ChromaDex Corporation

with the forward-looking statements, actual results, or to changes in its expectations. In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company's earnings presentation and earnings press release, which were issued this afternoon and are available on the company's website, present reconciliations to the appropriate GAAP measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the investor relations section of our website at www.chromadex.com. With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

Thank you, Brianna. Good afternoon, everyone, and thank you for joining our third quarter 2020 investor call. I'm pleased to say that Chromadex had another strong quarter, financially and strategically. E-commerce sales grew by 7% sequentially, and 21% year-over-year. Sales to Watsons grew 93% sequentially and 10% year-over-year. True nitrogen overall net sales were up 22% year-over-year. In addition, we delivered an adjusted EBITDA loss, which we define as EBITDA excluding legal expense, of only $125,000 in the third quarter and break-even year-to-date. an important achievement for this company. The science on Niagen has been very strong since our last update. We announced completed clinical and preclinical research in areas such as autism, cardiovascular and immune health, telomere health, and most recently on coronavirus. Frank will go through this research in more detail shortly, as well as some additional preclinical research showing that Niagen may have an impact on several of the nine hallmarks of aging, which are gaining the attention of the scientific and investment communities of late. Earlier this year, we committed to advancing collaborative COVID-19 research on Niagen and sharing the findings when appropriate. I'm very proud to say that we have delivered on this commitment and have more studies in the pipeline. This includes our collaboration with the National Institutes of Allergy and Infectious Diseases, or NIAID, the division of the NIH, to assess the therapeutic potential of Niagen in COVID-19 animal models. And last month, we announced results of a controlled clinical study in Turkey showing that a nutritional protocol which included nicotinamide riboside in combination with the therapeutic standard of care reduced recovery time in COVID-19 patients by nearly 30%. from 9.3 days to 6.6 days. This study included 100 patients with mild to moderate COVID-19. Researchers are now enrolling for a Phase III clinical trial with 300 patients. We are very proud to support research to find answers to this global pandemic, and we look forward to sharing more results of these endeavors in future updates. Chromadex also delivered on our launch expectations for TruNiagen with Nestle Health Science, one of the world's great food science companies. Last month, Nestle launched Celtrient Cellular Energy, a protein-based flavored drink mix featuring TruNiagen. This is one of three products under the new Celtrient brand, which will help address the effects of age-associated cellular decline, or AACD. Nestle began marketing in August by launching a new unbranded website, myaacd.com, to educate consumers about AACD. According to that site, AACD is the time-related deterioration in the way our cells function as we age. Often begins in our 40s and accelerates in our 60s. This partnership with Nestle Health Science to launch Celtrian Energy is an exciting opportunity to reach a new base of consumers. and introduce them to the cellular health and healthy aging benefits of TrueNiogen. We're proud to be in business with Nestle, and we are encouraged by their commitment to this new product launch. Two additional accomplishments in our core e-commerce business this quarter were, one, the relaunch of our USTrueNiogen.com website, which features our full suite of products and improved customer experience, and two, a record-breaking Labor Day promotional event leveraging our new CRM, which enabled us to customize emails and offers by audience segmentation. We appointed a new head of marketing earlier this year who has assembled a strong new team with expertise in acquisition, retention, creative, and third-party marketplaces. Going forward, we see opportunities to optimize each of these areas. We also continue to build upon and protect our intellectual property, which includes our ongoing litigation against Elysium Health. In Delaware, the patent case is scheduled for trial in September of 2021 with a Markman hearing in December of this year, where the judge will rule on claims construction arguments. We remain as confident as ever in the strength of our licensed patents following Elysium's unsuccessful attempts to invalidate them. with the PTAB office and the U.S. Court of Appeals. We are also very confident in the other litigation against Elysium. They never paid for the NR that Chromadex applied to them. W.R. Grace, which holds patents on the two known nicotinamide riboside chloride morphologies and sells this ingredient, Niagen, exclusively to Chromadex, has also sued Elysium for patent infringement. We are encouraged to see a blue-chip manufacturer like WR Grace protect the intellectual property surrounding Niagen. WR Grace is an important partner of ours, and we see a tremendous opportunity to grow the true Niagen business with them over time. Comadex will not be incurring legal fees for that case, and it does not impact our litigation against Elysium, although we believe it further validates Elysium's egregious behavior. As I reflect on the quarter and the year to date, I'm extremely proud and grateful. I'm proud of the entire team at Chromadex who pivoted quickly when the coronavirus hit, adjusting marketing messaging, advancing the science, adjusting to a virtual work environment, and reducing costs. This is reflected in the stability of our operations as well as our strong financial results year to date. I'm also proud of our science and to be part of the conversation around potential solutions to the COVID-19 global pandemic. This is unique for a dietary supplement company, and it is thanks to our deep commitment to science and our hundreds of research collaborations globally that we've been able to quickly put together these studies. We will continue to invest in the science behind Niagen and fiercely protect our intellectual property against infringers, which we believe creates long-term value for our shareholders. And I am grateful to our business partners, Watson, Nestle Health Science, and W.R. Grace, among many others, who believe in true Niagen and have committed to building the business with us. With that, I will pass the call over to our Chairman, Frank Jacks, for an update on scientific research.

