitted a joint written status report and the court granted our request for a status conference in June. In New York, discovery has been extended by four months due to restrictions on taking depositions in the wake of the coronavirus and in Delaware regarding patent infringement by Elysium, it has been scheduled for trial on September 27, 2021 and is moving forward following the recent Court of Appeals decision that upheld the validity of the Dartmouth patent which is licensed by ChromaDex. To remind everyone, Elysium could not appeal the rejection of their challenge to the '807 patent and now that Elysium lost their appeal of the PTAB decision validating the '086 patent, Elysium cannot raise those same arguments in the patent infringement lawsuit regarding any claims on the '086 patent. We remain confident in the facts of all three cases and are eager to get to trial. In the meantime, we expect lower near-term legal expense with delays attributable to the coronavirus. Our third strategic pillar is to focus on fundamentals. It is our mission to lead by example in this industry. During a time when the world is looking for new solutions to maintain their health we strongly encourage consumers to choose trusted brands, supported by published scientific data, with regulatory approvals. We continue our basic philosophy of science-based marketing and conservative financial management. We recently announced a $5 million capital raise to provide some further strength to the already strong balance sheet. In summary, in the wake of the coronavirus, we are successfully driving the business forward. We are leading important research in the field, delivering on incremental growth opportunities and adjusting our cost structure and maintaining a strong balance sheet. I believe ChromaDex will be even stronger once this global macroeconomic crisis is behind us. And now I will pass the call over to our Chairman, Frank Jaksch for an update on scientific research. Frank?

Thank you, Rob. As Rob stated, one of our core objectives is to own the science. We are committed to remaining a global scientific authority on NR and NAD research as well as setting the standard for excellence in the industry with our commitment to science, safety, and quality. Since our last call, publication of research on NR and NAD has continued to accelerate with the publication of the ninth human trial and multiple preclinical studies. As Rob mentioned earlier, Dr. Brenner and scientists from the University of Iowa, Oregon Health & Science University, and the University of Kansas recently published preliminary preclinical research on the potential impact coronavirus has on NAD levels in cell, animal and human tissue. The findings were published on BioRxiv, a preprint server. The research has characterized the key steps in what happens in a coronavirus infected cell and the impact it has on innate immunity. Before moving on, I want to briefly discuss the concept of innate versus acquired or adaptive immunity. Acquired immunity is where the body's immune cells have developed specific antibodies after being exposed to a virus and they can quickly seek out the virus and destroy it before it can spread infection. This is how vaccines work using the acquired or adaptive immune response to protect us from viruses. In contrast, innate immunity is where the cells go to work to fight off the infection when it is first introduced to the body. The body mobilizes immune cells to seek out, attack and destroy the virus. What we've learned from these early publications is that NAD is important for the initial innate or nonspecific response. However, further preclinical research is required and those preclinical studies are underway. There are 40 ongoing, completed, and published clinical trials currently registered on ClinicalTrials.gov to investigate the pharmacokinetics and the therapeutic effects of NR. This is one more than our last update. An additional nine clinical trials are registered to test NR in combination with other ingredients for a total of 49. We finished the quarter with 195 signed research collaborations, up by approximately 10 compared to last quarter. I'll highlight an interesting recent published study on NR since we last spoke. In April, a preclinical study demonstrating the effects of both niacinamide and our product nicotinamide riboside supplementation on cardiac electrophysiology was published in the Journal of Molecular and Cellular Cardiology. Researchers from the University of Iowa were able to demonstrate that both NR and NAM increased NAD and NADH levels. However, only NR indicated the potential cardiovascular effect. These results reinforce earlier preclinical findings that suggest increased NAD levels may have a beneficial impact on cardiac conditions and arrhythmias. The researchers concluded that the results warrant further investigation into NR as a potential therapy for cardiac arrhythmic disorders. Finally, I'll briefly touch on the newly registered clinical studies, all of which were registered in April. First, a study was registered by Koc University Hospital in Turkey to establish metabolic improvements in obese patients with nonalcoholic fatty liver disease, or NAFLD, through dietary supplementation of NR in combination with serine, L-carnitine and N-acetylcysteine. Previous studies have suggested that each of these nutrients decreases liver fat. So the researchers hypothesize that supplementation of a combination of these ingredients including NR will stimulate pathways to enhance hepatic oxidation resulting in decreased liver fat. Additionally, a pilot study was registered by the Cleveland Clinic, a comprehensive cancer care center, to investigate the effects of nicotinamide riboside supplementation in allogenic hematopoietic cell transplantation. The objective is to find a safe and tolerable way to improve engraftment after transplant. Research studies have shown that adding NR to donor cells has the potential to increase blood stem cell numbers and potentially decrease the time to engraftment. Before turning the call over to Kevin, I'd like to briefly discuss our new framework for categorizing the areas of ongoing research on NR. In the past, I've discussed studies categorized by various health conditions such as heart health or cardiovascular health, brain health or neurological health, liver health and many others. At ChromaDex we've begun to frame the discussion in the context of a new way of looking at health called intrinsic capacity, which is part of the World Health Organization's framework for healthy aging. According to the WHO, intrinsic capacity is the composite of all mental and physical capacities that a person can draw on, including their ability to walk, think, see, hear and remember. It is an indicator of one's ability to cope with physiological stress and still maintain these functions. We categorize these concepts into five domains of intrinsic capacity: vitality, cognition, locomotion, sensory and psychological. In other words, our intrinsic capacity is defined by the underlying health of our cells. Nutritional solutions such as NR represent an opportunity to help maintain or even improve intrinsic capacity. We've included a slide in our earnings presentation illustrating how cellular health supports intrinsic capacity. Going forward, I'll be presenting the summary of our ongoing clinical studies in these intrinsic capacity domains consistent with our internal framework. In summary, ChromaDex is committed to remaining the leader in the NR, NAD and cellular health conversation. As Rob mentioned, Dr. Brenner's preclinical research is ongoing, and we will provide updates when appropriate. With that, I'll pass the call over to Kevin Farr.

