Niagen Bioscience, Inc. Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation’s Second Quarter 2021 Earnings Conference Call. My name is Ashley 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 2021. If you have not reviewed this information, both are available within the Investor Relations section at ChromaDex’s website at www.chromadex.com. I would now like to turn the conference call over to Brianna Gerber, Vice President of Finance and Investor Relations. Please go ahead Ms. Gerber.

Thank you. Good afternoon and welcome to ChromaDex Corporation second quarter 2021 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 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, business opportunities, future financial results, cash needs, operating performance, investor interest and business prospects and opportunities as well as anticipated results of operation. Forward-looking statements represent only the company’s estimates on the date of this conference call and are not intended to give any assurance as to actual future 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 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 statement after the date of this conference call to conform the forward-looking statement to 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 reconciliation 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 second quarter 2021 investor call. It was yet another strong quarter for ChromaDex, including $17.7 million in total net sales and $640,000 in positive adjusted EBITDA, which excludes total legal expense. Overall, sales were up 21% sequentially, with continued growth in our existing direct-to-consumer and B2B Tru Niagen business. We launched Tru Niagen in Walmart in June, our first mass retail launch in the U.S. and a significant accomplishment for the company. And we had a small shipment of Niagen ingredient to our new partner, ROW, where we expect to be a strategic long-term Niagen ingredient partner along with H&H Group, Nestle Health Science, and Life Extension. As I mentioned, total company net sales for the quarter were $17.7 million. E-commerce sales continued to grow 11% sequentially and they were up 31% over the second quarter of 2020. We benefited from strong Amazon Prime Day sales this quarter as well as an easier comparison as a result of the impact of COVID on our business in the second quarter last year. We also delivered higher sales to Watsons of $2.9 million following last quarter’s temporary supply chain disruption. In total, our sales to existing partners, including Watsons increased year-to-date compared to 2020. We added sales to new partners Walmart and ROW in the second quarter. Gross margins were approximately 61%. And the second quarter adjusted EBITDA, which we define as EBITDA excluding legal expense was as I mentioned, a profit of $600,000, a $1.3 million improvement from the prior quarter. Total legal expense was down compared to last quarter, but remains high as we prepare for three trials this year. As I have repeatedly said, we will continue to protect our intellectual property against infringers, companies who try to build their brands on the back of our science and our regulatory accomplishments. Speaking of our science, the science behind Niagen has never been stronger. We now have 13 completed clinical trials and nearly 40 more clinical trials in progress. In July, the results of ScandiBio Therapeutics Phase 3 COVID-19 study were published in the peer-reviewed journal Advanced Science. Researchers showed the statistical significance that supplementation with the nutritional protocol, including our ingredient, nicotinamide riboside, reduced time to recovery in symptomatic patients in Turkey by 38% compared to a placebo, 38%. Frank will provide additional updates on the science momentarily. ChromaDex remains committed to expanding our knowledge and patent portfolio around nicotinamide riboside as well as other NAD precursors and is increasing R&D investments in 2021 to maintain that leadership position in this rapidly growing market. While direct-to-consumer remains the core engine of the business, we are excited about the opportunity to reach new consumers for Tru Niagen at 3,800 Walmart stores and to work with Walmart to build the NAD supplements category. Our new lower priced, lower dose introductory product should be available in approximately 3,800 locations and our standard 300 milligram product should be available in approximately 2,800 locations. Sales to Walmart were strong this quarter due to initial selling for the launch, with product delivered on time to all Walmart locations. Both SKUs are also available on walmart.com. We have a new Head of Marketing at ChromaDex who is working on a more aggressive campaign targeting Walmart consumers. In the short-term, we continue to expect that sales will build slowly at Walmart and that growth should accelerate upon rollout of this campaign. Overall, it’s still early in the launch and we look forward to sharing more information in the future. I am proud of the entire ChromaDex team for delivering on this milestone launch. It was a cross-functional effort and is important foundationally as we continue to build this great global brand. I would like to thank our shareholders, our strategic partners and our Tru Niagen consumers, our growing group of true believers for your continued support. I have never been as optimistic about our future as I am today. And now, I will pass the call over to our Chairman, Frank Jaksch for an update on scientific research.

