ChromaDex Corporation

Ladies and gentlemen, thank you for standing by, and welcome to Chromadex Corporation's second quarter 2022 earnings conference call. My name is Dennis, and I will be your conference operator today. At this time, all participants are in a listen-only mode. And as a reminder, this conference call is being recorded. This afternoon, Chromadex issued a news release announcing the company's financial results for the second quarter of 2022. If you have not reviewed this information, Both are available within the investor relations section of Chromadex's website at www.chromadex.com. I would now like to turn the conference call over to Heather Van Blarkum, Senior Vice President of Legal and Corporate Secretary. Please go ahead, Mrs. Van Blarkum. Thank you.

Good afternoon and welcome to Chromadex Corporation's second quarter 2022 results investor call. With us today are Chromadex's Chief Executive Officer, Rob Freed, Chief Financial Officer, Kevin Farr, Vice President of Finance and Investor Relations, Brianna Gerber, and joining us for the Q&A portion of the call, Senior Vice President of Scientific and Regulatory Affairs, Dr. Andrew Hsiao. 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 and the sale of TruNiagen in new markets, business development opportunities, future financial results, cash needs, operating performance, investor interests, and business prospects and opportunities, as well as anticipated results of operations. Forward-looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurance as to the 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, as well as inflationary and adverse economic conditions on our business, results of operations, financial condition, and cash flows. Please note that the company assumes no obligation to update any forward-looking statements after the date of this conference call to conform with the forward-looking statement's actual results or changes to 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.

Thanks, Heather, and good afternoon to all, and thanks for joining us on our investor call. The second quarter of 2022 marked an important period of organizational improvement as we adapted to this changing market dynamic and placing an emphasis on fiscal responsibility, on efficiency, and on profitability. The core e-commerce business continued to grow 10% sequentially and 13% annually. The overall net sales declined a bit, however, year over year, primarily due to timing of orders from our partners in Watson, Hong Kong. We believe This timing will be made up in upcoming quarters. As I mentioned, our core e-commerce channel is delivering consistent growth and becoming increasingly efficient. Amazon is our fastest-growing channel within e-commerce. Despite a challenging macroeconomic backdrop, TrueNiogen has been delivering very strong results there. As an example, we're very proud to have reached the status of number one best-selling vitamin B3 supplement. This momentum, also supported by nearly double the number of subscribers since the beginning of last year, has enabled us to reduce spending in the short term by focusing on campaigns that drive the highest conversion. As you heard last quarter, we launched a new TV campaign for TrueNiogen in late March. We and Walmart were very encouraged by the significant increases in sell-through once our campaign aired. But this improvement came a bit late to impact their spring shelf set plans. TrueNiagen will continue to be carried, but in fewer stores going forward, with a focus on the better performing stores and on our introductory 100 milligram SKU. We established that TV advertising works well to drive awareness for TrueNiagen, but it is an expensive channel, particularly the linear television channel. And this is a challenging macroeconomic environment, so we have paused this campaign. to focus on our core e-commerce channel, which delivers consistent growth with measurable return on advertising spend. And we are already seeing efficiencies in the third quarter. We see this difficult market as an opportunity to improve our operations. Our expectation is that we will approach break-even in the third quarter and deliver positive adjusted EBITDA or cash EBITDA in the fourth quarter of this year. At the same time, we know that the addressable market for our ingredient, Niogen, and our brand, True Niogen, remains very strong. This is supported by the science, where numerous preclinical studies published this quarter once again support the efficacy of our novel ingredient, nicotinamide riboside. These include studies investigating the effect of Niogen on cardiomyopathy, on neuropathy, on inflammation, and on myogenesis. In addition, and importantly, Preliminary findings from a study supported by the Gates Foundation and conducted by our chief scientific advisor, Dr. Charles Brenner, were presented at the FACEB NAD Plus Metabolism and Signaling Conference this past June. The study performed in an animal model showed that moms supplemented with Niagen bore offspring with improved body composition and brain development, significantly outperforming NMN. We look forward to sharing more once the results are peer-reviewed and published. And as the science supports the long-term prospects for TruNiagen and Niagen, so does our continued innovation in the NAD precursor space, which we will share in future updates. We also made significant strides in our China strategy this quarter, a large and growing market for NAD supplements. As many of you know, we have a partnership with Sinopharm Xingsha, large state-owned healthcare group in China. As consumers already understand the benefits of elevating NAD in China, we can differentiate TruNiagen as the most trusted and science-based brand with a trusted local marketing partner like Sinopharm. While we have been in discussions with Sinopharm since late last year, we solidified our relationship in June with the cross-border agreement. This now enables us to progress more quickly toward commercialization. We continue to be impressed with their deep knowledge of the local market, as well as commitment to our brand, and we look forward to them taking over the management of the cross-border operations in the coming months. We also signed an agreement to establish a joint venture in China to pursue blue hat approval for in-country sales of true nitrogen. This will open an even larger addressable market to accelerate growth over time. Another strategic market for TruNiogen is South Korea. We recently signed a definitive agreement with Juvenis, our healthcare marketing partner in the country whose focus is on cosmetics and dietary supplements. Lastly, in the broader Asia-Pacific market, our new partnership with H&H is progressing quite nicely. They recently launched their first exclusive product with Niogen, the Swiss Beauty Activator. in Australia, and they have plans to launch this as well as other products targeted at a unique benefit areas in China cross-border as well as other markets. As a reminder, the Swiss brand is the leading brand on China cross-border platforms, and we remain optimistic about the prospects with H&H. We're very excited to enter a new period of corporate development as we continue to grow the TruNigem brand, broadening our revenue base geographically and partnerships, and a strong recurring revenue base of well-informed users who are actively seeking the best science-based supplement to aid in improving their overall health and well-being. Part of this transition, from being a growing startup to a $70 million global revenue run rate for TruNiagen, has been a stepwise series of leadership changes designed to assist Chromedex in its next phase of corporate lifecycle development. This includes meaningful changes to our board of directors, as well as our executive leadership team. In April, we added two outstanding female executives, Ann Cohen and Kristen Patrick, to our board of directors. Ann is a financial expert and our new chair of our audit committee. And Kristen, the new chair of our non-gov committee, brings extensive marketing expertise, most recently at Claire's and previously at Pepsi. And just this week, we welcomed Hamid Shabazi, CEO of WellHealth. Ahmed is a successful healthcare internet entrepreneur whose company is focused on consolidating and modernizing primary healthcare facilities and practices in Canada. These three great executives are injecting new perspectives and energy into our board, and we are very grateful that they have decided to join us. And our executive team has also undergone some changes. As many of you know, our co-founder, Frank Jack, has stepped away from his executive duties to pursue a new entrepreneurial venture in a complementary space of synthetic biology, but he will remain as chairman of our board. We also have a new head of the legal department, Heather VanBlaakem, who is joining us on this call today.

