Hello everyone.  Now that we have begun bringing in the WeFunder investors, I’ll be moving to a longer-form quarterly results update.  I’ll start with a framing of the major efforts of the trailing quarter and a discussion of the business, then the financial facts and then a preview of the upcoming quarter.

 Q3 Major Themes:

* WeFunder investment

* Manufacturing challenges

* Moving towards profitability

 

 WeFunder 

Obviously a major focus in Q3 was the effort to raise capital from WeFunder.  Broadly, this effort has been a solid effort with to-date just over $500k committed to the funding. While this amount does not give us the room to push hard on new product development, it does give us the capital to wrap up our manufacturing challenges (more on this later) and begin our scale into profitability.  Which is nice.  We now plan on closing the WeFunder round in the next three weeks - and we understand that a hard deadline tends to bring in a bit more cash.  So we expect to be able to fund two new products in the next quarter (more on this later as well).  All-in a great experience and I, personally, am delighted with the human beings who have chosen to join our efforts.

 Manufacturing challenges

By far the biggest challenge this last quarter was manufacturing.  The combination of a complex product and limited capital has had us walking a tightrope around making product orders big enough to meet growing demand and small enough to not tap our cash.  We’ve been watching this risk area for a while and beginning in mid-August we started to feel the pain.  Through much of Q3 and though October we’ve been on and off back-order and have substantially reduced advertising as we’ve struggled to keep supply flowing.  The net result has been significant friction on revenues — with Q3 coming in at just under flat to Q2.   In response, we ultimately decided to take a larger portion of our supply-chain in house with direct relations with raw material vendors and higher redundancy in manufacturing.  This has been a major distraction, but we feel that we have the problem now in hand and expect to resume normal advertising volume and marketing activity to re-build our sales and customer base in early November.

 

Path to profitability

Fortunately, if a manufacturing curveball had to come, it came at a good time because our originally intended focus during the quarter was to move away from revenues to what we are calling “profit contribution” (gross revenues net of both COGS and customer acquisition expense) as we mature the business model.  As a consequence, Q3 was the subject of a lot of experimentation around the business model and we think we have dialed it in: by the end of September we had been able to move the revenue mix strongly towards subscribers. 

Specifically, the percentage of new customer choosing to subscribe moved from 38% to 56%.  As a result, when we compare September to October, this shows up as 861 new subscribers in October vs. 560 new subscribers in September --- an increase of 54% and we did this while spending 15% less money on ads. Historically, the lifetime revenues of subscribers acquired in 2016 has been over $600 which is a solid 4.5X of a one-time customer.  This kind of shift is decisive.  

In addition to the move towards profitability, other initiatives in the quarter include launching Qualia on Amazon, launching our podcast Collective Insights (with over 10,000 downloads and a five-star rating on iTunes), and shifts in our advertising mix and focus.  

The net of all of these efforts was that even as revenues fell by 3% compared to Q2, profit contribution rose by 37% and net loss fell by 23%.  Even with our feet mired in manufacturing mud, we managed to make significant progress towards our goal of profitability.  While we don’t yet have enough data to know whether the great results of the new model will continue, we are optimistic and if Q4 results follow this trend, the road to profitability is clear. 


 Q3 Financial Details

     Revenues

       Q2: $1,387k

       Q3: $1,335k

 
     Profit Contribution

       Q2: $304,872

       Q3: $419,073

     Operating Income

       Q2: -$425,039

       Q3: -$327,264

      Cash and available credit at close of Q3: $427,000

Looking to Q4

Our Q4 plan is pretty simple.  First priority is to accelerate into the new business model now that the combination of our new supply chain and our WeFunder capital has removed barriers to scale.  Our current operating plan is to get to positive net income (profitability) by the end of Q1, 2018 simply by executing on the model and mix that we have established.  While the books haven’t closed on October yet, we expect the revenue results of this last month to be ugly as the last and hardest portion of the manufacturing challenge hit the business - but we will begin pushing hard again on advertising and marketing under the new model in November and December and we expect to be able to make up lost ground.  

Second priority is product.  In October, we launched a 21-day study of consumer response among 150 tests users of a new version of our flagship Qualia product. The new product (codenamed “one step”) is targeted at a lower price point and a less daunting user experience (fewer pills and ingredients) - while maintaining or even improving on the level of quality and performance of the NHC brand.  If the results of this study prove out what we have seen so far, we expect to bring the new product to market quickly - likely seeing first sales in Q1 of 2018.  

In addition, we are now actively working with the collective to fill our product pipeline with a variety of formulations in the nootropic category as well as other areas in the broader neurohacker space.  It remains to be seen how effectively we can test and bring these formulations to market with current resources, but from where we sit right now, our ability to deliver on our purpose of using applied complexity to improve human well-being is going to be decidedly upgraded in 2018.  

 

Special note to WeFunder investors

As mentioned at the opening, we expect to close the WeFunder in the next three weeks and will begin issuing your perks.  With 240+ investors in so far, we likely will get overwhelmed by logistics - so please bear with us as the staff tries to match people to perk!

 

Many thanks, 

Jordan Greenhall