Thank you, Rob. In the second quarter, there were several preclinical publications on nicotinamide riboside, or NR, including studies on bone health, alcohol-induced inflammation and neuroinflammation. In addition, in June, an article was published demonstrating that systemic treatment with NR was protective in acute and chronic mouse models of retinal ganglion cell damage, which often precedes glaucoma. This is the first preclinical study of its kind and has implications for clinical research on an area of human health that affects a broad population, specifically vision health. Two new clinical studies were also registered since our last update, both in May. Both studies are part of our ChromaDex external research program. First, Maastricht University Medical Center in the Netherlands registered a randomized, double-blinded, placebo-controlled clinical study to explore whether combined treatment with NR and exercise imposes greater improvements in skeletal muscle mitochondrial metabolism in older adults compared to exercise treatment alone. Exploratory outcomes of the study include muscle NAD metabolites, energy metabolism, and physical performance. 34 participants will be given 500 milligrams of NR twice daily for 40 days. Participants will engage in supervised exercise over a 3-week period, which consists of four approximately 30-minute sessions, including two endurance sessions on a bike and two high intensity interval training sessions. We have recently seen more studies registered examining the combined effects of NR and exercise. This is an important area of research given the opportunity for Tru Niagen in the professional sports and fitness community, many of whom are early adopters of our product. In addition, a clinical study entitled 'NAD supplementation to progressive neurological disease in ataxia telangiectasia' or AT, was registered in Norway. Researchers will investigate the effects of dietary supplementation of NR in children with this rare disease that affects the nervous system, immune system and other body movements. The primary focus of the study will be on neurological symptoms. We are proud to support important research on a growing list of rare orphan diseases like AT, Friedreich’s ataxia and others like Cockayne syndrome, Werner syndrome, CITRIN disease and ALS. In addition, there were two newly published clinical studies since our last update. First, in June, the results of a randomized double-blinded, placebo-controlled Phase 3 clinical study on patients with mild-to-moderate COVID-19 in Turkey were published in the peer-reviewed journal Advanced Science. Researchers showed a statistically significant 38% reduction in average time to recovery in the group receiving the nutritional protocol that included NR compared to placebo. The placebo group recovered in 9.2 days, whereas the group receiving the nutritional protocol recovered in 5.7 days. The results were statistically significant with a p value less than 0.001. We had previously announced the preprint results of the study, but shared the update in a blog post on aboutnad.com with subscribers as well as the medical community through our network of healthcare practitioners. In addition, a study entitled 'Combined metabolic activators improves cognitive function in Alzheimer’s disease' was published on the preprint server medRxiv. The study was led by Dr. Adil Mardinoglu from the Royal Institute of Technology and King’s College London. This is the first study to investigate the effects of combined metabolic activator supplementation in Alzheimer’s patients. This study demonstrated that supplementation with the same combination of metabolic activators used in the COVID-19 study, including NR, significantly improved cognitive function and markers of liver and kidney health in moderate-to-severe Alzheimer’s patients, suggesting this may be an effective therapeutic strategy for Alzheimer’s disease. Further studies are needed to build on and validate these initial findings and we are waiting for the study to be peer-reviewed before sharing these results more broadly. Finally, I wanted to highlight ChromaDex’s participation at a virtual conference hosted by the American Society for Nutrition, or ASN. ChromaDex had a large presence during the session entitled 'Optimizing NAD Status, a Call to Action for Nutrition Research,' featuring speakers from our Scientific Advisory Board, our ChromaDex external research program partners as well as our internal team members. This session was attended by 160 members of the scientific community with high engagement during the Q&A session. The ASN event was an opportunity to raise awareness of the importance of NAD on human health, as well as the extensive body of safety and efficacy data on our proprietary ingredient, NR. Our Head of Scientific and Regulatory Affairs, Dr. Andrew Shao also discussed the importance of a dietary supplement database for the industry, a topic I previously explored on a panel hosted by the American Conference Institute and the Council for Responsible Nutrition. Finally, Dr. Yasmeen Nkrumah-Elie, Director of the ChromaDex External Research Program participated in a panel session entitled 'ASN Sustaining Partner Forum: Your Nutrition Industry, Who We Are, and What We Do.' This is a testament to ChromaDex’s continued position as a thought leader in the industry. I continue to believe that 2021 is shaping up to be an exciting year for ChromaDex based on completed and ongoing clinical studies. Furthermore, the robust preclinical research pipeline and recent publications showing the benefit of NR in mouse models represents the seeds for future clinical trials in 2022 and beyond. ChromaDex maintains a deep and growing relationship with the scientific community as well as regulatory bodies around the world and is committed to remaining the leader in the growing NAD market. With that, I will pass the call to Kevin Farr. Kevin?