Thank you, Rob. Since our last update, peer-reviewed publication of research on NR and NAD has continued to accelerate. In addition, there were two newly registered clinical studies on NR, and Chromadex signed nine new research collaborations as part of our CERT program. There are now 43 ongoing, completed, or published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and health benefits of NR. In addition, 11 clinical trials are registered to test NR in combination with other ingredients for a total of 54. Earlier this year, we committed to advancing research on NR related to COVID-19 and are encouraged that our ingredient is being studied as a potential nutritional solution. As Rob noted, we recently announced initial results of an open-label randomized placebo-controlled Phase II study, which included 100 COVID-19 positive patients with mild to moderate symptoms, and were published in MedArchive, a preprint server for health sciences. This clinical study was registered in October by Scandi Biotherapeutics and conducted at the University Health Sciences Istanbul Training and Research Hospital in Turkey. The objective was to assess the clinical efficacy, tolerability, and safety of the combination of a nutritional protocol including nicotinamide riboside and the local standard of care that includes hydroxychloroquine compared to a placebo and the local standard of care. The key findings were the combination treatment reduced average recovery time by 29% compared to the placebo group. There was an improvement in markers of liver function for a combination of treatment on day 14 compared to day zero as measured by plasma ALT, AST, and LDH. And adverse events were uncommon, benign, and self-limiting. According to the investigators conducting the study, the phase three trial will be double-blinded and include 300 patients at eight clinical sites in Turkey. We are currently exploring other research opportunities to see how NR may be part of the solution to the COVID-19 pandemic. A second clinical study was registered in August by the National Heart, Lung, and Blood Institute, part of the NIH, and the University of Washington to assess the mechanisms by which raising blood and heart NAD levels in humans helps mediate changes in mitochondrial function, protein and epigenetic modifications, as well as inflammation. If the results are positive, this would provide evidence to proceed with additional studies of NR as a potential nutritional solution for heart failure patients. In August, we announced the results of a pilot study which indicated that Niagen may reduce inflammatory cytokines in stage D heart failure patients. This marked the 11th published clinical study and the second study focused on the potential cardiovascular benefits of Niagen in humans. According to the lead researchers, by increasing mitochondrial health of peripheral blood mononuclear cells, or PBMCs, in the study patients, pro-inflammatory cytokine production was reduced. A key marker studied was IL-6, a known pro-inflammatory molecule that was suggested to play an important signaling role between mitochondrial function and inflammation in PBMCs. These new findings build upon a growing body of evidence identifying how Niagen may support cardiovascular health. Rob mentioned the nine hallmarks of aging in his remarks, a reference to the landmark article called The Nine Hallmarks of Aging, published seven years ago. The group of researchers identified nine cellular and molecular hallmarks of aging that contribute to the aging process and together determine aging. Many listening may be familiar with some of these, such as cellular senescence, telomere attrition, stem cell exhaustion, and of course, mitochondrial dysfunction, our strategic focus. I'll briefly highlight two important preclinical studies that were published in October, which are related to the nine hallmarks of aging, stem cell exhaustion and telomere attrition. First, a mouse study published in Nature Immunology found that NR improved T cell function, which is a component of new cancer immunotherapies. T cells are immune cells tasked with recognizing and eliminating affected, damaged, or cancerous cells. This research built upon a previous preclinical study that found NR could improve cancer treatment by preventing chemotherapeutic-induced stem cell depletion, including T cells. We know mitochondrial function is essential to the function of energy-expensive cells, including stem cells and immune cells. The results of these recent preclinical studies suggest that NR can support these cells. However, further research is required to verify this. Proper immune cell function in turn may play a key role in a wide array of diseases, including many forms of cancer. Stem cell exhaustion, as explained in the nine hallmarks of aging, is the age-related deficiency of stem cells, which contribute to many of the physical problems associated with aging, including a weak immune system. As such, while early, this is an interesting area of research for NR. Second, a preclinical study from the National Institute of Aging at NIH published in the European Molecular Biology Organization Journal found that replenishing NAD with NR alleviated telomere damage, providing a protective effect to DNA as cells replicate. Telomere attrition, or shortening, is another of the nine hallmarks of aging, which refers to the gradual loss of protective caps of chromosomes. It is well accepted that telomeres play a significant role in aging and nutrition has been linked to many age-related health conditions. These promising findings suggest that NAD repletion with NR may play a role in maintaining healthy telomere function, however additional research is needed. In summary, we are committed to remaining a global scientific authority on NR and NAD research and being an innovative science-based responsible company. The growing body of clinical research supports the potential for sales of our patented NAD-boosting ingredient, Niagen, and our consumer product, TruNiagen. I look forward to sharing more in future updates. With that, I'll pass the call to Kevin Farr. Kevin?

