Niagen Bioscience, Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation's Third Quarter 2021 Earnings Conference Call. My name is Julie and I will be the conference operator today. At this time, all participants are in a listen-only mode. And as a reminder, this conference call is being recorded. This afternoon, ChromaDex issued a news release announcing the company's financial results for the third quarter 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.

Thank you. Good afternoon and welcome to ChromaDex Corporation third quarter 2021 results investor call. With us today are ChromaDex's Chief Executive Officer, Rob Fried; Founder and Executive Chairman, Frank Jaksch; Chief Financial Officer, Kevin Farr; and Chief Marketing Officer, Fadi Karam. 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, business development 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 with the forward-looking statements, actual results or to changes in its expectation. 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 third quarter 2021 investor call. This quarter marks an inflection point for ChromaDex. The litigation is largely behind us and we look forward to receiving the approximately $2.25 million to $2.5 million that was awarded to us by the California jury. This is an important milestone because we can now devote more resources, both human and financial, to the important tasks of building our global Tru Niagen brand, developing our science and furthering our relationships with global partners. Today, in addition to hearing from Kevin on the financial results and Frank on the significant scientific achievements this quarter, our Chief Marketing Officer, Fadi Karam, will briefly discuss what we can expect in 2022. As I said, the scientific developments this quarter have been significant and Frank will outline in greater detail. But we now have 15 completed and published clinical trials involving Niagen and over 40 additional clinical trials in progress. Our industry-leading ChromaDex External Research Program, CERP, has now amassed over 240 collaborative research groups. Our focus going forward is to translate this extensive and growing body of science into compelling marketing messages, including aging, heart health, muscle health, cellular health, and others. We're also investing in clinical trials to support future marketing claims and to build our product pipeline. As many of you know, the ChromaDex intellectual property portfolio and scientific expertise goes well beyond nicotinamide riboside chloride. Still, by far, the best and safest way to manage NAD levels, but it also includes NRH, NRT, and NAR. All have interesting unique properties and potential applications and all could be important to the company's long term plans. Of our 40 plus total NAD related patents, 19 of these relate to NRT, NRH and NAR, with maturity dates ranging from 2026 to 2040. We recently announced results of the first clinical study of NR in children with ataxia-telangiectasia or AT. This study is particularly interesting because AT is an orphan disease characterized by premature aging. And we believe the fact that supplementation with NR showed a benefit in this patient population is further evidence of Niagen's impact on age-related health issues. Previously, we've discussed the Phase III COVID-19 study on NR as part of a cocktail of ingredients in Turkey. To the best of our knowledge, ScandiBio's submission for drug approval of this cocktail is still being reviewed by the Ministry of Health in Turkey. We have no further updates at this time. Finally, I'd like to highlight three of our strategic partnerships: Sinopharm Xingsha, Walmart and Ro. Perhaps the most strategic event this quarter was our deal with Sinopharm. Sinopharm Xingsha is a subsidiary of Sinopharm Group, a state-owned enterprise and one of China's largest domestic pharmaceutical companies. This is possibly the most strategic partner for ChromaDex to have in China. We're very excited about the potential for Tru Niagen given high consumer awareness of NAD-boosting products among Chinese consumers presently. While the Chinese market is currently led by NMN, nicotinamide mononucleotide, we believe it should be led by NR based on the clinical evidence and safety data available to date. Sinopharm will initially focus on accelerating Tru Niagen sales across our existing cross-border marketplaces. We're currently in discussions on new product formulations. We anticipate sales of a new product formulation in 2022. Additionally, the companies will collaborate to secure health food registration in China. This is a multi-year process, but would open up a much larger market given Sinopharm's 10,000 plus pharmacies and broad distribution network in China. We believe this agreement is a significant milestone for ChromaDex because this partnership has the potential to be transformative over time. Our Walmart launch earlier this year marked another strategic milestone for the company as our first US mass retail launch for Tru Niagen. We recently had our first line review with Walmart and we're encouraged by their team's continued commitment to building the category. Our future plans include education programs, a packaging refresh, and of course, as we've discussed, a national TV campaign. Fadi will discuss this further shortly. Finally, Roman Life, the product from our new partnership with Ro, was launched in September. Roman Life's packaging prominently features that it is supercharged by Tru Niagen. Ro is taking a phased launch approach with Roman Life beginning with their subscribers. We will support them in maximizing awareness, consistent with their phased launch strategy. As many of you know, ChromaDex is unique as a company operating in the dietary supplement space. We do the scientific research, we develop proprietary compounds, and we obtain regulatory approvals. We work with selective valued partners worldwide, including Sinopharm Xingsha, Walmart, H&H, W.R. Grace, the fast-growing startup Ro, and we are currently developing a pipeline of products featuring Tru Niagen alongside their best-in-class R&D and commercial teams. We believe these companies have partnered with us and chosen Niagen because of our reputation as pioneers in the industry and our relentless focus on the science, which dates back over 20 years. We understand that Tru Niagen has tremendous potential. And as I said, we believe we're at an inflection point for this company. And we are just getting started. I'd like to thank our shareholders, partners, employees and customers as we enter this next phase of growth. And now I will pass the call over to our Chairman, Frank Jaksch, for an update on the scientific research. Frank?