Thank you, Frank. ChromaDex delivered a strong quarter, with total net sales of $17.7 million, up 16% year-over-year, or about 30%, excluding the $1.6 million Horizon Ventures purchase last year and up 21% sequentially. In the underlying business as measured by adjusted EBITDA excluding legal expense, a non-GAAP metric, we posted a profit of $640,000, a $1.3 million improvement sequentially and up slightly versus the prior year. We believe that adjusted EBITDA, excluding legal expense, remains an important metric to gauge our progress towards cash flow breakeven and we have included a reconciliation to the appropriate GAAP measures in our earnings release slides. I will begin by reviewing the sequential P&L results and we will then discuss the year-over-year trends. For the three months ended June 30, 2021, ChromaDex reported net sales of $17.7 million, up 21% compared to $14.7 million in the first quarter of 2021. Tru Niagen net sales were up 24% sequentially. This growth was driven by Watsons with sales of $2.9 million this quarter compared to $1.6 million in the first quarter. We benefited from a catch-up shipment in the second quarter, following a $1 million shortfall last quarter. We expect a smaller benefit in the third quarter compared to the baseline demand for Watsons, but we have seen some recent improvements in sell-through as the Hong Kong economy recovers from the impact of COVID-19. Watsons store traffic is still down year-over-year and sales from Chinese tourism and local resident traffic have yet to return to pre-COVID levels. We believe this is due to social distancing measures, travel restrictions, and concerns over the COVID-19 Delta variant that may remain a headwind through 2021. Our e-commerce business was up 11% sequentially, including a boost from Amazon Prime Day sales this quarter. Finally, we successfully shipped to Walmart in the second quarter. There was a large initial shipment to stock the shelves at the 3,800 stores as well as the safety stock at their distribution centers. Our Niagen ingredient sales were up 7% versus the prior quarter, including ongoing sales to Life Extension and a small shipment to our new partner, ROW. Our gross margin was down sequentially by 180 basis points from 62.9% in the first quarter of 2021 to 61.1% in the second quarter of 2021. We had a higher mix of business-to-business sales in the second quarter, which carried a lower gross margin than e-commerce. This includes sales to Watsons and Walmart among other partners. At the same time, we continue to deliver on our supply chain and product cost savings initiatives and are benefiting from our overall scale. As a result, we are tracking well to our full year goal of slightly better than 60% gross margins. Total operating expense for the second quarter of 2021 was $16.4 million, down $0.2 million compared to the first quarter of 2021. Selling and marketing expenses were down slightly to $6.2 million in the second quarter of 2021 compared to $6.3 million in the first quarter of 2021. As a percentage of net sales, this expenditure was down 740 basis points in the second quarter of 2021 versus the first quarter of 2021 due to higher net sales to business-to-business partners with minimal advertising by ChromaDex. As I have previously said, this ratio will generally decline over time as sales ramp, but the quarterly investments may fluctuate as a result of our marketing campaigns. As reported, G&A expense was down $0.4 million to $9.1 million in the second quarter of 2021 versus $9.6 million in the first quarter of 2021. Legal expense was down $0.9 million compared to the first quarter of 2021 to $4.2 million in the second quarter of 2021. As expected, activity declined in the second quarter and we saw a corresponding decline in legal expense. It is difficult to predict the timing and magnitude of pre-trial litigation expenses with three cases potentially going to trial in the second half of this year. We have refined our trial budgets and now expect that the third quarter total legal expense may be higher than the first quarter of 2021. We will continue to look for ways to optimize these budgets while vigorously protecting our intellectual property. Excluding legal fees, severance, restructuring and equity compensation expense, second quarter 2021 G&A expense was higher by $0.2 million versus first quarter 2021 comparable G&A expense. For the second quarter of 2021, our operating loss was $5.6 million versus $7.4 million in the first quarter of 2021. The net loss attributable to common stockholders for the second quarter of 2021 was $5.6 million or a loss of $0.08 per share, as compared to a net loss of $7.4 million, or a loss of $0.12 per share for the first quarter of 2021. Total net sales are up 16% year-over-year compared to the second quarter of 2020, with 31% growth in Tru Niagen, including a 31% growth in e-commerce and 32% growth in combined Watsons and other business-to-business sales. Our Niagen ingredient net sales were down 36% and other ingredient net sales were down 74% year-over-year. We are no longer selling to one of our Niagen ingredient customers, which remains a short-term headwind as we replaced this business with new strategic partners like H&H and ROW. In other ingredients, we are comping strong sales of an ingredient with immune boosting properties last year during the height of the COVID-19 pandemic. Gross margin decreased by 170 basis points to 61.1% compared to 59.4% in the second quarter of 2020. Selling and marketing expense as a percentage of net sales increased 280 basis points to 35.2% compared to 32.4% in the second quarter of 2020. We benefited from the sales to Horizon Ventures in the second quarter of 2020 without any associated marketing investments. As reported, general administrative expense was higher by $2.2 million primarily due to higher legal expense of $2.3 million. Finally, our operating loss increased by $1.9 million year-over-year as higher sales and gross margins and cost savings across the organization were more than offset by higher legal expense and investments in selling and marketing. Moving to the balance sheet and cash flow, our balance sheet remained strong. We ended the quarter with $38.8 million in cash, including $1.9 million raised from our $50 million ATM. This further strengthens our balance sheet and we have not accessed our $7 million committed line of credit. In the second quarter of 2021, our net cash used in operations was $7.9 million, versus a $5.4 million use of cash in the first quarter of 2021. The difference this quarter was primarily driven by a decrease in accounts payable due to the timing of payments to our vendors, and the payout of a bonus to employees related to prior year company performance. As it relates to our 2021 full year outlook, we provided details on key P&L metrics in our earnings press release along with the slide presentation. Consistent with our previous outlook, we expect to invest more in marketing and brand awareness, customer acquisition and R&D to maintain our position as the leader in the growing NAD+ market. The underlying business is essentially breakeven on a quarterly basis today and year-to-date 2021, as measured by adjusted EBITDA excluding total legal expense. This remains a key metric for the organization, and we will focus on achieving similar performance for the second half of 2021, but there may be quarterly volatility due to the timing of investments. As it relates to full year net sales, we continue to expect steady revenue growth consistent with our previous financial outlook. However, we expect that our third quarter total net sales will be flat to slightly down from the second quarter. While the e-commerce business should continue to grow sequentially, a growing portion of our sales are coming from new partners including Walmart, H&H, and ROW, which may cause quarterly volatility until they ramp to more steady consistent growth. We expect to benefit from growing sales to ROW and H&H in the fourth quarter based upon their respective launches of Roman and Swiss products with Tru Niagen planned for later this year. And we remain bullish about full year 2021 and the 2022 outlook. We expect the third quarter year-over-year growth rate will accelerate from the 16% reported year-over-year growth rate in the second quarter, and that it will further accelerate in the fourth quarter. In summary, I am very proud of how the company continues to execute, balancing the long-term market opportunity with near-term profitability objectives. I believe our strategic pipeline including business development, and R&D is much more robust. And our internal team is the strongest I have worked with during my time at ChromaDex. We have successfully transformed the company over the last four years and I remain very optimistic about our future. Operator, we are now ready to take questions.