Thank you, Frank. We continue to focus on operational and financial discipline on our path to achieving cash flow break even. This discipline is again evident in our third quarter 2020 financial results, which reflect continued progress against our key financial objectives and strong underlying business performance. The underlying business is measured by adjusted EBITDA, excluding total legal expense, was a loss of $125,000 in the third quarter, essentially break-even, and a $1.7 million improvement year-over-year. Compared to the second quarter of 2020, we delivered slightly lower net sales driven by a tough comparison with the 1.6 horizons purchased last quarter, sequential and year-over-year growth in our core true nitrogen consumer product sales, higher gross margins, higher advertising expenses of percentage in net sales, and lower general and administrative expense. I'll begin my review of the sequential P&L results and will then discuss the year-over-year trends. For the three months ended September 30, 2020, Chromadex reported net sales of $14.2 million, down 7% compared to $15.3 million in the second quarter of 2020. which, as I said, included a $1.6 million purchase from our shareholder, Horizon Ventures, who donated True Niagen bottles to healthcare workers in Hong Kong hospitals during the height of the pandemic. True Niagen sales were up 2% sequentially for mid-teens, excluding the Horizons purchase. Importantly, this growth was driven by our e-commerce and Watson's businesses, which were up 7% and 93%, respectively, compared to the prior quarter. Sales to Watson's were $2.5 million in the third quarter, roughly double the $1.3 million of sales in the second quarter, with sequential growth in both true nitrogen and true nitrogen beauty brands. Conversely, and as expected, we experienced headwinds from our nitrogen ingredient business in the third quarter, and we continue to expect lower nitrogen sales in the second half of the year. Our gross margin was up 20 basis points from 59.4 percent in the second quarter of 2020 to 59.6 percent in the third quarter of 2020. As a reminder, last quarter we included 110 basis points from a rebate related to prior year supply chain efficiency initiatives, so the underlying improvement was stronger. Product cost savings initiatives favorable mix and overall scale on our supply chain drove the improvement in gross margins. Total operating expenses for the third quarter of 2020 were $12.7 million, down $0.1 million compared to the second quarter of 2020. Selling and marketing expense was up $0.3 million to $5.2 million in the third quarter of 2020, compared to $5 million in the second quarter of 2020, consistent with our expectations. As a percentage of net sales, This expenditure was up 440 basis points in the third quarter of 2020 versus the second quarter of 2020. We continue to monitor daily e-commerce metrics such as customer acquisition costs to adjust messaging and spending. At the same time, we increased spending this quarter consistent with our full-year financial outlook. Some of the investments this quarter were focused on brand building, which was a higher customer acquisition cost in the short term but is important for increasing awareness and for long-term customer retention. As reported, G&A expense was down $0.3 million to $6.5 million in the third quarter of 2020 versus $6.9 million in the second quarter of 2020. This included $1.9 million of legal fees and $0.2 million of severance and restructuring expense in the current quarter. Excluding legal fees, severance and restructuring and equity compensation expense Third quarter 2020, G&A expense was lower by 0.1 million versus the second quarter 2020 comparable G&A expense. Legal expense was up 0.1 million compared to the second quarter of 2020. No trial dates have been set in California due to the coronavirus. There were ongoing investments in the Delaware patent infringement case as we prepared for the claims construction Markman hearing in December 2020 and trial in September 2021. We also incurred expenses related to ongoing discovery in the New York litigation. While overall legal expense was lower than expected this quarter, we expect these to ramp up in the fourth quarter driven by the New York and Delaware litigations. For the third quarter of 2020, our operating loss was $4.2 million versus $3.7 million in the second quarter of 2020. The net loss of Tributo Commons stockholders for the third quarter of 2020 was $4.2 million, or a loss of $0.07 per share, as compared to a loss of $3.7 million, or a loss of $0.06 per share for the second quarter of 2020. Moving to our year-over-year financial results, total net sales were up 18% year-over-year compared to the third quarter of 2019, with 22% growth in true nitrogen, 21% growth in e-commerce and 10% growth in Watson's being the key highlights. Gross margins increased by 360 basis points to 59.6% compared to 56% in the third quarter of 2019. Marketing efficiency is measured by selling and marketing expenses percentage at sales improved by 150 basis points. General administration expense was lowered by $1.4 million due to savings from organizational realignment initiatives and lower legal expense. Finally, our operating loss improved by $2.7 million year-over-year, driven by efficiencies across all areas of the P&L. To help investors better gauge the underlying financial performance of our business and progress towards cash flow break-even, In the second quarter of 2019, we introduced a new non-GAAP measure, adjusted EBITDA excluding total legal expense. Chromadex defines adjusted EBITDA excluding total legal expense as net income or loss, which is adjusted for income tax, interest, depreciation, amortization, non-cash stock compensation expenses, bad debt expense related to Elysium, severance and