Thank you, Rob. Since our last update, there were several exciting preclinical publications on NR. I'll briefly highlight two. First, a study found that systemic treatment with NR is protective in acute and chronic models of retinal ganglion cell survival, and builds upon the growing body of preclinical evidence on NR's role in eye health. Second, a study demonstrated that administration of NR in a mouse model of Alzheimer's disease increased brain NAD levels and reduced neuroinflammation, DNA damage and cellular senescence. NR also improved learning and memory in mice with Alzheimer's. In addition, as Rob mentioned, we announced promising findings from our first-of-its-kind clinical study on NR in children, highlighting improvements for prematurely aging patients with ataxia telangiectasia, or AT. The study included 24 AT patients with 17 of them under the age of 18. The effects of NR on ataxia, which is a group of disorders that affect coordination, balance and speech, quality of life, and standard blood laboratory parameters were analyzed. NR improved ataxia scores in patients and increased serum immunoglobulin G, or antibodies, which are important for protection against pathogens. Patients with AT are known to be immunodeficient, with decreased serum immunoglobulin concentrations. And on October 25, results from a phase II clinical trial of patients with non-alcoholic fatty liver disease were published in a peer-reviewed journal, Molecular Systems Biology. The results found a 10% reduction in liver fat and improved liver function and inflammation in participants who received a nutritional protocol of four ingredients including NR. This is one of several human studies exploring the benefits of this nutritional protocol through our research collaborator, ScandiBio Therapeutics. We are excited to share the results of several additional completed studies in the coming months and are committed to remaining a leader in the growing NAD market. With that, I'll pass our call to our Chief Financial Officer, Kevin Farr. Kevin?