Thank you. Operator instructions: Your first question comes from Brian Nagel with Oppenheimer. Your line is now open.

Hi, good afternoon. Nice quarter.

Hi, Brian.

A couple of questions. I guess first with regard to sales, I think, Kevin, I think you mentioned the COVID crisis that you are referring primarily to the Hong Kong market. So the question is we are starting to see it’s obviously very fluid at this point, but maybe, obviously more reopening generally versus a few months ago. Are you seeing any type of impact or reaction in your Tru Niagen sales?

A reaction to COVID?

Well, I guess from a consumers’ perspective, is there some indication that if the economy started to open, you’re seeing improving underlying demand trends?

Yes, it’s been up and down. There have been times when we see the stores reopening and foot traffic returns. And then a few months later, COVID picks up and we see a retraction. One thing we know is that tourism from Mainland China into Hong Kong has still yet to open up. And that’s always been a significant portion of Watsons traffic. So we’re impacted by that. We also know that there’s a very loyal core customer base of Tru Niagen in Hong Kong. But the overall foot traffic in Hong Kong has, especially in the last few months, declined.

Okay, got it. Then the second question, I have this one on marketing. I think it was a comment. I think Kevin you made a comment about the forward financial outlook about marketing spend. It sounded to me like you’re telegraphing higher spend. So the question is, am I hearing that correctly, and more importantly, is this just more of the same or will there be some type of newer campaign, fresher campaign that you’re looking at?

You have some Kevin or Rob? I would say we – in the prepared remarks, we indicate we’re going to be spending a little bit more than what we’ve said previously. It’s a small increase for brand building and supporting Walmart. Last quarter, we said it would be slightly up. And now we’re saying it’s a larger increase. But it’s not huge. I don’t know, do you want to comment on where we’re going to be?

In terms of marketing plans in general Brian? Okay, well, as you know, we recently brought in just four months ago a new CMO at the company. And we also just launched on Walmart. And so we have indicated that we expect to increase our overall brand awareness marketing. And we are formulating those plans now. We understand that the Walmart customer is slightly different than our existing customer who is basically an e-commerce based customer. So that means the type of advertising and to a certain extent, the messaging and the distribution, the advertising channels are going to shift a bit towards traditional media like television. So it’s our expectation that you’re going to see an increase in TV based advertising in the coming months. But we haven’t yet begun that.

Got it. Thank you.

Your question on Hong Kong, I think for the first half of 2021, shipments were up versus the first half of 2020. And we have seen some recent improvements in sell-through as the Hong Kong economy recovers from the effect of COVID-19. Although we in Watsons believe underlying consumer demand remains strong. As Rob said, store traffic is down year-over-year. Watsons is investing in new marketing campaigns this year and we expect to see sell-through trends return to normal post the pandemic.

Perfect. Thank you very much again.

Sure.

Your next question comes from Jeffrey Cohen of Ladenburg. Your line is open.

Hi, Rob, Frank and Kevin. How are you?

Great.

So, I have got a few, sorry to bounce around here. So, it sounded like 2,800 Walmarts are getting 100 milligrams like $20 and then another additional 3,800 are getting the 300 milligrams. That’s correct so far. Do you have anything else?

So first let me say, it’s the other way around. It’s the larger numbers with 100 milligrams and the smaller numbers with 300 milligrams.

Okay. And distribution centers, how many approximately?

They have got 42 distribution centers. So that’s basically what we are doing is we are shipping them to distribution centers and then they have shipped them to in June to the stores that are setting more or less the planograms product on the planograms in June and July and continues into August.

Okay, so you are most of the way through that as far as hitting the challenge with the two SKUs?

Yes. We are not 100% certain it’s set in all stores, but in the next few weeks, it should continue to be put on shelf. And then it’s early to tell where we stand with regard to consumer takeaway, but our expectation for the third quarter is we will have tough comps against the second quarter, because we are shipping in for the 3,800 and 2,800 stores. And then they also have more in their 42 distribution centers, about a four to six weeks supply so that they can replenish. And basically what our orders will be for the third quarter and fourth quarter is based upon POS, which we have low expectations for out of the gate, but we expect it to build over time as we do more marketing.

Okay, got it. And then Kevin, it looked like you did more with less in the second quarter meaning your revenues up $2.7 million over Q1 sequentially while your spend went down sequentially. I imagine there is some nice pull-through there. But as you pointed out, you have got some big order in the Watsons in the long haul. So that’s part of I guess your back half commentary. We talked about sequential flat to down Q3 and anything further on Q4 of the year as it may play out in the 17.7 from second quarter?

Yes. I think the thing we said in my prepared remarks is that we expect the year-over-year growth to be greater in the third quarter. The second quarter growth is 16%. So, we expect that to be higher than 16% in the third quarter and the fourth quarter accelerating.

Got it. Okay, 16%. And can you repeat what you said about I heard something about the ROW channel later this year?

