ChromaDex Corporation (NASDAQ:CDXC) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation’s First Quarter 2023 Earnings Conference Call. My name is Brianna and I’ll be the conference operator today. [Operator Instructions] 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 first quarter of 2023. 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 Kendall Knysch, Director of Media Relations. Please go ahead, Ms. Knysch.

Kendall Knysch: Good afternoon and welcome to ChromaDex Corporation’s first quarter 2023 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 call may include forward-looking statements, including statements related to ChromaDex’s research and development and clinical trial plans and the timing and results of such trials, the timing of future regulatory filings, the expansion of the sale of Tru Niagen in new markets, business development opportunities, future financial results, cash needs, operating performance, investor interest and business prospects and opportunities, as well as anticipated results of 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 quarterly reports on Form 10-Q most recently filed with the SEC, including results of operations, financial condition, cash flows, the effect of the COVID-19 pandemic as well as inflationary and adverse economic conditions on our business.

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 is now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Rob Fried : Thanks, Kendall. Good afternoon, everyone, and thank you for joining us on today’s investor call. I’m pleased to report that we had a strong start to 2023. We achieved $22.6 million in revenue, a 31% increase year-over-year. And we generated positive operating cash flows while remaining adjusted EBITDA breakeven. We ended the quarter with $23 million in cash and no debt. These achievements reflect our commitment to maintaining fiscal discipline and driving sustainable growth for our business. We’re confident in opportunities for greater future growth, having achieved record-breaking results in these past 2 consecutive quarters. Our e-commerce business remains our largest and most consistent source of revenue. E-commerce net revenue was up 12% year-over-year, with the contribution from the large brand-building event that we mentioned on our last call.

On March 13, we had prominent placement on the homepage of Amazon across the U.S. and a large-scale brand awareness campaign that Amazon refers to as its homepage takeover. On the day of the event, we achieved our highest sales on Amazon in a single day with over 130 million brand impressions according to Amazon and a significant increase in new-to-brand purchases. We continued retargeting consumers who searched our Tru Niagen brand into the second quarter. And as a result, we expect to see some efficiencies in our e-commerce advertising moving forward through 2023, although the first quarter was impacted by this large upfront investment. We should also benefit from reorders in future quarters. As it relates to our own website, we made some changes to our internal personnel in the first quarter as well as with external agency partners more recently.

We were encouraged by observed improvement in leading indicators in the first quarter and stronger growth in new customers. We believe this bodes well for future quarters. But as with any transition, it takes some time for the impact of changes in strategy to be reflected in net revenues. Meanwhile, we have significantly reduced spend on search and social as we revamp our campaigns and website landing pages. This quarter, we continued to strengthen existing partnerships and developed some new partnerships. We notably delivered a 245% increase in Niagen ingredient sales year-over-year, including very solid contributions from longtime partner Life Extension as well as more recent partners like H&H. I continue to be impressed by H&H product launches featuring Niagen in Australia, China, and other regions as part of their Swiss innovation portfolio.

Additionally, Life Extension’s recent expansion into a specialty retail distribution model is promising for growth. And finally, we continue to work with Nestle to support their development of new products with Niagen. We expect the first of these to launch later this year. In China, our partner, Sinopharm, is actively building the Tru Niagen cross-border business across multiple distribution channels, following the transition of our Tmall and JD.com platforms to their management at a local level late last year. This has shifted our revenues from China cross-border within e-commerce to wholesale to Sinopharm. Encouragingly, as China reopens its borders, we anticipate a benefit to both Sinopharm’s cross-border business as well as Watsons’ Hong Kong retail business for Tru Niagen.

We had a very strong first quarter sales to Watsons at $3.7 million, a portion of which was due to timing of shipments, which will be lighter in the second quarter. We extended our agreement with Watsons in Hong Kong and Macau this quarter and Singapore and are excited to build on the strong foundation they have established for Tru Niagen in those markets. We’ve been working even more closely with them on marketing co-investments, which includes TV and social campaigns with influencers in Hong Kong. We’re also helping them to refine the brand messaging so that their loyal consumers continue to understand the benefits of combining Tru Niagen Beauty and the soon to be launched Tru Niagen Immune with our core Tru Niagen product. Overall, we believe that Tru Niagen’s premium position in the marketplace as the highest quality trusted brand enables us to unlock significantly greater growth, particularly in light of the FDA’s ban on sale of NMN as a supplement in the U.S. Several retailers, including Amazon, have voluntarily withdrawn these products and are no longer selling NMN.