Thank you, Frank. Let's look at our financial results for the first 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, approaching breakeven in the first quarter with a loss of $316,000. This was a $1.8 million improvement sequentially, and a $2.4 million improvement year-over-year. Compared to the fourth quarter of 2019, we delivered strong sequential topline growth, higher gross margins, significantly lower advertising expenses as a percentage of net sales and lower general administrative expenses primarily driven by the absence of Elysium-related bad debt expense in the current quarter, partially offset by higher severance and restructuring charges, which are related to cost savings initiatives. In April, we strengthened our balance sheet with a $5 million common stock raise from existing strategic investors. While there was not an immediate need for the additional capital, we believe it's prudent given the current economic uncertainty. Based upon our current outlook, we believe we have enough cash to reach cash flow breakeven and defend our intellectual property, excluding our $7 million committed line of credit. The line of credit provides additional financial flexibility. Moving to the first quarter results for the three months ended March 31, 2020: ChromaDex reported net sales of $14.3 million, up 10% compared to the $13.1 million in the fourth quarter of 2019. Year-over-year net sales were up 43% compared to the first quarter of 2019. Tru Niagen net sales were up 10% sequentially and grew by 50% year-over-year with diversified growth across U.S. e-commerce, Watsons and international cross-border launches year-over-year. Watson sales remained solid at $1.8 million in the quarter, but were down slightly versus last quarter. As expected, Watsons experienced softer consumer takeaway in the first quarter due to store closures in the wake of the coronavirus. As the economy began to reopen in March, these trends improved, but have yet to return to prior levels. As Rob mentioned, we also shipped our new product Tru Niagen Beauty in the quarter, which aligned with Watsons' late April launch. We expect continued impact on sales at Watsons in the second quarter due to the coronavirus. Total Tru Niagen related net sales were up 8% sequentially, and 53% year-over-year. Turning to the rest of the P&L on a sequential basis, our gross margin was up 90 basis points from 57.0% in the fourth quarter of 2019 to 57.9% in the first quarter of 2020. Year-over-year gross margin increased by 520 basis points to 57.9% compared to 52.8% in the first quarter of 2019. As a reminder, last year we recorded a 250 basis point charge related to the wind down of our Purple Corn Ingredients sales. Product cost savings initiatives and overall scale on our supply chain drove the improvement in gross margins. We believe both factors, 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 first quarter of 2020 was $14.2 million, down $2.1 million compared to the fourth quarter of 2019. As a reminder, the fourth quarter of 2019 included a one-time bad debt charge of $2.2 million related to the full write-off of our Elysium receivable. Our selling and marketing expenses were down $0.7 million to $4.4 million in the first quarter of 2020 compared to $5.1 million in the fourth quarter of 2019. As a percentage of net sales this expenditure was down 800 basis points in the first quarter of 2020, versus the fourth quarter of 2019. We made continuing progress improving market efficiency in our Tru Niagen business, driven by strong returning customer growth, while investing in initiatives to drive new customer growth, both in the U.S. and internationally. We continue to monitor daily e-commerce metrics such as customer acquisition costs to adjust messaging and spending, which is increasingly important in this fluid environment. As reported, G&A expense was down $1.3 million to $8.8 million in the first quarter of 2020 versus $10.1 million in the fourth quarter of 2019. This included $2.4 million legal fees and $1.0 million of severance and restructuring expenses in the current quarter. Excluding legal fees, severance, restructuring and equity compensation expense, first quarter 2020 G&A expense was lower by $0.1 million versus the fourth quarter of 2019 comparable G&A expense, which also excluded Elysium related bad debt expense. Legal expense was up slightly compared to the fourth quarter of 2019. Motions for summary judgment were decided following hearings in the California matter during the first quarter, and discovery accelerated in the New York litigation. Sequentially the trial was delayed in the California case due to the suspension of all jury trials caused by the coronavirus. For the same reason, deposition discovery was delayed in New York. As a result, we expect legal expense to be lower in the second quarter of 2020 despite ongoing investments in the Delaware patent infringement case in preparation for the McMahon hearing in December 2020 and the trial in September 2021. For the first quarter of 2020, our operating loss was $5.9 million versus $8.9 million in the fourth quarter of 2019, which included the $2.2 million bad debt write-off. The net loss attributable to common shareholders for the first quarter of 2020 was $5.9 million or a loss of $0.10 per share, as compared to the net loss of $8.9 million or a loss of $0.15 per share for the fourth quarter of 2019. 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 engage the underlying performance of our business, in the second quarter of 2019 we introduced a new non-GAAP measure: adjusted EBITDA excluding total legal expense. 