Hi, Heather.

Heather has been Assistant General Counsel of Chromadex for almost nine years. She's an extremely talented executive who has extensive knowledge of Chromadex and over two decades of experience in the industry. I am quite confident she will manage our legal affairs, our litigation, and our overall legal expense quite prudently. And finally, Kevin Farr is stepping down as Chief Financial Officer. Chromadex has long been respected in the ingredient and dietary supplement industries as one of the most respected scientific and regulatory affairs companies. Under Kevin's supervision, our finance and operations have become equally and universally respected. We thank him for sharing his years of experience as CFO at Mattel and experience at Pricewaterhouse prior to that, and for helping us to proudly become the professional organization that we are today. We now look forward to working with Brianna Gerber, who I recently promoted to interim CFO. Brianna has over 20 years of diverse experiences in investment management and finance at the Capital Group, at Mattel, and, of course, right here at Cromadex. Brianna will be and is a key leader in our efforts to continue to improve the organization as we adapt to this changing market dynamic and to place an emphasis on fiscal responsibility, on efficiency, and on profitability. Over the last four years, I've been quite impressed by her leadership, her broad business acumen, and her passion to constantly deliver positive results. I'm very excited to be working with her. In summary, I am quite bullish on what is taking place at Chromadex, on the internal changes, on the key pillars we have put in place for our China strategy and globally, and for our upcoming scientific developments. I would now like to return the call to Kevin and Brianna, who will run through the quarter's financials and then on to Q&A and closing remarks. Kevin, Brianna.

Thank you, Rob. Good afternoon. It's a pleasure to speak to you today. It's been an honor to be CFO at Chromadex for the past five years. Since our pivot five years ago, we've grown TrueNiagen into a global $60 million brand with a global footprint and diversified channel strategy. expanded gross margins from around 48% to over 60%, and achieved cash flow break-even in our underlying business, including total legal expense, with a focus on achieving this, including total legal expense, in the fourth quarter of this year. I want to announce my transition from CFO to consultant, providing services over the next few months to ensure a smooth transition. I also want to congratulate Brianna Gerber, Head of Finance and Investor Relations, on the promotion to Interim Chief Financial Officer. As many of you know, Brianna has been my most trusted finance partner for the better part of a decade as she moved with me from Mattel to join Chromadex. Over the last four years, her role has evolved as she assumed more responsibilities in almost all aspects of the business, which has prepared her to ascend to the CFO role. Over the last year, we've made significant progress on building our global brand optimizing our marketing messages, and testing targeted advertising campaigns focused on specific benefits of True Niagen since aging means different things to different people. We believe these activities provide a strong foundation that will accelerate our revenue growth rate as well as improve our profitability over time. Finally, I'm also proud of the strong teams that we've built across the company in just a short few years. With that, I'll hand it over to Brianna who will comment on the quarter's results as well as put into context our strategies going forward. Before we dive into the details, Brianna?