Thank you, Frank. ChromaDex delivered a solid quarter with total net sales of $17.3 million, up 22% year-over-year, and a gross margin of 61.1%. The underlying business as measured by adjusted EBITDA excluding legal expense, a non-GAAP metric, posted a loss of only $621,000 in the third quarter. We believe adjusted EBITDA, excluding legal expense, remains an important metric to gauge our progress towards cash flow breakeven and we included reconciliation to the appropriate GAAP measure in our earnings release slides. Furthermore, with a significant litigation expense behind us, we're prioritizing investments in a larger brand campaign to drive overall growth and support our Walmart launch. Our larger national TV campaign is currently planned for early 2022. I'll begin by reviewing the sequential P&L results and then we'll discuss the year-over-year trends. For the three months ended September 30, 2021, ChromaDex reported net sales of $17.3 million, down 2% compared to $17.7 million in the second quarter of 2021. Tru Niagen net sales were down 4% sequentially. As expected, the largest driver was lower sales to Walmart following the initial shelf stocking in the second quarter to support the launch at 3,800 stores, as well as the build of safety stock at their 42 distribution centers. Watson sales were $2.6 million this quarter compared to $2.9 million in the second quarter. The catch-up in shipments from the first quarter supply chain disruption is complete. And we expect slightly lower sales to Watson's in the fourth quarter compared to the third quarter, which is more aligned with recent base demand. We've seen some recent improvement in sell-through as the Hong Kong economy recovers from the impact of COVID-19. The recovery has not been steady. Watson's 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 at least the end of 2021. We're working with Watson's marketing programs to drive improved sell-through while they manage through COVID-19-related headwinds. Our e-commerce business was down 1% sequentially. While the underlying business remained strong, we faced a challenge in comparison with Amazon Prime Day sales last quarter. We are optimistic entering the fourth quarter, which is seasonally strong driven by promotions in the US and China. Our Niagen ingredient sales were up 30% versus the prior quarter, driven by sales to Life Extension and a shipment to Nestlé Health Science. Our gross margins were roughly flat at 61.1% in the second quarter of 2021 and the third quarter of 2021. We are tracking well to our full year goal of slightly better than 60% gross margins due to supply chain product cost savings initiatives, overall scale and product mix and are currently offsetting inflationary pressures across global supply chains. Total operating expenses for the third quarter of 2021 were $19.4 million, up $3.1 million compared to the second quarter of 2021. Selling and marketing expenses increased to $7.2 million in the third quarter of 2021 compared to $6.2 million in the second quarter of 2021. As a percentage of net sales, this expenditure was up 650 basis points in the third quarter of 2021 versus the second quarter of 2021. We've experienced higher costs for new customer acquisition, driven by broader industry trends that are impacting advertising costs on social channels. In addition, we're investing more in top-of-funnel brand advertising that does not immediately drive conversion. This includes incremental spend on television advertising as we test networks and messaging ahead of our larger brand campaign rollout. As I previously said, this ratio would generally decline over time as sales ramp, but the investments may fluctuate as a result of our marketing campaigns. As reported, G&A expense was up $2.1 million to $11.2 million in the third quarter of 2021 versus $9.1 million in the second quarter of 2021. Legal expense was up by $1.5 million compared to the second quarter of 2021 to $5.6 million in the third quarter of 2021. As expected, litigation-related activity increased in the third quarter due to the California trial, and we saw a corresponding increase in legal expense. However, it was lower than expected for the quarter since the Delaware trial did not take place in September. I'll discuss our preliminary outlook for 2022 legal expense in a moment. Excluding legal fees, severance, restructuring and equity compensation expense, third quarter 2021 G&A was higher by $0.1 million versus the second quarter of 2021 comparable G&A. For the third quarter of 2021, our operating loss was $8.8 million versus $5.6 million in the second quarter of 2021. The net loss attributable to common shareholders for the third quarter of 2021 was $8.9 million or a loss of $0.13 per share as compared to a net loss of $5.6 million or a loss of $0.08 per share for the second quarter of 2021. Moving to the year-over-year financial results. Total net sales were up 22% year-over-year compared to the third quarter of 2020, with 24% growth in Tru Niagen, including 21% growth in e-commerce and 31% growth in combined Watson's and other B2B sales. Our Niagen ingredient net sales were up 89% year-over-year, and gross margins increased by 150 basis points to 61.1% compared to 59.6% in the third quarter of 2020. Selling and marketing expense as a percentage of net sales increased 490 basis points to 41.7% compared to 36.8% in the third quarter of 2020. The drivers of this year-over-year increase were similar to the sequential drivers I discussed earlier. As reported, general and administrative expense is higher by $4.6 million, primarily due to higher legal expense of $3.7 million, as well as investments in technology and headcount and key functional areas to support growth. Finally, our operating loss increased by $4.6 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 remains strong. We ended the quarter with $33.1 million in cash, and we did not access our $7 million committed line of credit. In the third quarter of 2021, our net cash used in operations was a negative $5.9 million versus a negative $7.9 million use of cash in the second quarter of 2021. The difference this quarter was primarily driven by the increase in accounts payable and accrued expenses due to the timing of payment to our vendors and a decrease in accounts receivable due to the timing of collections from business-to-business customers. As it relates to our 2021 full year outlook, we have provided details on key P&L metrics in our earnings press release along with the slide presentation. Consistent with our prior outlook, we expect to invest more in marketing, brand awareness, customer acquisition and R&D to maintain our position as a leader in the growing NAD market. The underlying business is essentially breakeven for 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 in the fourth quarter of 2021, but we may choose to invest more ahead of our larger 2022 brand campaigns as we balance investments in growth and profitability. As it relates to the full year net sales, we continue to expect steady revenue growth consistent with our previous financial outlook. Our e-commerce business has grown fairly consistently quarter to quarter, but a growing portion of our sales are coming from new partners, including Walmart, H&H and Ro, which may cause quarterly volatility until they ramp up to more steady consistent growth. Ro launched their new product featuring Tru Niagen in September and we expect H&H will launch later this year or in early 2022. As such, we expect to benefit from sales to Ro and H&H in the fourth quarter and beyond. As we look ahead to 2022, we expect a more meaningful revenue contribution from our new partners, including Walmart, Ro, H&H and Sinopharm as well as other potential strategic partnerships in the pipeline. Our US partnerships and our own e-commerce business should benefit from the Tru Niagen national TV campaign next year. And we are excited about the potential with strong players in China, notably Sinopharm and H&H Group in 2022 and beyond. We look forward to sharing more about our plans and theirs on the next earnings call. Finally, I'd like to address our preliminary outlook for total legal expense in 2022. We expect a baseline legal expense which consists primarily of patent, general corporate expense and headcount expense will be around $4 million in 2022. Ongoing litigation expense, including the New York case, Delaware appeal, and the Thorne IPR should each cost less than $1 million. We'll continue to look for ways to optimize these budgets and conclude the outstanding litigation. In short, with litigation largely behind us, our legal expense would decline significantly beginning in the fourth quarter of 2021. We believe this marks an important milestone for shareholders, as well as our team at ChromaDex. This enables us to prioritize additional investments that will accelerate growth in the business. In summary, I'm very proud of how the company continues to execute, balancing the long-term market opportunity and the near-term profitability objectives. As I said last quarter, I believe our strategic pipeline, including business development and R&D is much more robust, and our internal team is the strongest I've worked with during my time at ChromaDex. I'm particularly excited about the global brand-building experience that Fadi brings to the company. Under his leadership, the marketing team has continued to build their capabilities, and importantly, use concept testing to refine their messaging across all channels. I'm very optimistic about our potential to accelerate growth as we enter 2022. With that, I'll turn the call over to Fadi. Fadi?