Yes, I think that’s our business development opportunity with ROW and with H&H. We are selling the ingredient. And they are mixing that ingredient with some of their primary products. We saw a shipment to ROW, a small shipment in the second quarter. We don’t expect to ship to either of them in the third quarter because they are in the process of manufacturing their product and their intent is to actually sell it in the fourth quarter to bring it to market.

Perfect. Okay, that’s it for me. Thanks for taking questions.

You’re welcome.

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

Hi, thanks very much for taking my questions and congrats on a very solid quarter. Firstly, I was wondering if you could comment on potential expansion of the Walmart store presence to all of the U.S. Walmart stores, because based on the June announcement, it looks like there probably are still some Walmart stores where product placement has not yet occurred. Just wanted to get an update on the potential timing of that, when it might be, kind of full Walmart footprint store wide?

We’re in the vast majority of their stores at this point. We don’t yet know exactly how many of the 3,800 stores have actually placed the product on the shelves at this point. We have only begun to receive reports from the stores. We know that we successfully shipped to the distribution centers and most of the stores have received from the distribution centers and have placed them on the shelves. So until we see which stores are performing better than others, which we do not yet know, we are not going to have additional conversations with Walmart about expanding into the remaining stores.

But suffice it to say I think there’s about over 5,000 Walmart stores in the U.S. The original arrangement was for Tru Niagen to be placed in 3,800 of them. In principle, there’s nothing excluding Tru Niagen from eventually bringing in every Walmart store, right?

That is correct. The initial idea was 1,000 stores, then they suggested going to 2,000, then they further suggested going even further. So there is nothing in our arrangement with Walmart that would preclude going into all of the Walmart stores.

And I think the first opportunity is if we get good velocity behind the 300 milligram 30 count, you would expect that to expand from the 2,800 stores that they’ve selected to at least 3,800 stores. So, again, I think this is part of their launch strategy of having customers probably sample the 100 milligram and then hopefully move up to the 300 milligrams product.

Got it. And then with respect to the ROW arrangement, can you just provide us with some additional background on the specific Roman product or product line that are likely to incorporate Tru Niagen? And what specific market segments those might be targeting?

At this point, there is only one product that they are going to release. They have a name, they haven’t yet released the name, but it’s a sort of a Life Extension product. They’re combining Tru Niagen with a couple of other ingredients, but obviously, the hero ingredient is Niagen. I expect them to launch the product in the fourth quarter. We haven’t had discussions with them yet about any subsequent products. But any additional product that they would propose, obviously, we would have to approve.

Okay. And how many Roman products are there right now?

I don’t know how many products they have. Obviously, the core of their business is—and also this is only for their male division and a female division. This is initially just targeting their male division, the Roman division.

Got it. And then with respect to the H&H collaboration, can you confirm whether because this is going to be primarily positioned within the context of the Swiss product lineup, if reasonably speaking, Australia is likely to be the most substantial driver of pull-through demand, or if you expect broader regional demand than Australia, which is where I think the Swiss product lineup enjoys the most favorable positioning from a market ranking standpoint?

We don’t know if they expect their cross border business into China to be bigger than their Australia business. But those are clearly the top two markets that they’re going to pursue.

They are the leading brands in supplements in China, on cross-border.

Okay. Any notable additional initiatives with respect to increasing the e-commerce contribution to your overall revenue mix that you expect to take root over the course of the second half of this year?

The way we view e-commerce is steady and consistent growth. There is a very large and growing and extremely loyal consumer base that purchases online either on Amazon or on our website. Retention rates are very, very strong. And we expect that to continue to grow. You have seen over the last four years steady, consistent growth. We expect that to continue. But I also anticipate that as we launch a brand campaign, which has television as a major component of it, not only do we think that that will be helpful for the Walmart sales, we also think that will have an impact on our e-commerce sales as well.

Great. Thank you very much.

Sure.

Your next question comes from Jeff Van Sinderen with B. Riley. Your line is open.

Yes. Good afternoon, everyone. Thanks for taking my questions. Multiple questions: first, I know you spoke about development in the science around Tru Niagen and now you plan to spend more on R&D. So, I guess, I am wondering where the R&D dollars are going, maybe which studies are underway right now, or leading you to think about where you want to invest the R&D dollars to pick a couple of those. And then, I guess just give us a better sense of where it makes more sense to spend R&D and what the potential impact is for the business?