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 cost, bad debt expense related to Elysium, severance and restructuring expenses and total legal spending. We have included a reconciliation to the appropriate GAAP measures in our earnings release slide. Litigation expenses represent the majority of our legal spend today. We are excluding total legal spending from adjusted EBITDA since we expect it to decline significantly after the matters are concluded. In the fourth quarter of 2019, we began excluding severance and restructuring expenses that we expect to deliver measurable, sustainable, net cost savings in late 2020 and beyond. We made changes to the organization in the first quarter and completed negotiations as part of our end-to-end supply chain evaluation. On an annualized basis, we identified at least $2 million of gross savings with the majority of the savings to be realized in 2021. We incurred $1.2 million of severance and restructuring expenses related to these cost savings initiatives. As is prudent in this uncertain economic environment, we'll continue to evaluate our cost structure and see additional opportunities in our supply chain. As I previously highlighted, adjusted EBITDA excluding total legal expense improved by $1.8 million to a loss of $0.3 million in the first quarter of 2020, compared to a loss of $2.1 million in the fourth quarter of 2019. Year-over-year, we delivered a $2.4 million improvement in the first quarter of 2020 versus a loss of $2.7 million in the first quarter of 2019. The improvement was primarily driven by higher sales, gross margins and marketing efficiency. Moving to the balance sheet and cash flow, we ended the first quarter 2020 with cash of $13.6 million, down $5.2 million versus the fourth quarter of 2019. In the first quarter of 2020 our net cash used in operations was negative $5.2 million versus negative $0.6 million in the fourth quarter of 2019. Consistent with our expectations, the higher cash outflows from operations this quarter were driven by working capital, which was a $1.6 million use of cash in the first quarter of 2020, compared to a $3.9 million source of cash in the fourth quarter of 2019. The use of cash was related to an increase in accounts receivable and a decrease in accounts payable largely due to lower Niagen ingredient purchases. Today, we've successfully navigated the business during the coronavirus pandemic. At this time, we do not expect any supply chain disruptions from coronavirus, and have implemented risk assessment strategies to manage this going forward. As it relates to revenues, the COVID-19 situation remains fluid and difficult to predict. Against this backdrop, we are managing our expenses to mitigate the bottom line impact to the company. As Rob said, we took a hard look at our 2020 financial plan to ensure we're prioritizing investments with the highest return in the current environment. For full-year 2020, we expect continued top line growth driven by our U.S. e-commerce business, launches in new international markets such as the U.K. and Australia, and launches on new platforms such as Persona Nutrition. We anticipated a lower growth rate than the 47% in 2019 due to a larger revenue base, the impact of the coronavirus, and the impact of divesting our Spherix regulatory consulting business, which accounted for roughly $700,000 of 2019 net sales. As Rob mentioned, we see the coronavirus having impact on Watsons in the second quarter. There has also been a modest impact on our HCP business where some sales are tied to trade shows, which have been canceled. COVID-19 mildly also impacted our international market launches at retail, but these are incremental opportunities relative to 2019. It's too early to determine the impact of the coronavirus on our e-commerce sales. Consumers are likely to balance concerns about employment and overall macroeconomic weakness with their desire to invest in their health with supplements like Tru Niagen. Based on the trends of the day, we're planning for continued growth in this business in 2020. We continue to expect gross margin expansion due to the favorable mix from our growing e-commerce business, the product design changes implemented in late 2019 and additional supply chain cost savings initiatives. We continue to expect an increase in selling and marketing expense of $3 million to $5 million including investments in brand awareness and investments in new market launches. We expect continued improvement in selling and marketing expense as a percentage of net sales driven by strong sales growth from returning customers. Lastly, we continue to expect 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. We're excluding legal expense from our outlooks since two of the trials have not been rescheduled and there may be further discovery and other delays in our other matters due to the uncertainty caused by COVID-19. Severance and restructuring expense is included in reported G&A. Adjusted EBITDA excluding total legal expense remains a key metric. We expect this to improve throughout the year. We continue to believe we can achieve cash flow breakeven at $17 million to $19 million of quarterly revenues if the litigation ends and legal costs decline. Total quarterly operating expenses will be higher in the near-term driven by higher litigation expense. As a result, we need sales of approximately $19 million and gross margin slightly better than 60% to achieve this. In short, the overall framework is unchanged, and we will continue to manage all levers of the P&L to deliver on this important objective. Operator, we're now ready to take questions.

