ChromaDex Corporation (NASDAQ:CDXC) Q4 2022 Earnings Call Transcript

ChromaDex Corporation (NASDAQ:CDXC) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation’s Fourth Quarter 2022 Earnings Conference Call. My name is Julian, 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 fourth quarter of 2022. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex’ website at www.chromadex.com. I would now like to turn the conference call over to Tom Shumaker, LifeSci Advisors, Agency IR Counsel for ChromaDex. Please go ahead Mr. Shumaker.

Tom Shumaker: Thank you. Good afternoon and welcome to ChromaDex Corporation’s fourth quarter 2022 results investor call. With us today are ChromaDex’s Chief Executive Officer, Rob Fried; Chief Financial Officer, Brianna Gerber; and Senior Vice President of Scientific and Regulatory Affairs, Dr. Andrew Shao, who will join the call for Q&A. Today’s conference may include forward-looking statements, including statements related to ChromaDex’s research and development and clinical trial plans, and the timing and results of such trials; the timing of future regulatory filings; the expansion of the sale of Tru Niagen in new markets; business development opportunities; future financial results; cash needs; operating performance; investor interest; 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 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 annual report on Form 10-K 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 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, presents 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 my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Rob?

Rob Fried: Thank you, Tom. Good afternoon everyone, and thank you very much for joining us on our investor call today. It’s good to be with you again. I’m pleased to report that we delivered our best ever quarterly revenue in the fourth quarter of 2022, $21 million, up 18% year-over-year and 23% sequentially. Furthermore, as promised, we achieved positive adjusted EBITDA, defined as EBITDA without share-based compensation and severance, of approximately $400,000 for the quarter. We believe it is important for enterprises to prioritize profitability as well as growth at all times, but given today’s challenging macroeconomic environment, frugality is particularly important. We have a trusted quality brand in Tru Niagen and a portfolio of protected NAD precursors, especially Niagen that can endure turbulent times.

The Tru Niagen brand is based on strong science and in truth. It is the safest, most researched, indeed the best product in the fast growing NAD marketplace. On our last earnings call, we briefed the market on major events that occurred in the fourth quarter reporting period, including the signing of an amended long-term supply agreement with Nestle Health Science, which expanded their rights to sell Niagen in multi-ingredient formulations and included a $2 million upfront purchase. We also formed a ChromaDex Asia joint venture, our operating entity in China that is working with Sinopharm Xingsha that broadened the Tru Niagen’s penetration in the region. Alongside these two major events, Nestle and our existing strategic investors collectively invested $7.7 million net of fees into ChromaDex and we are very grateful for this vote of confidence.

We ended the year with over $20 million in cash and no debt. Brianna will provide detailed financials shortly, but in the second half of the year, which coincided with her promotion to CFO, we have dramatically improved our management of operating expenses and this discipline will continue in 2023. Fourth quarter selling and marketing as a percent of net sales was down to approximately 30% as compared to approximately 49% in the year ago period. Legal expense was significantly lower, a trend that was evident throughout the year as well. As we’ve said, the litigation is largely behind us and we continue to build upon and protect our extensive long-term intellectual property portfolio, which was noted in my letter to shareholders last month. G&A in the fourth quarter was also down approximately $500,000 year-over-year.

In that shareholder letter, I cited a series of new critical patents that we were able to obtain last year, which in combination with existing IP and patents from W.R. Grace, who supplies NR to ChromaDex exclusively. We expect to protect NR for at least the next 10 years. Two of ChromaDex’ recently granted patents protect methods of making NR and various salt forms. Third recently granted patent covers a crystal form of NR methanolate chloride, NRMCl, while a previously granted patent in 2018, covers a crystal form of NR triacetate chloride, NRT. NRMCl and NRT are important intermediates in the production of the final ingredient NR Chloride. Despite these important financial and strategic improvements, our primary objective has not changed to keep building and growing our trusted global brand, Tru Niagen.

We do got some challenges in the fourth quarter. There was a decline in our direct website sales in part due to scaling back our acquisition spend. We are addressing this by revamping our website design and functionality and by optimizing our customer acquisition strategy. We were also impacted by an inaccurate press release from a university attempting to associate NR with cancer. This research article is in the top 5% of articles of its kind due to the media coverage resulting from the misleading and sensationalist university press release. This according to an Altmetric rating that measures attention for published studies, but I am quite proud of how the ChromaDex team responded to this misleading piece of PR. The ChromaDex employees and the Scientific Advisory Board responded quickly by emphasizing the large body of scientific research that shows no such correlation.