Thank you, Kevin. Let me first say that I'm grateful for the opportunity to serve as interim CFO on behalf of our Chromadex shareholders. We have a novel ingredient that can unlock a very large addressable market of consumers who want to address a root cause of aging and I believe we have the right team in place to capture this opportunity globally. As interim CFO, my immediate objective is to look at all areas of our cost structure, with an emphasis on becoming a leaner and more focused organization beginning in the third quarter. We recognize this attention to operational efficiency is critical in the current economic environment. We've already adjusted immediate levers, such as media spend, in July, and reduced R&D spend on projects without a clear ROI for large commercial opportunity. I'm encouraged by the executive team's commitment to this important initiative and look forward to leading the company through this transition. In the past, Kevin has discussed adjusted EBITDA, including total legal expense, as a proxy for cash flow prior to working capital investments. We expect to approach break-even in the third quarter and are targeting cash flow breakeven or better on this basis in the fourth quarter of 2022. With that, let's turn to the second quarter financials. Chromadex reported total net sales of $16.7 million, down 5% year-over-year, and a strong growth margin of 60%. Importantly, our e-commerce business continued to grow, with 13% growth year-over-year and 10% growth sequentially in the second quarter. As a reminder, the prior year period included Amazon Prime Day, which falls in the third quarter this year, so underlying sales were even stronger. Overall sales were down due to two primary drivers. First, the timing impact of sales to Watson's due to COVID-19, and second, the initial shelf stocking to support our Walmart launch in the second quarter of 2021, both of which created challenging prior year comparisons. Adjusting for the Walmart impact alone, our net sales would have been roughly flat year over year. As Rob said, given the current macroeconomic environment, the company has pivoted to spend on distribution channels and marketing campaigns with the highest short-term return on investment and a strong focus on conversion beginning in the second half of 2022. We are optimizing advertising spend within these channels, targeting consumers who are more likely to convert based on their purchasing patterns and demographic profiles. And we are exploring tools we can leverage to become even more sophisticated in this targeting going forward. At the same time, we have decided to pause our television campaign, which, while effective, is a much more expensive marketing approach in the short term. For context, we invested just over $1 million in TV in the second quarter. This TV campaign was originally launched to support brand awareness at Walmart, but we anticipated that our e-commerce channel would also benefit, which it did. As Kevin noted last quarter, we saw increases in organic searches and new website visitors, growth in new customers on our own site, as well as strong sales trends on Amazon. While Walmart was encouraged by the sell-through trends immediately following the TV launch, they'd already planned to reduce their spring shell set for truniogen. As a result, the 300-milligram 30-count SKU will no longer be carried in stores, and the 100-milligram 30-count introductory SKU will be sold in fewer stores. We view this as a healthy reset for the brand to focus on the better performing stores. Beyond Walmart, we recognize that a brand like ours requires continuous consumer engagement and education. This extends to our B2B partnerships where we are increasingly looking to learn from each other and adapt content to their local markets. We recognize that many of these partnerships have been slower to ramp than we anticipated. Consistent with our emphasis on efficient spend, we are focused on maximizing sales with our existing partners as we had important new strategic partners like Sinopharm to optimize our omnichannel global distribution strategy. Moving to the P&L details. Total net sales in the second quarter of 2022 were down 5% year-over-year compared to the second quarter of 2021, with a 6% decrease in true nitrogen, driven by 13% growth in e-commerce, offset by a 47% decline in combined Watsons and other B2B sales, as previously discussed. Gross margins decreased by 110 basis points to 60%, compared to 61.1% in the second quarter of 2021. The decline was primarily driven by a loss of scale due to lower net sales, coupled with input cost inflation and increased headcount in our supply chain to support future growth. We also had a small impact from markdown funds at Walmart as they optimized their store and SKU mix for Trina Agents. We are very proud of the work by our supply chain team to achieve a consistent, strong gross margin of 60% in a challenging inflationary environment. Selling and marketing expense as a percentage of net sales increased to 47.9% compared to 35.2% in the second quarter of 2021. Our investment in TV advertising was a driver of the increase, but as mentioned, we have paused this top of funnel spending, which will improve the trend in the second half. We are also experiencing higher costs for new customer acquisitions driven by broader industry trends year over year. As reported, general administrative expense was lower by $2 million, primarily due to lower legal expense of $2.4 million, partially offset by increased investments in technology and increased staffing in key functional areas to support growth. We expect legal expense to further decline going forward and continue to expect full year 2022 legal expense to be under $7 million. For the second quarter of 2022, our operating loss was $6.4 million versus $5.6 million in the second quarter of 2021. The net loss attributable to common stockholders for the second quarter of 2022 was $6.4 million or a loss of $0.09 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. Finally, our adjusted EBITDA, including legal expense, was a loss of $4.6 million compared to a loss of $3.5 million in the prior year. Moving to the balance sheet and cash flow. Our balance sheet remains strong. We ended the quarter with $17.1 million in cash. In the second quarter of 2022, our net cash used in operations was $3.8 million versus $7.9 million use of cash in the second quarter of 2021. The difference year over year was primarily driven by lower trade receivables due to timing of payments from customers, as well as other changes in working capital, including inventory investments and timing of payments to our vendors. As a reminder, the second quarter of both periods includes a payout of a bonus to employees related to prior year company performance. As it relates to our 2022 four-year outlook, as I mentioned, we believe our decision to focus on more efficient channels and make tough decisions related to our cost structure will enable us to be cash flow break-even or better in the fourth quarter of 2022. and approached this goal in the third quarter. Our updated net sales outlook is high single-digit growth. While e-commerce remains strong, the reduction from 15% to 20% previously is primarily driven by lower growth from combined new and existing partners due to continued COVID-19 headwinds internationally, as well as a slower ramp up with new partners. We expect approximately 60% growth margins, slightly lower selling and marketing expense in absolute dollars year over year, approximately $1 million increase in R&D, and approximately $6 to $7 million decrease in G&A. Relative to our prior outlook, this reflects more conservative investments in marketing as well as R&D with a focus on near-term ROI and a reduction in executive headcount in G&A. We have provided details on the key P&L metrics in our earnings press release along with the slide presentation. In summary, I'm excited for the next chapter of Chromadex. We have work to do, but I'm confident we can achieve positive adjusted EBITDA. Additionally, we have learned so much about our consumers over the last five years and can build on this foundation going forward. By segmenting our true Niagen and Niagen consumers into different cohort groups through e-commerce analytics as well as insights from our partners, we can orient our marketing content, communication, R&D, and business development pipeline to strategically target the market. We look forward to sharing more about how we are optimizing the business to align with this consumer-oriented vision in future calls. Operator, we are now ready to take questions.