The companies still promoting NMN are doing a general disservice. Even David Sinclair, the primary promoter of NMN has acknowledged in his research that NMN breaks down into NR before being used by the body. He has also expressed concern about the presence of endotoxins in some NMN products. And our own study showed that 60% of the NMN products on Amazon, prior to the FDA’s ban, were mislabeled or had virtually no NMN. In contrast, Niagen, the ingredient in Tru Niagen is third-party tested, has extensive safety data, the proper regulatory notifications, is a more efficient precursor than NMN, and is available legally today for consumers who want to elevate NAD levels. We believe that many customers who purchased NMN did so in anticipation of future demand.

And they still have a supply. Accordingly, transitioning them to Niagen may take more time. While we see positive early indications of this shift in the market, it is still too early to estimate the impact on our business this year. And as such, we are not building it into our revenue outlook. But we clearly see the potential longer term to capture this business since the consumers already understand the importance of elevating NAD through supplementation. Just to be clear, as I said last quarter, the FDA decision to ban NMN does not apply to our proprietary ingredient, nicotinamide riboside, NR, patented Niagen. Looking ahead, ChromaDex is in our strongest financial position to date. And we are building momentum on the top and bottom line, which will enable us to invest in innovation that will unlock new commercial opportunities.

We have made great strides and progress in our innovation pipeline. And I’m increasingly confident in the growth opportunities that lie ahead in 2023. As we continue to set the stage for ChromaDex’s growth, I want to remind everyone that we are building the Niagen brand based on a strong scientific foundation while delivering the highest quality NAD product in the marketplace. We are currently preparing to reflect on the 10th anniversary of ChromaDex’s External Research Program or CERP. Looking back these past 10 years, it’s inspiring to see how far our science has advanced from the time CERP was in its infancy in 2013. And all studies were preclinical to today with the majority of new collaborations are for clinical studies. Importantly, research has shown that the health benefits from Niagen translate from preclinical models to clinical studies with remarkable consistency in health areas such as brain, heart, and muscle health.

Some of the notable conditions of study include brain health with a focus on Parkinson’s disease, Alzheimer’s disease, and the orphan disease ataxia. There have been over 15 published preclinical and clinical studies with nearly 10 ongoing clinical studies, also heart health, including studies on heart failure and hypertension. There have been over 10 published preclinical and clinical studies along with 2 ongoing clinical studies. And also muscle health with 10 published preclinical and clinical studies as well as 2 ongoing clinical studies. We’re looking forward to the next 10 years. Our primary efforts are to help validate whether and to what extent observed benefits from in vitro and in vivo preclinical studies are translatable to Phase 1, 2 and 3 clinical studies.

We believe through CERP, we will see the translation of early preclinical findings for Niagen as well as our intellectual property on other emerging health areas such as sensory, including neuropathy, age-related hearing, vision and olfactory decline, reproductive health, and infant development into clinical studies. We understand that CDXC is both a consumer product company as well as the bioscience R&D Company. And we are exploring opportunities to unlock the value of our extensive IP and scientific research assets. In addition, as mentioned on our last call, we 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, we continue to expect to protect our NR IP for at least the next 10 years.

With these patents secured, we continue to seek new innovations as well as innovations we have worked on for years. We are increasingly close to commercialization, including expanding our portfolio beyond supplements. While not an immediate business driver, we also have untapped potential in NAD precursors beyond NR, which are protected by a deep intellectual property portfolio. ChromaDex also possesses unique knowledge of the process and synthetic chemistry behind these NAD precursors, which leads us to believe, there may has significant prophylactic and therapeutic value in the pharmaceutical space. Beyond diet and exercise, elevating NAD levels through supplementation is one of the most important things people can do to improve the way they age.