We also appreciated the widespread support from the research community, including one of the study’s very own authors, who publicly denounced the university’s coverage of this study as clickbait. In fact, the majority of the data shows that NR may be cancer preventative. Numerous published studies of NR at high dose levels have also shown it to be safe, along with studies on the safety of vitamin D3 in general over the past 70 years. An important Tru Niagen’s sales highlight was Watson’s where revenues in the fourth quarter were up over 50% year-over-year, and we are quite optimistic, but we’ll see more consistent sales from Watson’s now that China has ended its zero COVID policy. Brianna will provide a full year 2023 revenue growth outlook that is appropriately conservative in the challenging macro environment.

However, as I look at the landscape of upside potential, there is a realistic possibility that we could see significantly greater growth this year. Innovations that we have worked on for years are close to commercialization and we could see additional upside from new partners, new channels and new products, and we have several additional opportunities for growth. First, we have planned a significant brand awareness event scheduled for this month. This event might have an impact on EBITDA in this first quarter, but we expect that to pay off significantly during the year. We also believe that the FDA’s recent decision to ban the marketing and sale of NMN will benefit Tru Niagen. With the FDA’s decision, NMN cannot legally be sold or marketed as a dietary supplement in the U.S. since it was first investigated as a drug.

Niagen is superior to NMN as an NAD precursor, but NMN has recently gained traction, although no primary dietary supplement companies of which we are aware are selling NMN in the U.S. There are a large number of smaller players. But according to a study conducted by ChromaDex and republished by ConsumerLab.com, less than 40% of NMN sold on Amazon was accurately labeled and many NMN products had no NMN at all. Just to be clear, this FDA decision to ban NMN does not apply to our proprietary ingredient, nicotinamide riboside, or NR, patented Niagen. Speaking of the science behind Niagen, our cumulative body of research is truly remarkable. When I joined the company as an executive nearly six years ago, there was impressive preclinical data, but until you have the results of clinical studies, it is hard to assess the value of an ingredient like Niagen.

Results of now 24 peer-reviewed published clinical studies have exceeded our expectations and proving that this is indeed a special ingredient. Speaking of SERP, it’s subjected as not a link to support health benefit claims for our consumer product, but more broadly, it is to advance our understanding of this ingredient with potential applications beyond the supplement industry. As an example, we understand mechanistically that NR reduces systemic inflammation, it penetrates the blood-brain barrier and reduces inflammation in the cerebral spinal fluid. And as such, we are excited but not surprised when we see positive results of NR supplementation for patients with important neurological disorders. Recently, a clinical study published in the peer-reviewed journal Aging Cell found that NR oral supplementation significantly increased NAD+ levels in the brain and positively impacted neurodegenerative biomarkers.

Studies like this as well as the more than 40 ongoing studies that largely focus on disease states highlight the value of the deep intellectual property portfolio and scientific expertise at ChromaDex, which is largely untapped today. I do not know of another dietary supplement company that has an innovation pipeline of next-generation NAD precursors that may have significant therapeutic or prophylactic value in the pharmaceutical arena, as does ChromaDex. I would now like to turn the call over to Brianna to discuss the quarter’s results in more detail and then onto Q&A and closing remarks. Thank you for your attention. Brianna it’s all yours.

Brianna Gerber: Thank you, Rob. It’s a pleasure to speak to our investors, partners and employees, who have joined us today. ChromaDex delivered on our latest full year 2022 financial outlook to investors across all metrics, and we exceeded our targeted reduction in G&A expense. For the full year we delivered total net sales of $72 million, a 7% year-over-year increase, including 8% growth in E-commerce. Gross margins of 59.4% reflecting the strength of our business model as we navigated significant inflationary pressures across global supply chains. Selling and marketing expense down approximately 270 basis points as a percentage of net sales. An increase in R&D expense of $1 million. And a decrease in general and administrative expense of $8.1 million year-over-year better than our outlook of a $6 million to $8 million decline.

The underlying business as measured by adjusted EBITDA, a non-GAAP metric, posted a full year loss of $10 million compared to a loss of $18.9 million for full year 2021. We have provided a reconciliation to the appropriate GAAP measure in our earnings release slide. Going forward, we have decided to discontinue providing adjusted EBITDA, excluding total legal expense as we believe adjusted EBITDA is the more suitable metric to assess our current underlying performance. To underscore this, we delivered positive adjusted EBITDA of $0.4 million in the fourth quarter, a significant milestone for the company. Balanced growth remains an important objective, and our results stand as a testament to our amazing ChromaDex team who have committed to looking at our business differently.