And at this time, I'd like to remind everyone, in order to ask a question, simply press star 1 on your telephone keypad. Your first question is from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon.

Hey, Brian.

Hey, Brian. Congratulations, Brianna. Kevin, congratulations. Thank you so much.

So a few questions here. First off, with respect to Walmart, maybe could you size what's happening for us here? So kind of the shifting number of stores. I think you said you're going to, in Walmart now, it's only the 100 milligram product, the 300 milligram, you're not going to sell the 300 milligram products, or maybe if that's the case. And then to what extent is this shift, the shift in Walmart, how do we think about the, you know, the nearer term financial implications of that? I mean, how big a piece of your reduction in guidance is Walmart? Then the other question I have on this is, you talked about Walmart, you know, together with the TV advertising. Is the pullback of TV advertising somehow tied to this shift in Walmart?

So, Brianna, I'll answer the second one first, and I'll let you answer the first question second.

Perfect.

You there? Okay.

Yep, I'm here.

Sorry, Brian. We're in two different locations, so there's just a tad bit of a delay. So the primary reason for the pullback on the television campaign, and by the way, what we're pulling back on is linear television. There's still going to be streaming television. It's linear television, which is – much more expensive of the two and much more difficult to measure and much more top of the funnel expensive. And that's the primary reason. You know, we have a nice clean balance sheet, but we've burned some cash. We want to stop burning cash. We know that this is not a good time to be burning cash. We have a great product. We have a great revenue base. We have a great operation. The idea here is to be lean and creative and profitable. And top of the funnel, very, very high, most expensive top of the funnel marketing is linear television. So that's the primary reason. But secondarily, yes, there was some impact there. We did get the television ad out, and we did see dramatic improvement in the performance across the board of all metrics, not just sales at Walmart, but Google searches, traffic to our website, sales in other places. I mean, it showed that it was an effective ad. And the media buy was effective as well. But it's very expensive and it's something that you have to maintain. It's not like other forms of marketing like digital media marketing where you can go in and out and measure real-time performance and return on ad spend and customer acquisition costs and then make short-term adjustments. Television is much more difficult than that. So because Walmart did want to pull back from approximately 3,800 stores to approximately 2,000 stores, I believe. And because we're selling a lower-priced product. When you do the math, it just seemed like the return was not going to be there as much. So that's a secondary reason why we decided to pull back on linear television spending for the time being. So Brianna can hand off the... the first part of the question to you.

Sure, Brian. It wasn't a big part of our change in the top line outlook. So Walmart was not a big change. For reference, we said that last year's initial shelf stocking was about $1 million. If you look at our net sales that we report, Walmart would be in the other B2Bs. It was about $1.8 million in Q2 last year. It was about $1 million this year. So again, Walmart's a key driver of that. The bigger driver year over year, as we said, though, is Watson's. And again, Rob commented on the store count reduction for the 100 milligram SKU, and then it won't be carried for the 300 milligram. But the key here is that the stores that they're focused on, this was a bit of an experiment in a wide footprint at Walmart. Now they're refocusing on the stores that are performing better and the SKU that probably hits the price point mark. So we do view it as a healthy reset, and again, not a key piece of the change to our financial outlook.

That's very helpful. If I can squeeze in one more, just I guess just bigger picture from a demand perspective. So you talk about it. I mean, every consumer company I speak with or follow is talking about to some extent a more challenging macro backdrop, largely brought on by the inflationary pressures on the consumer. So when you look at your business, are you seeing more – from that standpoint, are you seeing more pressure on – kind of attracting that new customer to Chromadex, or are you seeing a higher churn rate with customers that are already using the product?

Actually, that's an interesting question. I don't know if the answer is unique, but we are seeing sort of almost an extraordinary increase in new-to-brand. However, we are seeing an increase in churn, and One of the reasons why we're seeing, I mean, truly like dramatic increases in the number of new customers coming to Chromadex via the e-commerce channels. But part of the reason is because we did offer this 100 milligram SKU. So it is a much less expensive SKU. But, you know, we all know that the science behind TruNiagen, and I'm sure at this point you know, Brian, and everybody else who's listening knows that The science really does show that 1,000 milligrams is where most of the studies have been conducted and show the dramatic statistically significant results. Most of us at Chromadex take 1,000 milligrams, but that's pretty expensive. So if you take 100 milligrams, we do have research that shows that there's a dose response. You do have an elevation of your NAD levels. But it might not be as easy to notice in your general health or lifestyle. So there is a higher churn rate of those people that buy the lower dose. So the answer to the question is yes, no, we are not having headwinds on nudibrand. But yes, we are seeing a higher churn rate.