Thank you, Kevin. It's a pleasure to speak to you all today and share more about our upcoming plans. I started my career as an engineer at Microsoft, followed by more traditional brand marketing roles at P&G and Nestlé. So my team and I are being methodical and disciplined about how we are building our strategies and plans, basing our work on established marketing science concepts and then aiming to use them at scale. Our vision is that this is a brand that should be present in every household, with someone over 75 and even younger in many cases. Delivering on this vision requires a straightforward message that makes the concept of aging and cellular health and repair more concrete, coupled with mass media presence, including national television. In early 2022, you can expect to see us scale our marketing plans, including the use of TV, which we have started this quarter using spots shot with one of our true believers, Shannon Sharpe, the NFL Hall of Famer. Our TV presence this quarter is meant to test our messaging and shape our plans for next year. That may include different types of creatives targeting different consumer needs. We are also exploring working with other A-list celebrities who can give us the national reach Tru Niagen deserves. We have a list of criteria meant to ensure that whoever is representing Tru Niagen is authentic, believes in our product and fits our brand image. I'll briefly touch on how this relates to our plans for Walmart. As this is our first mass retail launch in the US, our top priority has been to test and learn what are the needs of the retail consumer versus our current ecommerce consumer. Our tests to date have included micro-influencers and point-of-sale efforts. There have been two primary learnings from the early launch results coupled with very valuable guidance we see from the team we interact with at Walmart. First, education is key when it comes to a brand like ours that has an extensive amount of research to back its benefits. And we have limited real estate to do so on shelf at Walmart. So we're actively exploring ways to enhance our in-store education. Second, given the unprecedented geographical footprint of Walmart, we must choose marketing channels with wide reach such as national TV. As I said, this is our top priority as we enter 2022. And we believe that it will accelerate both our Walmart business and our ecommerce business when we begin to scale. Also, as you know, the consumer education experience with our brand extends well beyond Walmart. So we are working to enhance consumer experience across all channels, from sharing the latest scientific research to increasing our product offerings. I'm excited to be part of such great plans and look forward to sharing more with you in the future. Now I will pass it back to Rob.

Thank you, Fadi and Frank and Kevin. Okay, let's turn it over to questions.

The operator will now open the lines for questions. Your first question comes from Jeffrey Cohen from Ladenburg.

Just a few questions from our side. So, what's now the status, as you know it, at Elysium as far as the company and the sales and the channels?

We don't know much. They've disclosed their financials as of June of 2021. They don't look so good. There's a significant amount of debt and heavy liabilities far in excess of current assets. And sales have been flat for three years. We were not privy to their financials until recently. We don't know much about how they're operating. We know that they released a new product recently, which does not contain NR. So this is their third product on the market; two of the three do not have NR. But we don't see them as an important issue for ChromaDex going forward.

It sounds like legal expenses, big picture, for next year will be going down by 60%, 70%, 80%. So how does that tie into the sales and marketing expense going forward, Fadi, as far as the overall plan and with television included in the plan?

So are you asking a financial question?

Yeah, I guess the G&A will be decreasing by low double digits millions from legal next year. So do we expect that the sales and marketing will further increase more dramatically than what we had currently expected? Or how does that work?

Of course, with regard to the e-commerce business, we pay very careful real-time attention to the return on media spend. But we will be increasing our overall marketing investment, especially in conjunction with Walmart. So, you can anticipate a larger investment in overall sales and marketing.