restructuring expenses, and total legal spending. We have included a reconciliation to the appropriate gap measure in our earnings release slides. As I previously highlighted, adjusted EBITDA excluding total legal expense was a loss of $0.1 million in the third quarter of 2020 compared to a profit of $0.5 million in the second quarter of 2020. Total year over year, we delivered a $1.7 million improvement in the third quarter of 2020 versus a loss of $1.9 million in the third quarter of 2019. Furthermore, this metric has improved from the average quarterly loss of approximately $4 million in 2018 and $2 million in 2019 to break even in 2020 year-to-date as we put important foundational processes and systems in place. Moving to the balance sheet and cash flow, we ended the quarter with $15.5 million in cash and have not accessed our $7 million committed line of credit. In the third quarter of 2020, our net cash used in operations was $3.8 million versus $1.6 million in the second quarter of 2020. The difference this quarter was primarily driven by higher working capital investments. To date, we have successfully navigated the business during the coronavirus pandemic, managing our working capital. At this time, we do not expect any supply chain disruptions from the coronavirus and have implemented risk assessment strategies to manage this moving forward. As it relates to our 2020 full year, our outlook is unchanged from our second quarter. We expect to deliver continued top-line growth, including growth in our e-commerce business. We continue to expect gross margin expansion due to a favorable mix from our growing e-commerce business, the product design changes implemented in late 2019, and additional supply chain cost savings initiatives, which we implemented beginning in the first quarter of 2020. We continue to expect an increase in selling and marketing expense of $3 to $5 million, including investments in brand awareness and investments in new market launches, including our cross-border platforms in China. We expect continued improvement in selling and marketing expense as a percentage in net sales driven by strong sales from returning customers and scale on our business. Lastly, we continue to expect that G&A, excluding severance and restructuring expense and legal expense, will be up by 1 to 2 million year-over-year comparable 2019 G&A expense, excluding the Elysium-related bad debt expense in 2019. Adjusted EBITDA excluding total legal expense remains a key metric. We expect a significant improvement for full year 2020 versus full year 2019, but as we said, there may be quarter-to-quarter fluctuations driven by timing of our marketing campaigns and R&D investments. We continue to believe we can achieve cash flow break-even at $17 to $19 million of quarterly revenues if the litigation ends and legal costs decline. Total operating expenses will likely be higher in the near term, driven by higher litigation expense. As a result, we need to achieve sales of approximately $19 million in gross margins that is slightly better than 60% to achieve this. We believe we will deliver higher gross margins as we execute on supply chain cost saving initiatives and are on track as we exit 2020. This remains an important objective for the company. We've made significant progress and will continue to manage all levers of the P&L to deliver on this commitment. Before we conclude, let me briefly touch on the economics of the Nestle Health Science Supply and License Agreement. As Rob mentioned, Nestle recently launched their CellTrient cellular energy product with TrueNiogen online in the U.S. We wanted to update you on the accounting for the supply of Niogen, related royalties, and the upfront exclusivity fee and product launch fees. As a reminder, there are certain commercial milestone payments tied to the sale of TrueNiogen to Nestle as they launch in new markets. The aggregate payment is up to $6 million to Chromadex, which will be payable as the product launch milestones are achieved. We expect to collect the $1 million of cash related to U.S. launch in the fourth quarter. The supply of Niagen and related royalties will be recognized upon the shipment of Niagen. The $4 million upfront exclusivity payment and the product launch fees provide for material rights related to this exclusivity over the term of the contract. The term is through 2036 when the last patent issued to our exclusive manufacturer related to crystalline forms of NR chloride expires. The upfront exclusivity fee and launch fees will be deferred revenue. The deferred revenue will be recognized based on the shipments in the current quarter relative to our estimated quantities over the term of the agreement. We will be required to revise our estimates on a quarterly basis and true up revenue recognized as necessary. Beyond the upfront fee and milestone payments, most revenues will be driven by ingredient sales and royalty payments from Nestle in 2020 and beyond. While we continue to expect the contribution to be small in 2020 and 2021, there is meaningful long-term potential to create significant revenues and profits from our business partnership with Nestle. In addition, Nestle will raise awareness of TrueNiagent through its marketing programs and continued global expansion of distribution in the years to come. We're proud of our strategic partnership with a well-respected food science company like Nestle. In summary, we remain committed to delivering profitable growth and achieved an important milestone of profitable adjusted EBITDA, excluding total legal expense year to date. I'm very proud of the entire Chromadex team's execution and financial discipline. Operator, we're now ready to take questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeffrey Cohen of Ladenburg. Please go ahead. Your line is open.