Of course, there is a wide range of investments that include R&D, some of which are studies, some of which are just development of new products. There are various NAD related molecules that we have strong intellectual property around which we intend to develop and commercialize and build into products. There is also a growing and burgeoning NAD IV market as well as a global NMN market. And of course, most people who are on this call and are very familiar with ChromaDex know that the science is pretty clear that nicotinamide riboside is significantly superior to both of those molecules. Both of them are nucleotides, meaning that they are phosphorylated and don’t have any mechanism for entering the cell, whereas nicotinamide riboside not only has a clear mechanism for entering the cell, but what we have proven is that when the cell is under stress, it actually opens up a pathway specifically looking for nicotinamide riboside. So from a scientific standpoint, neither of those molecules stand up to nicotinamide riboside in terms of their ability to improve the health of the cell and elevate NAD. So, part of the investment is to invest in studies that further support that thesis, which is already fairly proven in the scientific literature, but we can support further. So, you have the addition and development of additional molecules, the comparison of our molecule to others, bioequivalence of certain molecules, proof of the superiority of nicotinamide riboside, as well as the investment in certain studies for nicotinamide riboside to further extend our understanding of the molecule, as well as the ability to make additional health claims. But as you know, there are many clinical studies ongoing, recently published or soon to be published on a whole host of health claims. And they have been fairly consistent yielding pretty positive results, not just the recent peer-reviewed published double-blind COVID study that included Tru Niagen as part of the cocktail of other ingredients, but several others that Frank Jaksch mentioned recently. We have some additional studies, as you know, Harvard is doing the long hauler study on COVID. We may make some investments in some of these studies. We won’t pay for them outright, but we may support and contribute to some of those studies. As our understanding of nicotinamide riboside extends and grows, our investment in some of those studies will increase. I would also like to point out that we have a very deep and strong patent portfolio that extends well beyond even the ones that we have been protecting against infringers. We are making further investments and even extending the patent portfolio even further. So, all of those investments ladder up to R&D. They are not just studies per se.

Okay. And then just as kind of a follow-up to that. You mentioned the study in Turkey around COVID. Is there anything that’s been done recently in terms of study that will allow you—I know, this is subject to regulatory constraints—but is there anything that will allow you to make different claims or new claims than you have been able to make up until now? Anything that’s brewing there that may sort of unleash new claims for it?

Yes, there are studies that may enable us to extend our claim portfolio not necessarily related to COVID. There are studies that are being done and we anticipate some on cognition. There are some on liver health or muscle health, heart health, inflammation studies. There is a range of studies listed on clinicaltrials.gov, some of which could yield extension of our claim portfolio. But with regard to COVID, it’s a very difficult issue. Even though we have this peer-reviewed published study that shows the cocktail reduced time to recovery by 38%, the regulatory authorities are hypersensitive to non-drugs making claims about COVID and disease states in general. So, it’s a challenge to communicate to consumers the efficacy of a dietary supplement for a disease state, and especially COVID.

Okay, that’s helpful. And then anything new to add on the partnership with Nestlé?

There is nothing new to add other than the fact that I can further confirm that Nestlé has a deep understanding of the value of nicotinamide riboside, a deep interest in nicotinamide riboside. They have recently acquired some companies in the dietary supplement space, so it’s a much higher priority today than it was a couple of years ago. They understand the value of nicotinamide riboside throughout the Nestlé Health Science portfolio of companies. There is a very strong and positive relationship there. I don’t know how it will evolve, but we are interested in working with them more and they are as well.

Okay, great. And one more, I know you said you have three cases that could go to trial in the second half. Anything new on litigation at this point versus last quarter or is it status quo?

Not really, it’s fairly quiet right now in anticipation of the trials. I think both sides have done their homework and are prepped and ready. We are just waiting for the trials to begin.

Okay. Thanks for taking my questions. Best of luck.

Thanks. Sure.

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

I believe just a couple of follow-up questions here. First, with regard to the e-commerce group, I always ask, but just curious on new customer growth versus recurring revenue, was it evenly split? Which part drove more of the growth this quarter?