Moving forward, we have initiatives underway to continue to optimize the business, which will have a larger lasting impact in 2024 and beyond. With that, let’s turn to the fourth quarter of 2022 financials. ChromaDex delivered a solid quarter with total net sales of $21 million up 18% year-over-year, the gross margin of 57.2% and selling a marketing expense of 29.5% of net sales, a significant improvement from 48.7% of net sales in the prior year quarter. The underlying business as measured by adjusted EBITDA, a non-GAAP metrics, posted a profit of $0.4 million in the fourth quarter, an improvement of $3.8 million from the prior year quarter. Moving to the P&L details, as I said, total net sales were up 18% year-over-year compared to the fourth quarter of 2021, with 14% growth in Tru Niagen including flat sales in E-commerce, and 67% growth in combined Watsons and other B2B sales.

Watsons’ sales were driven by timing due to a catch up in shipment from earlier quarters. They have also seen recent improvement in sell through as COVID-19 restrictions have been listed in Hong Kong as well as China, encouraging the return of some tourism. As I mentioned last quarter, China cross-border sales that were previously captured in E-commerce are now captured in Tru Niagen other B2B sales due to our wholesale agreement with Sinopharm versus direct sales model on these platforms previously. Niagen ingredient net sales were up 53% year-over-year, largely due to an upfront minimum purchase of $2 million from Nestlé Health Science, as part of the newly amended supply agreement. Gross margins declined by 400 basis points to 57.2% compared to 61.2% in the fourth quarter of 2021.

The decline in gross margin percentage is attributable to increases in supply chain headcounts, including higher wages and other inflationary pressures across the supply chain, as well as business mix, which was more pronounced in the fourth quarter. In 2023, we anticipate trending closer to the full year 2022 gross margin as business mix normalizes, but we are still contending with inflationary pressures that impact our P&L with a lag. Selling and marketing expense as a percentage of net sales declined 1,920 basis points to 29.5% compared to 48.7% in the fourth quarter of 2021, as we 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 third quarter of 2022.

In the fourth quarter, our customer acquisition costs or CPA declined by 40% year-over-year. As reported, general and administrative expense decreased by $0.5 million, primarily due to lower legal expense of $0.4 million. Finally, our operating loss improved by $3.9 million year-over-year as higher sales and initiatives to optimize our spending across the organization were partially offset by lower growth margin and investments in R&D. Moving to the balance sheet and cash flow, our balance sheet remained strong. We ended the quarter with $20.4 million in cash. In October, we raised $7.7 million net of offering costs, with a new investor, Nestlé Health Science, and existing strategic investors in two separate transactions. We did not access our committed line of credit.

In the fourth quarter of 2022 our net cash used in operations was only $0.3 million versus a $4.9 million use of cash in the fourth quarter of 2021. The difference this quarter was primarily driven by a lower net loss, a decrease in inventory, and increase in accounts payable due to timing of payments to our vendors, partially offset by an increase in accounts receivable due to timing of orders and collections from our B2B customers, including the $2 million upfront minimum purchase from Nestlé and higher purchases from Watsons. We collected cash from these customers in the first quarter of 2023. We’ve provided details on key P&L metrics for our 2023 full year outlook in our earnings press release along with the slide presentation. As it relates to full year 2023 net sales, we expect at least 10% growth year-over-year with a realistic possibility of significantly greater growth.

In light of the uncertain macroeconomic environment we are taking a conservative approach and only considering recurring steady revenue growth from our E-commerce business and established partnerships. As Rob said, we see potential upside from new partnerships, channels, and products in the pipeline. We anticipate that our gross margin will remain stable year-over-year as cost savings initiatives on over all scale are expected to largely offset inflationary pressures. Further, we expect that selling and marketing expense will continue to decline as a percentage of net sales on a full year basis as we pursue new focused customer acquisition strategies and further optimization. Deep quarterly volatility driven by the timing of targeted brand awareness campaigns like the one Rob mentioned in the first quarter.