Thank you. Your first question comes from Jeff Van Sinderen from B. Riley. Your line is open.

Hi everyone. Just a follow-up on the growth rate, just wondering what are you contemplating in terms of the top line growth rate this year? I guess trying to get a sense of what your thinking is regarding orders magnitude versus the growth rate last year?

Kevin?

Okay. I'm sorry. Jeff, with regard to our outlook, we think that it's not going to grow as much as the 47% last year, and I think it's not growing versus last year because the base is higher as well as the sales are expected for the full year to grow with regard to the launch of new markets as well as the growth in the DTC business. And we think relative to what we indicated in the first quarter it is going to be slightly lower than what we had indicated in the first quarter.

Okay, that's helpful. And then maybe if you guys could delve more into how your marketing is shifting or evolving for the COVID period. What are the milestones I guess we should think about in terms of getting to kind of the place you want to be with marketing?

I can tell you how we're shifting our messaging. I'm not sure how to give you milestones for that. As you've noticed we don't market beyond the published data and there is some published data on the impact of viruses on NAD and now we have some additional data specifically relating to coronavirus, but there is limited data on the impact of Niagen on coronavirus, especially in humans. We are working on it and as the data comes out, we will communicate that data. Anything that's preclinical can be discussed with healthcare practitioners, but cannot be marketed to consumers. We are very careful in the way we communicate these messages. So we are working vigorously to get these studies out. There are several underway, but we are not tone deaf about what the market is looking for. The market wants to understand how Tru Niagen could impact their risk for viruses in general and coronavirus specifically. So we did make a pivot; we did slightly adjust or add to our messaging and show that cell defense and NAD and Niagen are related. We are showing a positive benefit to that shift in messaging. But until we have some published scientific information, we're not going to be able to make the full message clear.

Okay. And then if you could delve into Nestlé, anything else you can share in terms of the rollout strategy there, maybe anything in terms of color on what marketing might look like in their initial launch?

Well, they've shared some information with us. They haven't shared all of it yet. They're still developing their plans. They are slightly impacted by coronavirus. They are still scheduled to be on track for a September, October release of the product and they are scheduled to begin their PR efforts in June. We've seen some creative materials from them. We haven't seen any final creative materials from them. Generally, it looks pretty good, but it's a slow rollout. You shouldn't have an expectation of anything large or dramatic initially. They're testing it. They have very high hopes long-term, but they don't have high expectations in the short-term.