And Rob, if I could build on that quickly. Brian, just to accentuate that, our new and returning customers both grew sequentially in the quarter. So I'd echo and reiterate what Rob said. And back to the outlook question, our expectation is even with the lower spend, our e-commerce business grew about 13% in the first half. It should be able to grow at a similar rate, albeit slightly lower with the reduction in media spend in the second half. So again, that's not what we're experiencing our business on the e-commerce side. The reduction outlook is more about slower ramp with new partners, continued international partner headwinds with COVID that we thought by now would be starting to abate.

Thank you very much, everyone. Thanks, Brian. Your next question is from the line of Mitch Bonero with Certivant & Company. Please go ahead. Hey, good afternoon, Mitch.

Hey, yeah, hey, and my congrats to Kevin and Brianna. So look forward to working with you more closely, Brianna, and thank you for all your time, Kevin.

Yeah, thanks, Mitch. Appreciate it.

Thank you, Mitch. So I guess first question, so listen, we've seen four consecutive quarters of slower e-commerce growth. It's grown, but we're just seeing, you know, it's ticking down, you know, from as high as 31% growth. There was an, obviously an anomaly there back in 21, but it's falling. And, you know, meanwhile, it doesn't seem to match, you know, the growth of the science and, and even, even just, you know, the media, I don't say media awareness, but certainly, you know, the, the, the, scientific publications, and, you know, we're seeing more of that. Why, you know, I would have expected it to be a little stronger than 13% growth. I realize Amazon Prime, that was, I appreciate you calling that out. But is this really just something you can kind of turn on with more effective, you know, e-commerce marketing, advertising, and... And why, you know, Bradley just mentioned with e-commerce maybe slowing a little bit in the second half as partly due to the lower TV. So, you know, if TV is not effective, then why would it be driving the second half? Yes.

What was the last thing you just said? If TV is not effective, did you say?

Yeah, if TV is not effective, why would we be expecting having that as a negative impact to the second half sales?

Okay, I don't think we said that.

Brianna, do you mind if I answer that?

Not at all.

Brianna? Thank you. So I don't know that we said that TV was not effective. I think, in fact, the data that we looked at showed that it was effective, but it's very expensive and you'd have to sustain the investment in television for quite a while. And it really does cost a significant amount of money. But we did see benefits across the board from that TV campaign of all the metrics that we measure. The other thing I wanted to point out is that the Amazon Prime numbers are, that week is fairly, it's a fairly significant week. The numbers can be fairly dramatic, like in some cases several times the average that you do in a single day. So it could really dramatically skew the percentage growth in any given quarter. But in answer to your question, You know, the sales of the e-commerce channel are directly a function of your customer acquisition cost and of your retention. We are seeing very strong reductions in our customer acquisition costs over the last several months, which is very, very encouraging. But partly because we've been selling a lower skew and partly because of the economy, we are seeing a slight increase in turn, in cancellations. But the good news about that is that it's something that you can address, but not expensively. There are ways to manage churn and cancellations without having to buy television ads. So I do believe that the growth rates for the e-commerce channel can and eventually will increase and get back to some of the levels that you've seen in the past. But we've given guidance to the next couple of quarters where we're expecting to spend significantly less in digital marketing. So we're giving what we consider to be realistic and perhaps conservative projections where we will still see comparable type growth but at a much reduced investment in marketing. So go ahead, Brianna. Did you want to add to that?

Yeah, just one more point on that. Mitch, we said... similar growth to the 13% in the first half. But as Rob said, pretty significant reductions in spend. It's not just TV. We really are focusing on even the digital media and trying to optimize that. Some of our campaigns within Amazon, within social search, and get more efficient. So we think we can achieve, again, a similar growth with lower spend. It might be a touch lighter, but nothing more than that.

And you also, you know, obviously, I would imagine every quarter you're adjusting your digital spend. It seems like to be, I mean, is it a moving target for you as to what is resonating or, I mean, why, you know, is there something inherent either in the product or in the messaging that What needs to be optimized further than what you've been doing?