We expect that R&D will be up year-over-year as we invest in new NAD precursor development related to our recently granted patents, as well as other innovation to drive future growth. Finally, we expect that reported G&A will be down $2 million to $3 million, driven by a reduction in severance and restructuring expense, lower share-based compensation driven by a reduction in executive headcount and a reduction in other general expenses as we optimize all areas of our cost structure. We recognize that disciplined expense management is only half of the equation to achieve sustainable profitability, the other half is growth. We are confident in a stable level of growth based on our existing business infrastructure, but we plan to make measured investments in growth this year.

As Rob mentioned, we have one such brand building investment this month. The full expense for this event will be recognized in the current quarter with sales upside that is realized over the next few quarters. Overall, we expect to be close to adjusted EBITDA break-even or better each quarter in 2023, with the exception of the first quarter due to this brand building investment. In summary, we’ve made meaningful progress in the last six months. We delivered on our immediate business and financial objectives, and positioned the company for success in 2023. We are planning conservatively, but have many reasons to be optimistic based on initiatives and partnerships already in the pipeline. I’m incredibly proud of the ChromaDex team for their efforts to bring Tru Niagena to market to date, and I’m encouraged by our renewed focus on operational efficiency as we pursue growth.

Rob and I look forward to leading the company through the transition to a leaner and more focused organization that is positioned for continued innovation-driven growth and profitability. Operator, we are now ready to take questions.

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Q&A Session

Operator: Thank you. Our first question comes from Mitch Pinheiro from Sturdivant. Please go ahead. Your line is open.

Mitch Pinheiro: Hey good afternoon.

Andrew Shao: Hi, Mitch.

Mitch Pinheiro: Hey, so I just want to your e-commerce business was flat year-over-year, and I just, you talked about it in your remarks, Rob and I was just curious if you could dive a little deeper into what was going on in e-commerce in the fourth quarter, and how it’s looked so far in the beginning of this year?

Rob Fried: Well, first we were affected by that cancer press release, so we did notice an impact in conversions and in subscribers, but it seems to have recovered, it only lasted about six weeks. But I would say that overall there for the €“ at least the website business during the last year, maybe year and a half, there’s been an inefficiency in our conversion rate and in our marketing spend. So, we’ve pulled back. We’re seeing a much greater efficiency now, but we’re not really hitting the gas pedal yet until we see a meaningful and stable improvement on return on ad spend, like we’ve seen in other parts of the business. We don’t €“ it’s definitely not an indication of demand. It’s just basic blocking and tackling. And yes, it looks a little better already.

Mitch Pinheiro: And so it just on the conversion side, what led to the inefficient conversions? What type of things either weren’t happening for you? Or is it just marketing messages were off?

Rob Fried: Nope, I don’t think it was about marketing messaging. I think we made the decision to outsource some of the basic functionality in that business and the enterprise to whom we had outsourced didn’t have sufficient resources to do it. So the basic blocking and tackling of running an efficient basic e-commerce site dipped. There’s landing pages, there’s creative, there’s AB testing, there’s optimization, there’s retention, there’s the process that we’ve generally been pretty good at, but we have not been very good at for the last, I would say year, maybe year and a half, although we’ve made some changes and I see improvements already, and my expectation is that we’ll see dramatic improvements this year.

Mitch Pinheiro: Okay. And then sort of just a follow-up just the with 10% revenue growth as the sort of the bottom end of the range, are you €“ and I did hear your comments regarding your adjusted EBITDA being positive in the, I guess the final three quarters. Are you going to be able €“ at a 10% revenue level, can you get to adjusted EBITDA breakeven or better for the full year? Or do you need a little bit of help from the potential upside?

Rob Fried: The answer to that is it depends on certain costs that are unknown right now for example. We have prepared for litigation costs for during this year that may be unnecessary, are likely to be unnecessary, and in the event that we do not invest in those litigation costs or royalty expenditures on certain patents, then yes, we get to EBITDA positive even at a 10% growth rate. There are other potential savings that we could see that would get us there, but you’re probably right. If we fully load all the costs, we probably have to do a little bit better than 10%.

Mitch Pinheiro: All right. Well thanks for the questions. I’ll get back in the queue.

Andrew Shao: Sure.

Operator: Our next question comes from Jeff Van Sinderen from B. Riley. Please call ahead. Your line is open.

Jeff Van Sinderen: Hi everyone. So Rob, I’m wondering if you can speak a little bit more about the new patents who’ve been awarded, the significance of those, and how that IP can be incorporated into your products? Maybe give us a sense of the new product pipeline and timeframe.