I think if you look at just legal expense this year, year-to-date, it's about $15 million. And as I went over in my prepared remarks, the baseline for things like headcount, as well as patents and general corporate expenses is about a $4 million run rate for the year. And as we look at the fourth quarter, I think we do have a court case the judge has indicated may happen in November or December. That could be about $1 million. And we've got, as I mentioned earlier, in addition to that $4 million for the full year, there's three litigation matters outstanding, which are the Thorne IPR, the Delaware appeal, as well as potentially the New York case. Those three would each be less than $1 million, as I mentioned on my prepared remarks. So, there should be a significant decrease in legal spending for 2022 based on that information. And again, I think we're going to then pivot over to marketing and invest in more marketing. We're going to do it in a very disciplined and measured way. We're going to be doing a lot of testing to make sure it works and we're likely to start off by crawling and then walking and then jogging. And when we know it's really working, we've got the right message, then we will start to run.

One more, if I may. Can you give us any further color or flavor as far as do the additional formulations that sound like you're working on — is that going to be tablets, liquid, powder, sachet? Any ideas there? Anything you want to say further than a new formulation?

We do anticipate that, in 2022, we will release another capsule product of a formulation that includes Niagen.

The operator will now open the line for the next question. Your next question comes from Brian Nagel from Oppenheimer.

I've got a couple of questions. First off, I've got one question on the science and one question on marketing. So, I'm going to separate that. Rob, this is for you. You talked in your comments, as you did just talking about all the scientific work that you and your team have done, which has been impressive. The question I have here now, particularly as you embark upon this next stage, so to say, of the development of ChromaDex and of Tru Niagen, is there a missing piece? Is there something with regard to the science behind Tru Niagen that still needs to be done? Or is it basically complete at this point? Fadi, welcome, by the way. Welcome to the company. So, I guess this is a question for you. Probably related to Kevin as well. As someone having followed your company for a while, use your product for a while, I guess, with regard to the marketing plans, and recognizing it's still quite early, just to talk about Kevin's comment to prior question, kind of slowly getting towards marketing. But the question I have is, as we look over the next few or several quarters, how much different from your vantage point will this this new marketing campaign be compared to what we've seen previously? Then, Kevin, as a follow-up to the prior question. But just from a financial — recognizing that some of the financial obligations or financial weights on the company are now being lifted as you move past this litigation. How much investment will you be willing to throw at this new marketing campaign?

It's never complete because we are always amazed by this molecule. Of course, remember, there are 40 clinical studies in process right now. And we have 240 collaborative agreements in place. So, there's a great deal of research going on presently, some of which we've had some early exposure to, some we have not yet, but our expectation is that we will continue to see good news about how nicotinamide riboside improves health. So, I would not say that it's complete. There may be alternative ways for us to take advantage of that research. Not just in new claims, formulations, but also new products. We have enough today to get to where we want to get to.

Let me start by answering the first part of the question. As you know, when you have a new molecule like this one, usually in the first few years, because usually the early adopters, people who don't need really education, they will go seeking the education, they will go seeking the research. And then, people like me — my entire family and I have been using this product for a long time. That's how I ended up reaching out to Rob, and one thing led to another. So, people like me are the ones that, in the first few years, are going to come to you. But after that, then to scale, given how wide-ranging the effects of this product are, we must do the work of education. This is a new category for consumers. And we have so much science behind it. The effects on health are so wide ranging that our marketing — our job as a marketing team is to really educate the consumers about the effects. So, I think the difference between the previous phase and this phase is that the previous phase was amazing work to make the product available, to have a well-oiled ecommerce machine. But the next phase is about going to a much larger audience. Because as I said previously, I truly believe and we truly believe that this product needs to be in every household with anyone above the age of 30 or 35. In many cases, even younger people. So, to do that, it requires extensive education at scale. And that's what my team and I have been testing methodically, day after day using very novel, quick research tools to ensure that the message we're going to have is the message that will resonate at scale and that will bring to life the benefits of the molecule we have.

The operator will now open the line for the next question. Your next question comes from Mitchell Pinheiro from Sturdivant.

Question for you. Just staying on Brian's question, so, Fadi, you said that you need to make the benefits around aging message to be more concrete. So, does that mean — you can't make specific health claims about diseases. But is there more you can do that you haven't been doing in terms of your messaging around specific and concrete benefits? A lot of Tru Niagen in aging is — in some way, this is prophylactic as much as anything. You don't really know what the benefits are. You may not feel them. You may see them in blood work or other things. But to get a concrete message seems to be the key to unlocking some faster growth. And I was wondering if you could talk about that.