Our team at ChromaDex is passionate about bringing Tru Niagen to consumers around the world. We believe the best way to build a trusted brand is to be trustworthy. As a result, we have a loyal following of true believers as well as world-class partners who have chosen to be on this journey with us. We expect to announce exciting new distribution channels and new product offerings soon. Some of these are years in the making because of this unwavering commitment to quality and to trust, which takes patience, but we believe is a more enduring business model. We look forward to sharing more in future updates. And I would like to now turn the call over to Brianna to discuss this quarter’s results in greater detail, and then on to Q&A and closing remarks.

Brianna?

Brianna Gerber: Thank you, Rob. It’s a pleasure to speak to our investors, partners, and employees who have joined us today. ChromaDex delivered strong results in the first quarter with total net sales of $22.6 million, up 31% year-over-year, gross margin of 59.9%, and a reduction in overall operating expenses of $2.8 million year-over-year, in line with our objective of maintaining operational discipline. In the last reporting period, we shared our full year 2023 outlook, expecting to be close to adjusted EBITDA breakeven or better following the first quarter of 2023. I am proud to announce that we exceeded expectations with an adjusted EBITDA loss of only $69,000 in the first quarter, an improvement of $4.4 million year-over-year.

Furthermore, we delivered positive cash flows from operations of $2.8 million, a notable improvement of approximately $10 million year-over-year. The strong performance this quarter was a result of continued growth in our e-commerce business, including the Amazon homepage takeover event that Rob mentioned as well as increased sales to key partners, including Watsons and Niagen ingredient partners. Furthermore, we continue to execute on operational efficiency initiatives across the organization, which contributed to solid bottom line performance. These achievements would not have been possible without the collaborative efforts of our entire ChromaDex team as we diligently balanced our investments in strategic growth initiatives, coupled with disciplined expense management.

Our primary focus in 2023 is to position the business for sustainable growth and profitability. And we are very encouraged by the execution this quarter. With that, let’s turn to the first quarter financials in more detail. As I said, total net sales in the first quarter of 2023 were up 31% year-over-year as compared to the first quarter of 2022, with an 18% increase in Tru Niagen, driven by 12% growth in e-commerce sales and 36% growth in combined Watsons and other B2B sales. Watson sales were up $1.1 million year-over-year, partially due to timing with modest growth from our other partners. The growth in our e-commerce business this quarter is partially connected to the Amazon homepage takeover event that occurred in mid-March. On the day of the event, we observed spikes in both unique visitors and shoppers on our Amazon channel, which can be attributed to the over 130 million brand impressions generated by the event.

In addition, we received access to data and sales funnel analytics related to these unique visitors, which allowed us to follow up with second chance offers and additional retargeting initiatives. Separately, we are seeing bright spots on our own website with the majority of leading indicators up sequentially, including organic search. The sales trend has yet to inflect, but these are encouraging signs of improvement. Another important driver in our first quarter results was Niagen ingredient sales, which grew 245% or $2.8 million year-over-year. This was fueled by the development of a new partnership and the strengthening of existing partnerships as their recent launches began to accelerate and they expanded into new markets. Going forward, our discussions about partnerships will focus on recurring stable business rather than new and less predictable business until we observe a successful ramp.

As such, we look forward to sharing more about our new partnerships and future updates. Gross margins decreased by 110 basis points to 59.9% compared to 61% in the first quarter of 2022. The lower gross margin was primarily driven by changes in our business mix as e-commerce sales accounted for only 54% of our total net sales in the current quarter compared to 63% in the prior year quarter. In addition, we experienced modest continued inflationary pressures, which we are working to offset through our cost savings initiatives. Selling and marketing expense as a percentage of net sales decreased to 34.9% compared to 47.7% in the first quarter of 2022. As a result of our continued focus on the most efficient distribution channels and marketing campaigns in the first quarter, our cost per customer acquisition or CPA decreased by over 40% year-over-year, with decreases in both our own website and Amazon.