Okay, understood. Thanks for taking my questions and continuing success.

Your next question comes from Brian Nagel from Oppenheimer. Your line is open.

Hi, this is William calling on behalf of Brian Nagel. Thanks for taking our question. First, there are two main topics that we wanted to talk about. First, given the strong expansion recently in gross margin, could you discuss the sustainability of that in the longer term? And secondly, do you have an expected timetable in determining whether Tru Niagen could become more of a factor in the fight against COVID-19? And at what point would ChromaDex begin to put more marketing spend behind Tru Niagen? Thank you.

Kevin, why don't you take the first one and Frank, why don’t you take the second?

Sure. Okay. Yes, we think that the gross margin improvements are sustainable, and we think there's more opportunities to continue to cut costs. In the quarter, we grew 90 basis points from 57 to 57.9. Why we think that it's going to continue moving in this direction is because we've got a tailwind from Tru Niagen. If you see growth in our DTC business, which has margins of over 60%, you should see gross margin continue to move in that direction and it has been doing that since we launched the Tru Niagen brand in 2017. We also instituted supply chain savings and we've been executing these initiatives since late 2019, and we realized savings from the fourth quarter of 2019. In September of 2019, we launched the 300 mg 90-count one-bottle configuration that reduced product, packaging and shipping costs. We've also implemented an ERP system to help optimize our inventory and identify additional efficiencies. We completed a project driving CMO cost savings through a strategic sourcing process that established strong partnerships with new and existing CMOs. We had four CMOs that blend, encapsulate, bottle and label our product. Through a competitive strategic sourcing process we realized significant savings. You should see those costs flow through in the second half of the year with the majority realized in 2021.

Yes, on your second question: there has been quite a bit of research over the past few months showing the decline of NAD in coronavirus infection. We know mechanistically why that's happening and it goes back to the same story we've been observing for NR. NAD comes under attack with age; it comes under attack in this case in a coronavirus infection. We know mechanistically how that's happening: an infected cell responding to RNA replication uses NAD and the virus attacks the supply of NAD. It's a similar process as with aging, but occurring over days rather than years. What we need to do now is conduct studies confirming that nicotinamide riboside can rescue or raise NAD when it's getting knocked down in a coronavirus-infected cell. Those studies are underway. We don't need to show that NR raises NAD — multiple human studies have already shown that NR increases NAD and is safe. What we need to show is that in this particular model we can use NR or Niagen to rescue NAD supply in coronavirus. Those studies are in progress and we hope to publish them as soon as possible to support any claims about the product.

Only that the last piece of the question was when are we going to increase our marketing? As you know, ChromaDex is very sensitive to the top line as well as the bottom line. We are constantly measuring the effectiveness of our marketing campaigns and assessing the efficiency of marketing and all spending. We hit the gas pedal when we find a vein that works. We have improved over time. Our retention is very strong; returning customers continue to purchase Tru Niagen. We hope that by continuing to publish good science and being fundamentally sound in our marketing, operations, and scientific approach, word of mouth will grow. We can share preclinical data with healthcare practitioners and we're working hard to communicate with them. We also have a very large and growing customer base. Those healthcare practitioners and customers may help spread information about Tru Niagen and how it could be helpful not just with coronavirus but with cellular stress in general. But today, rather than put the company in a position where we make a claim too soon, we are careful to wait for published science before broadening consumer marketing claims.

Okay, that's very helpful. Thank you.

Your next question comes from Mitch Pinheiro from Sturdivant. Your line is open.

Yes hi, good afternoon. So Rob, I wanted to ask you: you sort of said you’re still not sure if coronavirus circumstances will be beneficial to your results this year. But as you look at the second quarter, it sounds like the news and the science is certainly hitting home and I would think that can you talk about any difference in sales rates? Are we seeing new customers hit here? Is that part of the first quarter? Are you seeing it in the second? Obviously your ongoing customers, your retention is strong and those that use Tru Niagen are loyal. But can you tell us any nuances to your sales relative to the coronavirus circumstances?