Hi, thank you for taking the questions. Um, I'm just curious. So you know, you've mentioned additional potential partnership opportunities in the past and being in communication with some other partners. So I'm just wondering, have any of those moved a bit closer towards a firmer agreement following Nestle's launch of Celltreant?

Yes, we have been in discussions with several blue chip companies and, and some have moved forward, but none are imminent. They're ongoing discussions.

Okay, very good. And I guess my follow-up is more towards marketing. Do you have any insight upon Nestle's target consumer? And what kind of overlap is there between what, you know, your head of marketing, the demographic they're working on, and what Nestle and who Nestle is targeting?

Well, Nestle's product, as you know, is a protein-based product. and it's a powder product, and it's a complement to their suite of products that are targeting the anti-aging market. Obviously, TruNiagen, as well as Celtrient, are anti-aging products, so there is some overlap in the target market. We think that their target audience is a bit older than ours. There's overlap at the Celtrient product with their existing Boost product. In fact, it's complementary to the Boost product. But we don't really know yet the details of their target audience or their primary consumer at this point because it's new. We'll be calibrating with them and sharing information with them as we go along.

Okay, thank you. I'll take the rest of your questions offline. Thanks.

Our next question comes from the line of Brian Nagel of Oppenheimer. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for my question. Congratulations on continued nice progress here. So the first question I have, just with regard to sales, and Kevin, you spoke a lot about the difficult comparison with last year, which disrupted the sales trend a bit here in the third quarter. But if I'm doing the math right, I exclude that. It still seemed as though the pace of sales slowed somewhat further from Q2. So I guess the question I have is, am I right? But also, probably more important is, you know, to what extent, I think we talked about this last quarter, too, to what extent is the COVID crisis, you know, continuing to weigh somewhat upon sales of the true nitrogen products, you know, in the U.S. and elsewhere? And maybe any commentary on the sequential trend. So do you think, Hallie, as COVID has started to maybe abate some places, are you seeing sales rebound?

I think with regard to the organic growth this quarter, I think it is lower, but it's on a sequential basis because of the one-time purchase that we had in the second quarter. If you take that out from a total company's perspective, we grew at 3%. If you look at it from a true Niagen perspective, it actually grew high teens for us. So there was some good organic growth in the quarter that was masked by the $1.6 million purchase that we were comparing to in the second quarter. The COVID thing is hard to more or less calculate. We think at retail, it's obviously when you look at Watson's and the rate that we're growing last year, and they're up 2% year-to-date this year. But last year, they were growing at a much greater rate. So we know it's impacting our retail operations. We also know that it's impacting the new markets that we launched in 2020. But overall, it's hard to tell. You know, looking forward, we expect to continue to grow, but the environment's volatile. You know, on a sequential basis, our e-commerce business remains the core growth engine. And if you look at our year-to-date results, due to legacy B2B businesses that I mentioned, the microeconomic impact of coronavirus and the Horizon Venture purchase, there's been some volatility quarter to quarter. But when you look at it year to date, you see the company has grown 32 percent on a total company basis. When you look at TrueNiagen, it's grown 34 percent. Our e-commerce business has grown 28 percent. And as I mentioned earlier, Watson's has grown 2 percent. So, you know, good growth when you look at it in an aggregate basis over the first nine months. But there has been volatility, Brian.

And, Rob, I would add to that that the core, the nucleus of the operation at this point is your direct-to-consumer true nitrogen business. And I think if you compare first quarter to second quarter, second quarter to third quarter, you could see that the actual rate of growth is increasing.