Well, that's a very good question. So part of the beauty of digital marketing and e-commerce marketing is that you could really identify specific cohort groups. And different cohort groups respond to slightly different messaging. For example, in our case, you generally – It's people looking for a solution to our metabolic aging generally. And so our general customer base tend to be older. They're fairly evenly distributed between men and women, maybe a slight tilt towards women, but it's generally evenly distributed, but they tend to be people who are concerned with the way their body is aging. But the way the body ages can differ from person to person. And indeed, with all the science that's coming out on TruNiagen, we're seeing very, very specific benefits towards some indications, certain specific indications. For example, the study that was published last quarter on Parkinson's. For some people, aging is cognitive. For some people, it's energy. For some people, it's sleep. For some people, it's muscle or heart. You know, it varies. What you can do with digital marketing, though, is you can tailor a message towards a cohort group that is, for example, more specifically interested in cognition and remembering where their keys are. Some people aging means I can't find my keys. So a message that specifically says to them we might have a solution to that problem, cognition health or brain health, you get a much higher conversion rate. So well not managed e-commerce really does have multiple messages and it's targeting different cohort groups that are responding to those different messages. And then you're finding what they call look-alike audiences. Once you find a cohort group that responds to a particular message, you then widen the funnel and target others that are similar to them. And so the optimization process could go on really forever. And where we're at as a business is, you know, tens of millions of dollars of sales online, we could do many times that by continuing to optimize and pursue that channel.

And I'll just compliment the team for their work on Amazon. You know, our landing pages highlighting some of those benefit areas has really set a great foundation for us as we've tested and learned. And you have to invest to test, and now we're dialing that in based on our learnings.

Okay. One more question on your quest to reach cash flow break-even. Does that carry into 2023? Is sort of the run rate that you achieve in the fourth quarter, do you think is 2023 going to be a positive cash flow year for you?

Yes, it carries into 2023. Okay. All right. Well, thank you for the questions. Thank you, Mitch.

Our next question is from the line of Ram Savaraju with HC Wainwright. Please go ahead.

Thank you very much for taking my questions. Just three very quick ones. Firstly, I was wondering if you feel at this point that you have already established at which price point you expect you might see meaningful demand destruction? In other words, do you know precisely where, and again, this may be dependent primarily on the SKU, but do you know precisely where the demand inelasticity is? And how can we expect you might be able to take advantage of that from a sales growth perspective as well as margin improvement perspective going forward. Secondly, I was wondering if you could provide some color on how quickly you anticipate seeing meaningful impact from the Sinopharm collaboration with regard to potential revenue coming from the China region and if this is more something that we should be looking to see show up in the numbers next year. And lastly, if you could comment at all on the progress status or current status of your relationship with Nestle Health Sciences. Thank you. Yes, thank you for those three questions.

So let me go in reverse order. As you know, Ram, and we've discussed in the past, Nestle is is a very sophisticated science-based operation, and they're also the number one dietary supplement company in the world. One of their leading researchers, Carlos Canto, is also one of the leading NAD researchers in the world. In fact, he recently published a study about the combination of NR and NRH, another NAD precursor for which Chromadex has patents, has licensed patents showing that the combination was actually more effective than just NR alone, but that NR alone is still the most effective way to elevate NAD. So the relationship with Nestle, it goes quite deep. We speak to them, to their scientists, to their business people, and they are very interested in nicotinamide riboside, as they have, and have expressed interest in the past, and we've shared that We had discussions with them about expanding the relationship with them, but we have not arrived at an understanding of what that would look like. They have many brands. We have our own brand. But the Nestle relationship has not yielded, other than the $5 million that they paid for the rights, has not yielded a tremendous amount of ingredient purchases by Nestle. But I do think that the possibility remains that at some point, that that relationship could get expanded. There's interest on both sides. With regard to the first question, which is price elasticity, that's a very, very good question because what we've observed is our primary, if I were to say something collective about our customer base, it's that they're very smart. It's a very educated group. It's a very successful group. They have a high average income, extremely high education level. And the number one reason that people purchase TruNigin is because it was recommended to them from a friend. And that friend could be a doctor or an educated friend or a nutritionist or an advisor or something like that. So the elasticity with our existing customer base is pretty low. Like we believe we could raise the price and it wouldn't have much of an impact on our existing customer base. However, what we've learned over the last really six months or even slightly more since the Walmart launch and the launch of our 100 milligram product on Amazon is that there is a much, much bigger and broader market that has much greater elasticity that perhaps is a lower income and a less educated audience group but also interested in the way their bodies age, that's interested in a lower price point. Further than that, we also have data to suggest that there might even be a much higher cohort group that would be interested in paying significantly more for an even higher dose or a combination product. So it's not a simple answer. There are different segments of the market that have different levels of elasticity, and of course our goal is to make nicotinamide riboside available to not just all people, but pets as well, because we think it has a dramatic improvement on the body's health, particularly as it ages. So we do think that we could accommodate with our existing customer base a slight increase, but there's arguments to be made that there are other cohort groups that would dramatically expand growth in our addressable market if we went much lower. like we're seeing as 100 milligram, but also some evidence that there's a tighter, smaller group if we went much higher.

I don't remember question number two. Maybe I can just finish that one off, Rahab, and then Rahab can repeat if that's okay. On the rising inflation, as you know, Rahab, many of you... I was just going to be really quick on pricing. We have a delay. I'll let us jump to Sinopharm.

Okay.

So, yes, the second question was about the Sinopharm relationship. We expect Sinopharm to take over complete management of our cross-border business in the fall. We expect them to launch a campaign in connection with them taking over that operation. But I don't expect the numbers to be significant until next year.

Okay. Does that answer your questions, Ram? Okay, I think Dennis, I think Ron may have been on mute. Hello?