We do see that when the coronavirus publicly hit, it had an impact on sales across the board. As we've said in the past Watsons sales began to decline in the first quarter mostly due to store closures. I'm happy to say that as Watsons stores start to open up we are seeing an uptick and a bit of a return from Watsons in Hong Kong. When coronavirus hit, public attention shifted away from aging to coronavirus and although nutraceutical sales in general have been strong, non-immune related nutraceuticals have not. We have seen that when we communicate based on the science that Tru Niagen has an impact on innate immunity people do respond to it. But we are very careful not to market any claims before the science is published. It is interesting: there is very strong demand for products that are perceived to increase immunity, and for those that are not perceived that way you're seeing a decline in demand. So we're seeing both of those things concurrently. That's why it's difficult to say whether the net effect will be positive or negative.

Did customers of Watsons in Hong Kong shift to e-commerce when they couldn't get to the stores?

Yes, Hong Kong online sales increased.

When looking at Q1 results, was there any channel fill in Q1 related to the U.K. or Australia or any other new market?

Given the nature of the business, there wasn't a large ship-in to fill store shelves. The Australia launch is more online. The U.K. is both online and in stores, and the in-store presence is at 200 stores as a small test. So there is a minor amount with respect to the U.K., but basically there are no big upfront purchases to put in warehouses; it's more what they need to test in the U.K. Overall, the launches in total were about $700,000 for the quarter and were a driver of the growth rate in the quarter. There is opportunity for the rest of the year to grow that business, but it's hard to predict based upon the current economic environment.

And is the revenue breakdown to Watsons where the U.K. revenue will go or will it go into the other international line item?

It will go in the other international line item.

And then just finally, how long do these coronavirus studies typically take — a couple of weeks? The study is done and then you have to get it published; what's the typical cadence?

It depends on the type of study. Coronavirus infection studies, because they don't last that long in any model, whether it's a cell model or animal or human tissue, are not long-term. The studies themselves often take days. It's a matter of getting the studies staged, completed, and the data reported. Each one is a little different. Cell models differ from animal models and human studies are different still. Human studies are also more challenging because you don't infect people; you introduce the study in places where patients are already coming in infected and then you dose patients that are already infected, so it's more observational than a traditional double-blind placebo-controlled study. The studies themselves are not long; it's the timing and setup that take time.

There are other complications as well. For example, it's difficult to replicate human coronavirus in animals. So there aren't many places that have succeeded at replicating human coronavirus in mice or rats or other animals. There are also funding issues — some places have funding and some require funding. Then there are sometimes contractual issues like intellectual property terms. So there are reasons why these things take a while separate from the actual study itself.

Okay, thank you very much.

Your next question comes from Ram Selvaraju from H.C. Wainwright. Your line is open.

Hi, I'm calling in for Ram Selvaraju, and thanks for taking my question. I wanted to start with the California court case. I know you mentioned that the trial has been postponed. Could you add a little color on that, and what was the outcome of ChromaDex's status conference with the court on May 4?

The trial date was initially supposed to be the first half of last year, then it was moved to October. In January it was scheduled for May 12, and then the coronavirus hit and it got pushed back. There is no specific new date yet. We're estimating sometime around October, but we don't yet know. I hope that in June we will be able to set a date. That's been a frustration for us. Many facts have come out into the public record. Anyone who reads the public record can see the facts are fairly clear. We're eager for those facts to be resolved in trial. It's surprising to us that given what's been disclosed publicly that a number of parties continue to be associated with that company, but it is what it is. One day there will be a trial, a jury will hear the facts, and we're confident in the decision they will make.

Okay.

The May 4 conference relating to California was primarily an exchange of documentation at this point. In June we will determine the next trial date for California. As you know, we have a trial date scheduled for September 2021 on the patent case, which is the largest of all these cases. The Court of Appeals recently rejected Elysium's attempt to overturn the PTAB decision from last year on the '086 patent, which strengthens our position. These patents look extremely strong and we're confident. We're eager to have our day in court.

Understood. With respect to the New York case, is there likely to be any further extension to the discovery period or is this the final extension?

I'd like to tell you it's the last one, but the process has had many delays. It often seems to us that delay is the opposing side's primary strategy. There have been delays, but we are confident this will be resolved. The judge in New York appears eager to get this to trial. Based on public decisions, you can see the court wants to finally decide the case. This is a long-running matter on the docket and the judges seem to want it resolved as do we.