The answer is absolutely. If you, for example, take a look — one of the ways we're testing messaging, some of the testing we do is live testing, some we use tools. One of the live tests we're doing is the Shannon Sharpe spot on TV. If you see that spot, there are other iterations that are going to come up; he speaks about cellular energy and then he says, it's like 'beast mode' for your cell. One of the most important hallmarks of aging, according to our research, is energy. So, as we age — above the age of 30, 35, 40 — one of the things we feel is we don't have the same levels of energy during the day. And I think if we go and talk to our subscribers, that's the first thing or the most frequent thing that they report, among other things, which is, I'm not having that same feeling in the afternoon, that I need to take a nap. I have more energy to be with my family, to play with my grandkids, and so on. So, energy or cellular energy, or feeling more energetic basically is something that we have heard consumers reporting. Now, we're working internally — to answer the question that was asked about, we're working to substantiate it more through science, so we can make stronger claims around them. Then there are benefits around, as Rob also mentioned in his remarks earlier, which is heart health, cognitive health, liver. So, all of these are linked to signs of aging. What we're trying to figure out is, how can we through the funnel — because you have the top of the funnel, you go on TV, and you cannot talk about all of this. But when you go on TV or in more top-of-funnel channels, you talk about the general message. Once consumers start engaging with you online, how can we understand why they came to us and make the message more personalized to how they are experiencing aging. This is the kind of work we're doing now.

It does. It does. I have to sort of see the final work to see what the differences are between what you've been doing and what you plan to do.

I'm going to answer the second part of your question. The second part was how do we make people feel it. As you said, this is not something you feel immediately. What you feel is very subtle and sometimes it takes a few weeks. So what we do, and this is if you buy our product at Walmart, we've been engaging more and more, whether it's through packaging inserts, communication through email, to tell our subscribers what to expect. So, what's happening in the first week that you're taking Niagen, what's happening inside your body? What's happening in the fourth week? What's happening in the first month? What do you expect after six months? What's really happening in terms of what NAD leads to? One of our most successful blog posts ever was the nine benefits of NAD where you could see that consumers are really interested to know what's happening inside their bodies. And then, we talk about cellular health, cellular repair and so on. So, we are engaging — one of the most important things we're working on is how to engage with consumers in education. Every brand out there, every brand manager, CMO in the world, wants to engage more with consumers. But consumers have very little time and will allow only the brands that are most consequential in their lives to engage with them. We believe we are potentially one of the most consequential brands that a consumer can use, because, from my personal experience, your car stops working, you leave it behind; your phone stops working, you buy another one; but when your body stops working, you have only one and you cannot change it. So, being able to care for your body is very consequential to one's life. This is why when we communicate with our consumers, we see them really open their hands and hearts to listen to what we have to say. They know that what we're saying is very important to them, it has an impact on their health, their happiness, how long they will live and, ultimately, health is linked to happiness. So, this is why we're taking advantage of this ability to connect with consumers, to explain to them how these subtle changes occur, what to expect from the first week up to the first year, and then get them to understand more the value of our brand.

Well, I look forward to seeing what happens there. I have two more questions. Rob, I ask you this every quarter, but can you give us some color around e-commerce growth, breakdown how new customer versus recurring customer looked?

Yes, I can. The overall growth looks steady and consistent, Mitch, as it always does. Remember, second quarter had a big growth from the first quarter. A lot of this has to do with the number of days in the quarter, but also the special events. There was an Amazon Prime event for three days in June where the numbers were significantly high. So, if you normalized it, it was just another steady growth quarter for us on new customers as well as retained customers. But if you put that day back in, it was a slight decrease in new customer acquisition. We are steady and consistent. We have noticed in conjunction with the Apple changes that there's a slight increase in social media marketing costs. So, we're seeing a bit of a bump in customer acquisition costs in e-commerce of late. We're monitoring this on a day-to-day basis. But the quarter was steady and consistent with previous quarters.

With regard to Brian's question about how we will manage and scale marketing: we know how to scale the investment. We know we need to invest at a level that's sufficient to ensure success over time. We know metrics like frequency and reach are important. As we scale, that is going to raise the growth rate on both our e-commerce business, as well as on Walmart, and the good news about our ecommerce business is it has about 70% gross margin. So future funding can be done with the proceeds from increasing our business. We'll be working to scale it, and as I said, as we become successful and more confident that we have the right message, we'll continue to scale it over time and achieve the metrics that will make this a successful marketing program.

Last question on Sinopharm. So, Sinopharm has got to have a — they'll start selling, I guess, cross-border in the first half of 2022. Can you remind me when you think that would start? And is that something where you are a supplier or will Sinopharm be doing any formulation and manufacturing?

As you know, we presently operate a cross-border business ourselves — Tmall, Kaola, JD.com and WeChat. Sinopharm will be taking over those platforms. They're doing a heavy detailed analysis about pricing, messaging and formulation. So we expect that it will be within six months. I don't know for sure, but at a certain point in time, probably within that timeframe, they're going to take over the management of those platforms. In conjunction with that, there is likely to be a new formulation product in addition to the existing Tru Niagen product, and there is likely to be a campaign in connection with that into China.