I think you answered him, Ron, so let's go to the next one, please, Dennis. Thanks.

The next question is from the line of Sean McGowan with Roth Capital. Please go ahead.

Thank you. I appreciate the time to answer questions here. A couple of them. One, I'm not sure who would be best to answer this, but kind of pulling back from the TV spending, will there be other channels that get a boost in spending, or are you just looking at targeting a reduction in overall marketing spending?

I don't expect a boost in spending in any other channel, but I do expect a boost in certain other channels. and activity in certain other channels. Probably, you know, one big important source of business for us is the healthcare practitioner market, where we sell a version of TruNiagin we call TruNiagin Pro to physicians, nutritionists, healthcare practitioners in general. And we could see a boost in activity in our marketing activity in that channel. Concurrent with that would perhaps be the sports channel, professional sports teams, college sports teams. And then we might increase our overall, maybe not channel, but marketing activity to the partners that we have. The e-commerce business is a very solid, strong business that keeps growing steadily. But the B2B business where we supply the ingredient to partners or we supply it to retailers or distributors, sometimes they could use some support. They don't understand the science quite as well or they're perhaps less aggressive. So we might support our business partners a bit more in our marketing activities. And of course, all word of mouth, social media influencer type of activity. We'll be increasing activity there. Okay.

And just emphasizing, Sean, that doesn't mean spend necessarily. What Rob, I think, is saying is it's allocation of time and resources and really making sure our head of sales, business development, marketing are really aligned and supporting and optimizing our existing partnerships. And when we have new partners coming on board, they're just as excited as we are about the science, the content in their channels.

Yeah, I took it that way. Thanks for clarifying. So my question, does the fact that you're able to put up 60% margins with the kind of sales coming in a little bit softer, does that suggest that it could have been and could be in the future significantly higher than kind of low 60s? Like are you seeing positive variances in the supply chain that give you optimism for an even higher level of gross margin when we do see sales growth kind of reaccelerate?

Brianna, I'll let you answer that.

Sure. So, Sean, scale, loss of scale year over year and sequentially was a piece of it. However, we are seeing the inflationary impact in our supply chain overhead, rising wages, also hiring to support growth, future growth and input costs. So what I would say is we feel good about our approximately 60%. That's our full year outlook. Longer term, yes, I think there's always an opportunity for the growth margins to go up. We look at cost savings programs every year and ways that we can also make our internal operations more efficient. So I do think that there is an opportunity longer term.

Okay, thanks. And then I just wanted to ask Rob to clarify something. I think you said it early in the call. regarding, and you touched on it again, the timing of Watson's sales. Would you suggest that maybe you'll get that back and then some or just that you'll get back to where you would have been anyway? In other words, are those sales lost or could we get them back but at a later point?

We think we'll get them back this year. Okay.

Okay.

Yeah, and Sean, if you look at the third quarter, it should be higher than the second, but more weighted to the fourth, as we've said in the past, because of the timing of their promotional selling period. So shipping to them, aligning with their sell-through, that's 11-11 and 12-12. So the third quarter might be more like an average of historical sales with a higher fourth quarter. Got it.

Great. And then the last comment is just – Kevin, it was a pleasure working with you for 60 years at Mattel and five years at Chromadex. And hopefully our paths won't diverge. And Brianna, I look forward to working closely with you here at Chromadex. Thanks.

Thanks, Sean. Thank you, Sean. Your next question is from the line of Jeffrey Cohen with Lannenberg at Bellman.

Please go ahead.

Hi, this is actually Destiny on for Jeff. Congratulations, Brianna, and Kevin, you'll be missed.

Thank you.

You're very welcome. I guess most of my questions have been answered, which is awesome. I just wanted to get a little more insight onto your commentary around R&D. I heard you say you're going to reduce your spend a bit and focus on projects with a near-term ROI. So I'm wondering if you can maybe elaborate to the extent that you can. Could we expect the launch of something similar to like the immune product to kind of target maybe some of those other demographics that you discuss as you kind of widen that funnel?

I don't have an expectation of launching in the near term another product like the immune product, which is a formulation product. We do have partners that are launching formulation products like H&H. But I don't expect a true nitrogen branded formulation product as a third SKU in the near future. The comment you made about ROI, I think that was Brianna's comment about R&D and being selective about R&D investments so there's a measurable ROI. I can, after I make a comment, I'll defer to Brianna to clarify that specific. statement I can just tell you generally about R&D, is that it's very rare for a dietary supplement company to develop novel ingredients the way we do and to conduct the level of research that we do. We have not only nicotinamide riboside, but we have other precursors as well, as I mentioned before, NRH and ARH. And these are important ingredients that we're learning more about and a lot about, and we do not monetize or commercialize in any way right now. And it is important for us to not just own this knowledge and control these molecules, but to turn them into business for our shareholders. And we intend to do that. So I will let Brianna answer the specific question of ROI and R&D investments.

Sure. It's actually Rob piggybacking on the NAD precursor development. You know, as you know, Destiny, we've built a very large portfolio around NR and other NAD precursors. So we've also said not just in short-term ROI, but large commercial opportunity and things that are strategic. So we're just prioritizing within that. You know, we've been moving everything forward as is important, but we're just pulling back on some and prioritizing others as one example. And also within our CERT program, we look at the projects that we might be co-funding. Again, most of these were just supplying the ingredient, but if there are any that we're co-funding, that there's a market opportunity for those.