Well, thank you. That's perfect. And then for my follow-up question, And Frank, I know you talked about this in the prepared comments, but the Phase II study in Turkey, it was quite exciting. We spent a lot of time talking about that. I guess the question is, as investors here, what should we be thinking about the timing of where this goes from here, whether Phase III and when we'll get some further communication on what this could potentially mean for chromodextrin true nitrogen?

Well, the Phase II trial actually went went relatively quickly. And the phase three trial is already moving relatively quickly. So I don't think from a study timing standpoint, I mean, it's a short period where they're dosing patients. So it's really the question is around enrollment. How fast can they enroll 300 patients? So it's not like it lingers for months in terms of a dosing, from a dosing perspective. So that's moving relatively quickly. And I think, look, with everything you can see that's going on in the world right now related to coronavirus, it's accelerating the wrong way right now. I think coronavirus is going to be around for a while, and we're going to have, you know, having additional data is going to give us another bite of the apple here. I mean, having a phase three trial beyond that one, confirming, hopefully, keep our fingers crossed, confirming that the result that we got in that first study is going to go a long way.

In fact, I'm just going to ask one more on the heels of that. So, Kevin, you know, again, I know there's a lot of unknowns here with this trial. If this goes well, how would we think about the financial benefit to Chromadex? How would that flow into the model, so to say?

Well, I think, you know, hopefully it's going to increase sales, the rate of sales growth. And then, obviously, from a, you know, I think we've proven the model that as we get more scale, we should be profitable quicker, and that's kind of the bottom line.

What we could specifically do with this information when it gets published is market it directly to the healthcare practitioner market, the medical community in general, hospitals, pharmacies, physicians. It ought to be part of standard of care for people who are symptomatic COVID-positive. And this will enable us to communicate that better. That should ladder up to increase sales overall.

Got it. Thank you very much. I'll let the next person ask questions. Thanks, Brian.

Our next question comes from the line of Jeff Vincenderin of B. Reilly FBR. Please go ahead. Your line is open.

Great. Thanks for taking my question. First, let me say congratulations on the progress on all fronts. Can you speak more about how you're thinking about evolving marketing for community versus anti-aging as COVID spikes again? I know there's been some shifting around on that.

Right. It's a very good question. You know, managing messaging and marketing as a healthcare company during COVID is sort of like shifting from zone defense to man-to-man. because the market moves around as the news moves around. And as you know, we had positioned ourselves as an anti-aging and fitness product principally, and then we added immunity once we started releasing these COVID studies, and that was effective for us in the second quarter and continued to be effective for us in the third quarter. But what we also observed during the third quarter was a bit of COVID fatigue. And we saw that certain of the messages, especially those that were related to cell defense, as it were, were not converting as well. So we have pivoted again, and we've begun to add back some of the anti-aging and fitness messaging that was so successful prior to COVID hitting, and we see that converting as well. So it's challenging, but we are equipped to manage it. And in the meantime, the more studies we release showing the power and the efficacy of TruNiagen, the wider the market potential as it is.

Okay, great. And then can we shift to international for a moment? Just wondering about your near-term expectations for the UK and Australia. TruNiagen Beauty, I know you mentioned that with Watson. I guess anything else you can talk about at this point that's on the horizon as we're thinking about international going forward?

As you know, we are in 200 super drug stores in the UK. We sell cross-border into the EU. We sell cross-border into China. We sell cross-border into Japan. We are selling online in New Zealand and Australia and starting to appear in certain retail outlets in Australia. We sell in certain retail outlets in Canada, and we sell online in Canada as well. We see opportunity for growth in virtually all of these areas, particularly as the research continues to roll out. But the COVID thing has had an impact on retail, particularly outside the U.S. The foot traffic in the U.K. has been tremendous. very impacted. The timing of our release with Superdrug coincided with COVID. They closed a bunch of stores, and it's still somewhat small. So the online business is looking strong and growing, but the actual retail business seems to be waiting for people to come back. We think that there's an opportunity for growth there, but at this point, as long as COVID is still going to be around, they're implementing even stricter lockdowns in parts of the EU, including including the UK, our emphasis will be much more on online marketing and online sales. Fortunately, we're equipped to do that.

Okay, great. Thanks for taking my questions, and best of luck for the rest of the quarter.

Thanks, Jeff.

Our next question comes from the line of Ram Silvaraju of HC Wainwright. Please go ahead. Your line is open.

Thanks so much for taking my questions. Firstly, I wanted to ask about how you expect gross margins to trend going forward. And if you think there's likely to be significant, sizable improvement potential in the coming quarters, and if so, you know, when could we approach potential steady state? Is that likely to be in the low 60s, mid 60s, maybe even higher than that? Just give us some background on that, please.