The operator will now open the line for the next question. Your next question comes from Raghuram Selvaraju from H.C. Wainwright.

Firstly, I wanted to drill down a little bit on the Sinopharm relationship and specifically ask what you expect to be the process via which you anticipate, in the Chinese market specifically, it might be possible to position Tru Niagen as sort of the sole real nicotinamide riboside product and effectively get rid of the saturation currently with respect to NMN-based products that are being sold by other purveyors? And to what extent do you expect Sinopharm to potentially be instrumental in sort of cleaning up that picture?

As you know, Ram, NMN is quite popular in China. We think it's in excess of $100 million, although estimates vary. It's only been on the market a year or so, so there's been a great proliferation of NMN. A great number of companies are selling NMN in China, mostly cross-border. Fairly recently, the Chinese government has cracked down on NMN because it does not have regulatory approval. Worse than that, many sellers are making claims, some of which are actually NR claims, about who should take it and what it does. As many of you listening know, NR is significantly superior to NMN. The main scientific spokesperson for NMN has published work showing that NMN converts to NR in the bloodstream in order to be taken up into the cells. To make NMN, you first have to make NR. So, NMN is in effect a very inefficient and very expensive way to deliver NR and the safety profile is less well established. Sinopharm knows this. This was a big reason why Sinopharm got in business with ChromaDex. They're aware that NMN is popular and that NR is superior. So this is the opportunity that drove them to do the deal. We're excited to work with them to capture a market that's already been established and then grow well beyond. As you know, it's estimated that there will be perhaps 400 million or 500 million people over the age of 60 in China in the coming years. Aging and aging health is a very high priority with the Chinese government. So we see this as a significant opportunity, and so does Sinopharm.

I was wondering if you could also clarify the demarcation between what you expect Sinopharm to be prioritizing doing with their collaboration with you folks, particularly on the product development side, and what you expect to come out of the Nestlé Health Science relationship? In other words, we all know that Sinopharm is a pretty diversified organization, and that it's not solely focused on pharmaceuticals, but obviously pharmaceuticals is a big part of their business. So I wanted to better understand to what extent the Sinopharm relationship is going to be more in the consumer products arena versus, for example, the medical nutrition arena and whether that's going to be solely the purview of Nestlé Health Science or whether you expect Sinopharm to be doing some of that type of product development work with you guys as well?

China was carved out of the Nestlé deal. So in the case of medical foods, Nestlé does not have those rights in China. They, of course, have expressed interest in operating in China, but that was excluded from the deal. Nicotinamide riboside as well as NAR, NRH and NRT have significant potential beyond just the dietary supplement market. Nestlé and Sinopharm both operate in the pharmaceutical arena, as do other companies who are keenly aware of the potential benefits of these molecules. It is possible down the road that there will be discussions about developing some sort of medical food or drug-based product with one or both of those companies or other companies. We have spent a lot of time with the Sinopharm scientists, and we expect to spend more time. We have spent much time with the Nestlé scientists. So, all of these things are possibilities. They're not imminent or short-term, but they are certainly long-term possibilities.

Just one more for me. I was wondering if you could provide an update on the situation in Turkey and whether we should expect any near-term additional news, further studies looking at the potential of nicotinamide riboside, specifically in the context of treating COVID-19 infection. Historically there's been some work published on the combination of nicotinamide riboside with other agents, and I was just wondering if you had any additional updates there, if you anticipate any further clinical exploratory work being done in Turkey for the Turkish market?

Before I give an answer, let me ask Frank Jaksch, would you like to address that?

As you probably saw, Raghuram, the earlier medRxiv version had been published. We're still waiting in terms of the process on what's going on in Turkey. We don't have any further updates on that in terms of where it's at. But it's underway. There are no plans for additional clinical studies at this point. I think it's really more of a regulatory waiting game right now.

The operator will now open the line for the next question. Your next question comes from Jeff Van Sinderen from B. Riley.

Just wanted to follow up a little bit more on marketing. I realize it's early by the way, but any color you can give us on what's working best and any metrics you might want to share in terms of how TV ad spend, in terms of the testing you're doing, when you run it is driving sales or any of the other things you're testing. And then sort of curious, especially relevant to Walmart, if you're seeing any response in Walmart sales around that.