The CPA calculation accounts for the full investment of the Amazon homepage takeover in March. Benefits from which are expected to yield results beyond just this quarter. In addition, our CPA improved by 20% sequentially for our own website as we focused on acquiring new customers efficiently. As reported, general and administrative expense was lower by $2.5 million, mainly due to lower legal expense of $1.5 million as well as lower executive headcount and related expenses, including share-based compensation and severance. For the first quarter of 2023, our operating loss was $2 million versus a $7.7 million loss in the first quarter of 2022. The net loss attributable to common stockholders for the first quarter of 2023 was $1.9 million or a loss of $0.03 per share as compared to a net loss of $7.7 million or a loss of $0.11 per share for the first quarter of 2022, marking a significant improvement.

Moving to the balance sheet and cash flow. Our balance sheet remains strong. We ended the quarter with $23.1 million in cash and did not borrow on our line of credit. In the first quarter of 2023, net cash provided by operations was $2.8 million versus a $7.2 million use of cash in the first quarter of 2022. The difference year-over-year was primarily driven by improvements in our net loss of $5.8 million, paired with better cash flow management related to our inventory, which was an inflow of $2.8 million in the first quarter of 2023 versus a cash outflow of $1.7 million in the first quarter of 2022, a positive $4.5 million impact to cash. Our improved cash flow related to inventory was a result of stronger sell-through of Tru Niagen through our e-commerce channels and to key partners, higher volume of Niagen ingredient sales and more efficient production management, particularly in regard to newer partnerships.

As it relates to our 2023 full year outlook, we have provided details on the key P&L metrics in our earnings press release, along with the slide presentation. Overall, all key metrics remain unchanged from last quarter’s outlook with the exception of G&A expense, which we now expect to be down $1 million to $2 million versus our previous guidance of down $2 million to $3 million. And we’ve raised the low end of our revenue outlook. We continue to take a conservative approach to our top line outlook, but now expect at least 12.5% growth year-over-year, up from at least 10% previously. Of note, the conservative end of our outlook does not include upside from opportunities in our pipeline or the conversion of NMN customers to Tru Niagen, which Rob highlighted earlier.

Since it is still too early to estimate the 2023 impact of that major NAV market development, at least 12.5% projected growth is largely based on sustainable recurring revenues from our e-commerce business and existing partners with a slight increase based on upside realized from our newer partnerships in the first quarter. However, we still see many opportunities for significantly greater revenue growth this year, stemming from new business development initiatives, including new partners, channels, and products. As it relates to adjusted EBITDA, our focus remains on achieving sustainable profitability through strategic investments, balanced with financial discipline. We expect to be close to adjusted EBITDA breakeven each quarter. However, we may experience quarterly volatility due to the timing of sales and important R&D initiatives.

Notably, we anticipate heavier R&D investments in the second quarter. Some of which were delayed from the first quarter along with lower sales to Watsons and Niagen ingredient customers compared to the first quarter due to timing of purchases. In summary, we delivered strong performance in the first quarter and are seeing encouraging trends and opportunities in our overall business. Beyond operational efficiencies, we have many reasons to be confident in our pursuit of sustainable growth based on our internal initiatives and partnerships already in the pipeline. We realized there is still more work to do. But I am continuously impressed by the ChromaDex team and their dedication to position the company for long-term success. Operator, we are now ready to take questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Jeff Van Sinderen with B. Riley.

Operator: Your next question comes from Ram Selvaraju with H.C. Wainwright.

Operator: Your next question comes from Mitch Pinheiro with Sturdivant.

Operator: Your next question comes from Sean McGowan with ROTH MKM.

Operator: Your next question comes from JP Mark with Farmhouse Equity Research.

Operator: Your next question comes from Jeff Cohen with Ladenburg Thalmann.

Operator: We have time for one final question. Your next question comes from Matt Dhane with Tieton Capital Management.

Operator: There are no further questions at this time. I would now like to turn the call back over to Brianna Gerber.

Kendall Knysch: Thank you, Brianna. There will be a replay of this call beginning at 4:30 p.m. Pacific Time today. The replay number is 1800-770-2030 and the conference ID is 4126168. Thank you, everyone, for joining us today and for your continued support of ChromaDex.

Operator: This concludes today’s conference call. You may now disconnect.