Yeah, well, I think we're just, we continue to work on our supply chain and we're getting better. Mix has been something that's been helping us. I think also our product design changes that we did last year effective in the fourth quarter and going from three bottles for our 90 count dosage for three months to one bottle and smaller packaging and lower shipping costs are an opportunity. You know, we have, you know, I think secured and implemented things that are going to, or initiatives that are going to deliver $2 million run rate next year. So you should see sequential improvements in our gross margins. I'd say, you know, we think we can get to the low 60s. You know, I can see line of sight to that. And it's something that you always continue to work on. And obviously, I think scale will help us, too, as we, you know, continue to grow and get to a higher level. That also will be another benefit.

And, I mean, in the context of that, can you comment on, you know, as Nestle continues to scale with Celtrian, what kind of impact that is likely to have on the gross margin evolution?

Well, it should help, but I think when we look at it from a 2020-21 perspective, we don't see it as being a big number for us. So that's more like 2022, and that will help us scale. And also, you know, with regard to that selling of nitrogen, we do get a royalty from then, which is somewhere between low single digits as they launch to high single digits as, you know, the business gets bigger and bigger.

Okay. And then just very quickly on the COVID-19 program. In the context of the phase three, Frank, could you comment on, you know, what standard of care currently persists in Turkey and what the control is supposed to be in this phase three program. And also, you know, when you talk, I think both you and Rob talked about the potential utility of the drug in the context of symptomatic COVID-19. But what specifically do you mean when you talk about symptomatic COVID-19? How sick do patients need to be in order to potentially qualify? And would you consider this potentially being a therapeutic deployed only in the outpatient setting or specifically within the context of the hospital?

So the first part of your question there, Or let me take the last part first, I guess, is the best way. So we're only looking at mild. So patients that have tested positive but are only exhibiting mild symptoms. So people that are not going to enter the hospital or require hospitalization. That's the main bulk of the people that we're looking to put into the trial. That was exactly what we did in the first phase two study as well. yeah that's that's definitely helpful but when you say mild symptoms you're not looking specifically at respiratory symptoms though right well i i wouldn't say that they may be looking at some respiratory but obviously they're not going to be looking at people that that would uh you know from a pulse oximetry standpoint would be like in a bad way right so they're looking for people that are on the fringe of that but not not that not have to be hospitalized

Okay, no, that's very helpful. And then with respect to the standard of care and the control?

So standard of care, standard of care in Turkey, and we've had this conversation with others as well, but standard of care in Turkey is hydroxychloroquine. So we would love to be able to design this study without the standard of care. However, that's not an option. We have to follow what the standard of care in Turkey is, and they use hydroxychloroquine. So both arms, both the In this phase three study, it will be a double-blind placebo control. The first study was an open label, if you remember. But both arms do have to have standard care, so we have to have hydroxychloroquine in both arms. That's just the nature of the beast of dealing with turkey. In the first study, that was also the same, but we did see obviously a clear difference between both arms which had hydroxychloroquine. The arm with the nutrient cocktail plus niagen showed a significant improvement of recovery, and that was the clear difference between the two. So we don't believe that hydroxychloroquine plays a role. That's what we believe at least at this point. I would love to be able to do an arm without that to further show that, but that's kind of where it sits. Does that answer your question?

Yes. I think further to that, when we talk about mild symptoms and the fact that hydroxychloroquine is the standard of care in Turkey, can you comment at all on other medications that are specifically being excluded in this trial? For example, are you permitting use of steroids like dexamethasone?

I don't know if we have any specific exclusions that I can recall in the trial design. So it's possible. I mean, the phase three study is moving into eight. It's an eight site study. So it's possible that other things could be administered as part of the study, depending upon the site location.

What about ribbethavir?

I don't think there's a whole lot of REM disappear in Turkey, to be honest with you. I don't think that's going to be a major factor because of the fact that there's not a whole lot of supply there.

Okay. Very helpful. Thank you.

Thanks, Ran.

And our next question comes from the line of Mitchell Pinero of Certivant and Company. Please go ahead. Your line is open. Hi.

Good afternoon. Just a question on the e-commerce business. Can you talk about sort of a breakdown in this quarter, whether sequentially or year over year, how new customers comprise, you know, what the new customer growth was of the total recurring revenue, how that performed in the last quarter?