As I briefly mentioned earlier, we use two types of testing. One is live, like having the Shannon Sharpe spot on TV, and then of course looking at how this is impacting anything from Google searches up to acquisition. We also have offline testing tools where within a day we can test messaging with thousands of people and then iterate and test again. On the offline testing, we've been honing in on the right messages. We already see what messages resonate more with people because we have so much to say. We're backed by research, we have notable scientific backing, and that's only in terms of the science; we also have product benefits. We're trying to figure out how to fit all of this into a message that takes 15 to 30 seconds. On the Shannon Sharpe spot, we have started to see results. It's too early to comment fully, but we're starting to see positive indicators. This is what Kevin and Rob spoke about earlier, which is now we can learn from this and start to scale. To summarize, in a category with a lot of noise and many competitors making unsubstantiated claims, when we speak about the science it's resonating and it's resonating really well.

We are tracking the TV ads in real time. So, you can increase or decrease the investment in television media based on those results.

For Walmart, as Rob mentioned earlier, we just had the line review with them. They are very passionate about the category. They really understand the need for education. So besides what we're doing in terms of our plans for mass scale marketing using TV and other methods, we discussed with the Walmart team the need for connecting with the consumer beyond the shelves. We have walmart.com as well. They've been incredibly helpful. We're talking to some of the smartest buyers in the world. They have a lot of experience and they've been helping us figure out how to drive awareness for the Walmart shopper around Niagen and the benefits of Niagen.

I just wanted to follow up on this idea of inflationary raw ingredient prices, what you're seeing around that or maybe what W.R. Grace is seeing, and I guess what level of gross margin impact might you anticipate from inflationary ingredient inputs, raw material inputs? And also, since labor and shipping are components, maybe you can also touch on any anticipated impact on the P&L around labor, shipping, those sort of things going forward?

With regard to 2021, I don't see a major impact on our margins. I think getting to slightly higher than 60% is achievable. If you look at our year-to-date gross margins through September, it's about 61.9%. For next year, we're focusing on trying to maintain our margins at slightly better than 60%. There's a lot of moving pieces. We are looking at continued supply chain cost savings initiatives. We see overall scale on our business helping us, favorable mix. Ultimately, if costs are going up, we'll look at pricing as something to maintain our margins. It's a dynamic environment and we'll give you more detail on our plans for 2022 when we provide our outlook on the next earnings call. But I think we're looking for things to offset those pressures and it shouldn't have an impact on our 2021 target margins.

Just kind of a follow-up on Walmart. When you did your line meeting with them, did they indicate or, I guess, do you perceive that they would like to have more products from you? In other words, sort of the line-building idea rather than more SKUs are better for them to kind of have a real brand presence or just any comments around that?

I don't think we have much to comment about that. Walmart seems very happy with the product and with ChromaDex. We're excited about the future of the relationship, but we don't know if that means there will be further line extensions at this point or not.

I do think at the line review, we presented the 2022 product to them and they were interested in carrying it.

The operator will now open the line for the next question. We have time for one more question. The next question comes from Bill Desella from Titan Capital.

I'd actually like to ask two science questions, if I may. The AT that you described in the press release and here today, how does that compare to Cockayne Syndrome that you all have interacted with in the past?

It's similar in that both are genetic abnormalities that lead to premature aging-type components. It's a different genetic defect that leads to similar sorts of problems. AT affects the under-18 population but it's not as severe as Cockayne Syndrome, which is generally more severe. There still is no treatment for AT.

And then specific to the Alzheimer's study that you referenced, was that done on a prophylactic basis? Or was it truly in the middle of memory loss and it reversed the effects of Alzheimer's?

I'd say it's more the latter. Alzheimer's and prophylactic work is tough. Usually you're trying to find out whether it's mild cognitive impairment or Alzheimer's and whether treatment can improve or lessen the decline. In the mouse study, NR increased brain NAD, reduced neuroinflammation, DNA damage and cellular senescence, and improved learning and memory in mice. It showed signs of reversal in that model, though the study did not run out long enough to determine the duration of the effect or how long it might continue.

One additional question relative to Sinopharm and the studies like this one that are on mice rather than humans. Is that something in China that they can use and would be well received? In other words, from a regulatory standpoint and from the consumer's view?

You're on to something there. Regulatory bodies around the world have different ways of regulating claims. In China, they have a limited list of approved claims and some of those can be supported with animal studies, not necessarily human data. They do have mechanisms that allow claims based on studies done according to the formats they require. So if you do the studies in accordance with their protocols, you can support certain claims.

I will turn the call back over to Brianna for closing remarks.

Thank you, Julie. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1-800-700-2030 and the conference ID is 4126168. Thank you everyone for joining us today and for your continued support of ChromaDex.

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