I think you have asked that question before. We did see some acceleration in new customer growth this past quarter. But as always, retention is very strong at the company. We have fairly low cancellation rates of people who started to take it. Those that take it for two or three months seem to retain—many begin to notice improvement in their physical performance. But yes, we are seeing improvements in new customer acquisition.

Related to that, why would we—though there is slower store traffic, you have a fair amount of people that have been taking Tru Niagen. Why would they become recurring customers online through Watsons e-commerce? Why do they have to go to the store to pick it up? If I were out of Tru Niagen, I wouldn’t go to the store, I would order it online. Is there an issue there or some bottleneck that wouldn’t allow recurring revenue at Watsons?

No, I think that is a good question. Subscription is an important part of that business. But I think Watsons strategy has been to use Tru Niagen to attract people to the stores. So they are more interested in selling it in the stores, because it has been a draw for them in Hong Kong to get people into the stores. And I think that continues to be the case.

Another question is around studies: the most recent Alzheimer’s study conclusions were relatively meaningful. It seemed more impactful. It seems like you could design studies to have more impact rather than narrow science studies. Are you able to formulate better studies so that you can use them more effectively in your messaging?

We have a program called the ChromaDex External Research Program (CERP) where we work with researchers to design their study and we supply the ingredient, but we do not finance the study. As a part of that program, intellectual property that comes from it is licensed back to ChromaDex. With that program, we have been able to get perhaps $75 million to $100 million worth of research to the company without us putting up that money. The downside is it’s their study; we can influence it, but we can’t design it. So, mostly for studies that we are not financing, it’s not our call. But it is conceivable in the future that we might design some studies that specifically lead to claims or areas that we think are opportunistic. For example, we think inflammation is a particularly interesting area for nicotinamide riboside. We are seeing a fairly consistent set of studies that show results indicating a reduction of certain important inflammation markers. So, we can see designing studies around that, knowing that that is a likely expected outcome that might enable us to strengthen our marketing claims and target a specific audience. Regarding Alzheimer’s, we agree it’s important—there are many related neurological conditions where elevating NAD and improving mitochondrial function are relevant. We might pursue targeted studies in mild cognitive impairment where claims are more feasible. For studies we don’t finance, we work with researchers through CERP; for targeted claims, we may consider financing or co-financing studies with designs that support marketing outcomes.

To layer on, the Alzheimer’s study is useful because it goes to cognition, as Rob said. In order to support a specific claim, you would typically need studies in populations like mild cognitive impairment rather than late stage Alzheimer’s. These kinds of studies help to root out mechanisms; in this case, improving mitochondrial function, which seems to play a central role in Alzheimer’s progression. There are mild cognitive impairment studies underway listed on clinicaltrials.gov.

Thanks. I have one more: you have steady build in your e-commerce business, about 30% growth. If you are looking to accelerate growth, will it be from better digital marketing, TV, a credible spokesperson? Is there one lever you think unlocks acceleration?

We have a new head of marketing who is formulating strategy. My expectation is you will see more TV. We anticipate TV will increase Walmart sales and also have positive impact on e-commerce sales by increasing awareness. Conversion and retention are strong, but overall awareness of Tru Niagen is still not high. The opportunity in the U.S. and globally is significant.

Right. Thank you for your time.

Thank you.

Your last question comes from JP Mark with Farmhouse Equity. Your line is open.

Hi. Thanks for taking my call and congratulations on a great quarter. Most my questions have been asked and answered. I do want to ask a little bit about the professional market, which I think is something you talked about on the last call. Any update on whether that’s a great opportunity, or where do you see that going?

We think the Tru Niagen professional market is a significant growth opportunity. The rules around marketing to healthcare practitioners are different than the rules for general consumers, allowing more flexibility in communicating the research on nicotinamide riboside. What we sell to healthcare practitioners is Tru Niagen Pro. So yes, I see that as a growth opportunity for us.

And you would never actually have the 500 milligram formula on your own site—that it’s always going to just be for that professional channel?

No, I would not say never. However, it is important to distinguish between the two.

Got it. Okay. Thank you very much. Again congratulations.

Thank you.

Thank you.

This concludes the Q&A session. I will now turn the call back to Brianna Gerber for closing remarks.

Thank you, Ashley. 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 9972229. Thank you everyone for joining us today and for your continued support of ChromaDex.

This concludes today’s conference call. You may now disconnect.