Understood. Shifting gears to the Asian and international market: have any of these territories begun to experience recovery in the wake of the abatement of COVID-19? Do you expect a healthy rebound in consumer demand in 2020? In particular, are you anticipating a positive impact from Australia’s plan to reopen?

The only indication we have is what we're seeing in Hong Kong right now: as Watsons stores begin to open we are seeing increased traffic in those stores and demand is restoring. There's also the possibility that as studies on Niagen and its impact on viruses, and coronaviruses in particular, are published and we can properly communicate that information, consumer demand could increase if studies support that. At this point we are seeing some restoration of demand as stores reopen.

Understood. With respect to the coronavirus studies you're conducting, can you comment on what kind of studies are being conducted, and is the plan to focus on Tru Niagen as an immune system supporting supplement or to conduct a full clinical investigation?

It's a bit of both. The current research is focused on coronavirus models to demonstrate mechanistically how NR by increasing NAD impacts the specific challenge posed by coronavirus. Ultimately that maps to immune support claims. We're focusing on studies to show that Niagen can raise NAD when it's being knocked down in coronavirus infection. The data will likely support an immune support message. We believe there will be continued long-term demand for immune support products beyond this pandemic. The data should show that NAD plays a central role in a healthy immune system, which will be relevant both now and going forward.

Understood. And final one from me: how is the shift to online sales and e-commerce progressing? Is it in line with your expectation, and what might you execute going forward to accelerate this in the coming quarter?

The shift began about three years ago. There has been steady and consistent growth in the e-commerce business every quarter since we launched the Tru Niagen brand. Retention has been good and customer acquisition cost has steadily come down. Our systems for measuring conversion and retention are getting stronger. We have a strong team for content creation, owned media and social media. Running an e-commerce marketing operation is complex and requires both quantitative rigor and creative inspiration. We have a competent and improving team and strong processes. There is no magic bullet: we focus on research, then use published science as the foundation for our marketing creative materials. We are careful not to make claims not supported by published science and operate the company conservatively. We aim to be a model for how companies in this industry should operate: scientifically rigorous yet consumer-focused. That approach, along with high retention, drives steady growth.

Understood, yes. Thank you so much for taking my questions.

Our last question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

Hi Bob, Frank and Kevin. How are you?

Hi Jeff, good.

Just a couple quick ones: can you talk a little bit about the Tru Niagen Beauty product and with the 100 mg of NR, how do you see it playing out with the population and geography in which you're marketing it? Would you expect that this would be largely in combination with NR in addition to NR or a product unto itself?

The product launched in Watsons stores in Hong Kong and it is a combination product with NR as the hero ingredient. There are three other ingredients in the formulation that are beauty-related. Watsons requested this product; about a year and a half ago we spent time determining what ingredients to combine with Niagen to ensure stability and manufacturability. Watsons believes strongly this market will embrace it. Obviously no one anticipated the coronavirus, which meant we launched right in the middle of it, but we did produce and ship the product and both Watsons and we are pleased with early results.

Okay, got it. Frank, could you comment on the University of Iowa cardiovascular study you mentioned — specifically what cardiac conditions were measured in the study?

That study was focused on cardiac electrophysiology and specifically demonstrated potential anti-arrhythmic effects. It was primarily focused on arrhythmias.

Okay, measured before, during and after I assume?

Exactly right.

And then lastly, on intrinsic capacity and the framework you outlined, is this something you think could penetrate payers in the United States over time?

It's a bit early to say. There's a discussion about classifying aging as a disease and the WHO and others are defining healthy aging. WHO has stated that aging happens at the cellular level, which aligns with where the science is headed. Scientific evidence shows aging originates in molecular and cellular damage and that strategies to mitigate or repair cellular damage are increasingly important. Intrinsic capacity aligns with that — it's about molecular integrity and cellular function that ultimately drive physiological function. Nicotinamide riboside helps improve NAD, which underpins many cellular processes. We need studies to connect NR's effect on NAD to improvements in the intrinsic capacity domains, but the scientific direction supports the concept and it could inform payer discussions over time as data accumulates.

Okay, that's it from me. Thanks for taking the questions.

I would now like to turn the call over to Brianna Gerber for closing remarks.

Thank you, Julia. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1-800-585-8367 and the conference ID is 8259009. Thank you everyone for joining us today and for your continued support of ChromaDex.

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