Well, the bulk of our revenue is from returning customers. The retention rate, which we haven't yet provided, is very, very strong. And so we are confident in the base. When people start to take TruNiogen, particularly after they take it for a month or two, very few stop taking it. The growth of new customers, though, has slowed. And, uh, we have noticed that the number of new customers that we've added for versus a year ago has, has, has declined. And so that's an opportunity for us to grow further.

Um, and when you look at, um, sort of, uh, I guess your customer acquisition costs, are they focused more on new customer or do you, is there any element, um, in the recurring revenue customer that you're spending on now?

I'm sorry, Mitch, could you try that one more time? I'm not sure I understood the question.

So let me just ask it differently. I mean, just talk about customer acquisition costs and how they compared in, you know, in your, I guess, internal data, you know, to a year ago or to the sequentially and whether, I know you talked about you spent some money on branded awareness more than, you know, sort of a call to action marketing. Can you talk about that in the context of your customer acquisition?

Well, we did invest more in non-performance marketing in the third quarter. Satellite media tours, there was much more PR attempts. There were more interviews. more what you might call overall brand marketing, which is not conversion related directly related. So therefore our customer acquisition costs were higher in the third quarter. Additionally, uh, we did some experimenting in some new messaging. As I said, it's a fluid situation with COVID and we're noticing from month to month, some dramatic changes in audience response. You know, at the beginning of the year, we, we appointed a new head of marketing, and that new head of marketing then put a team together to work with her. We also implemented some very strong fundamental long-term marketing initiatives. For example, we have a much more robust cohort data analytical system in place, so we have a deeper understanding of who the customers are and how they behave, how they interact with us. We also have a much deeper understanding of website customers versus Amazon customers and who they are and what their interests are. Additionally, we recoded the entire website and relaunched the entire website, which also enables us to track behavior from visitors to the website. So we have a much stronger and deeper understanding of our relationship with our consumers. But right in the middle of that process, we got hit with this, the pandemic, and it sort of forced us to put some of these fundamental initiatives aside and actually be more reactive. Right now, we are restoring some of those fundamental policies and programs in place. So my expectation is that the e-commerce business is going to become much more efficient and grow in a much more dramatic way in the coming quarters.

Okay. And then that's helpful. And then as you look at your, you know, various other sub-segments, self-care practitioners, sports, fitness, any comments with regard to how they did in the quarter?

I'm not sure if we disclosed how they did versus previous quarters or versus last year. I know that. Well, I guess. I'm sorry. Go ahead.

What is in terms of color? I mean, are you seeing increases in health care practitioner? Have sports teams continued to grow? Any color would be helpful.

Yes. There are many more athletes and sports teams that are regularly purchasing TruNiagen from Chromadex. We also have a much larger base of health care practitioners that regularly purchase from us. One complication is some of them shut down their offices during the COVID period, so they're not carrying the inventory in the same way. So that was a headwind on COVID. But there's a much, much higher level of interest and interaction from the healthcare community and the sports community in general for TruNiagen. We are investing in a stronger infrastructure internally in both of those specific areas. and we are adding experienced high-grade personnel to specifically focus on both of those things. So we do see high growth potential in both sports and healthcare practitioner, and we're going to increase our focus in both of those areas in the coming quarters.

Okay. Thank you for your time.

Thanks, Mitch. Thanks, Mitch.

And our last question comes from the line of JP Mark of Farmhouse Equity. Please go ahead. Your line is open.

Hi. Good afternoon. Thanks for taking my call. So a couple of very quick questions here about marketing and redesign of the website. First of all, I think it's a good redesign. I think it definitely is an improvement. And I wondered whether you are doing different versions for different countries, or is it just one for every country?

We intend to do different versions for different countries, but we haven't yet.

Okay. And when do you think you might roll that out? Any idea? Next year sometime?

Yes, definitely next year, not this quarter.

Yeah. And second question, Rob, it says on the website that it has a list of the podcasts that you've done. Is that a complete list, or are there other ones that you've done that are not listed here on the News tab there?

Lately, I've been doing quite a few, so I'm not sure if it's a complete list. I don't know. But perhaps if you email Brianna, she can update you.

Yeah, it only has four, I think. Yeah. Okay. Well, I would tell you that the more podcasts you do, in my opinion, the better. I think you speak well for the company. I think it's fantastic marketing for the company. So if there's any way to continue that, I would highly encourage it. Anyway, it's just my comment. But, again, thank you for taking my questions, and I wish you continued success.

Anytime. Thank you for the questions.

At this time, we do not have any further time for questions. I'll turn the call back over to Brianna Gerber for closing remarks.

Thank you, Jody. 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 4699759. Thank you, everyone, for joining us today and for your continued support of Chromadex.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.