Okay, got it. That does it for us.

We'll take the rest of our questions offline. Thank you. Thanks, Destiny. Your next question is from the line of

Do you have Van Sunderen with B. Reilly? Please go ahead.

Yes, hi. Thanks for taking my questions. First, I want to wish Kevin well. Maybe you can just update us on plans. I know we've talked about this before in the past, but plans to introduce another NAD increasing product and maybe timeline around that.

a new product.

And we have, as you know, invested quite a bit in that process. There really isn't a company in the world that understands NAD the way Chromadex does. There are a lot of companies that pretend to or try to steal the product. But there's really only one company that actually has this kind of patent portfolio and level this scientific expertise That's Chromadex. And these other molecules like NAR and RH, we are going, we are developing plans to commercialize them, but we have not announced them and we haven't yet given a timeline to. I've only said that it is important and that it is, we recognize that it's important. And I think it's what's implied when we say we're investing in R&D with an ROI, that we need to do more than just learn about these molecules. We need to commercialize them. But At this time, we're not providing specific timelines or strategies.

Okay, fair enough. So just kind of stepping back from this, I mean, you know that I think you have a terrific product and amazing science behind it. However, revenue growth has been decelerating since 2018. Guidance implies further deceleration of top-line growth. Can you maybe give us a better sense of your plan to re-accelerate revenue growth? What are the specific elements of that plan? What drivers are needed to underpin that plan? And maybe over what time frame you're thinking about re-accelerating growth?

So one thing that's important to look at is that there's a BD, a business development, business-to-business business here and a direct-to-consumer business here, two different ones. The direct-to-consumer business has steadily grown in that period that you're talking about. I don't know that we've had many quarters where we did more than 10% sequential growth as we did this quarter. And as we pointed out, it excluded that Amazon Prime really weak, which can be a very, very significant week. So our e-commerce business has been consistent and steady and is really coming off of a very, very strong growth. second quarter, and it's our expectation that that will continue. It's the B2B side that's less predictable. Deals like Walmart or Watson's or some of the other companies like Nestle to whom we supply the ingredients to. Sometimes they're steady and consistent. Sometimes they're a little bit lumpy. Obviously, the Watson's deal has been an extraordinary success for us. A of the ingredient partnerships have also been terrific successes and some of the others have been sort of hits and misses but i could see us doing a few more of those types of deals where we supply the ingredient carefully to partners that market it aggressively and help support the messaging in that case the brand would be niagen not true niagen but i think part of the growth is to spread the marketing commitment amongst a few other companies, not just us, to get the word out. I also think that some of these international expansion opportunities are pretty significant. I don't want to count the money until we receive it, but we do have very, very high hopes for our relationships in China. You know, we commissioned a study last quarter estimating the size of the NAD market in China. We think the NAD market in China is more than $700 million, the current market, of ingredients that are inferior to niagen but are selling like they are niagen. And it's just many, many, many people telling the story, and that's one of the reasons why we partnered with Sinopharm. And then there are other opportunities with the molecule itself. It's not just the steady increase in awareness and growth of our e-commerce channels and perhaps other, you know, perhaps retail channels, but it's also there are other ways to provide Niagen to consumers, not just dietary supplements. There are foods and perhaps at some point drug indications and other ways to deliver it. So we are exploring those and we understand that that value is here at this company. When you control molecules like we have with the amount of science behind it and the efficacy that we're showing and the amount of research there, Just selling it as a dietary supplement is probably limiting it. It's probably much bigger than that. And you know many of the indications that we've already seen positive either preclinical and in some cases actually clinical studies. You've seen cocaines, you've seen COVID, you've seen Parkinson's, you've seen neuropathy, you've seen ALS, neurological in general, muscle health. I mean, there are many indications where a nicotinamide riboside might provide some sort of therapeutic or prophylactic value or some complementary value to an existing drug. So these are significant growth opportunities down the road for us while we continue to develop this core business of an e-commerce-based dietary supplement business that targets aging using NAD and develops a product line of Niagen-specific dietary supplements.

All right.

Thanks, and best of luck.

Thanks a lot.

Thanks, Jeff.

You know, just as an added point to that last point, you know, as I've mentioned the importance of the intellectual property and the science behind nicotinamide riboside, and there are companies who have challenged our intellectual property or who have made claims as though their product replicates NAD elevation the way Niagen does. There was a ruling from the patent office today of one of these companies that has challenged the 807 patents that we possess on nicotinamide riboside. And that challenge was made by a company called Thorne, and the patent office ruled against Thorne just today. and in favor of Chromadex and that 807 patent, which we consider to be an important decision and important ruling for further solidifying the intellectual property that Chromadex possesses.

This concludes the Q&A portion of today's call. I would like to turn the call back to Heather Van Blarkum for any closing remarks.

Thank you, Dennis. 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 412-6168. Thank you, everyone, for joining us today and for your continued support of Chromadex.

This does conclude today's call. You may now disconnect.