ChromaDex Corporation (NASDAQ:CDXC) Q1 2024 Earnings Call Transcript

ChromaDex Corporation (NASDAQ:CDXC) Q1 2024 Earnings Call Transcript May 8, 2024

ChromaDex Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. And welcome to ChromaDex Corporation’s First Quarter of 2024 Earnings Conference Call. My name is Jericho and I will be the conference operator today. At this time, all participants are in 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 first quarter of 2024. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex’s Web site at www.ChromaDex.com. I would now like to turn the conference call over to Ben Shamsian, Vice President of Lytham Partners. Please go ahead, Mr. Shamsian.

Ben Shamsian: Thank you. Good afternoon. And welcome to ChromaDex Corporation’s first quarter of 2024 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, as well as global market and 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 forward-looking statements, 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 Web site, 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 Web site at www.ChromaDex.com. With that, it’s now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Rob Fried: Thank you, Ben. And good afternoon, everyone. And thank you for joining us on today’s investor call. I’m proud to announce that we delivered a solid start to 2024, delivering $22.2 million in revenue and positive adjusted EBITDA of $0.7 million. This is the fourth consecutive quarter in which we have generated positive adjusted EBITDA, which reflects our unwavering commitment to maintaining fiscal discipline while making strategic R&D investments to support innovations launching later this year. In the first quarter, we generated net positive operating cash flow and ended the Q1 with $27.6 million in cash and no debt. Our e-commerce business continues to be our largest and most reliable source of revenue. e-commerce sales for the first quarter were up 5% year-over-year as our marketing team continues to focus initiatives and campaigns that drive direct and efficient returns, and continues to implement strategies to build our own Web site as the growth engine for the business.

In the first quarter of 2023, we had invested in a brand campaign through Amazon’s homepage takeover, which drove a significant increase in new to brand purchases on Amazon. In the first quarter of 2024, absent such a large campaign, we continued to see growth in our Amazon business and continued signs of stabilization in our Web site business, providing the foundation for growth in 2024. In the first quarter, our team committed to be less focused on price promotions and to focus on initiatives to build a robust base of subscribers to drive long term customer value. While it is still too early to assess consumer behavior, we believe this is the right strategy going forward. For 2024, we’re also allocating more resources to optimize influencer marketing.

Also retention strategies, content and social media presence, which are important elements of our strategy going forward. Last month, we announced that we are partnering with two major specialty retail distributors, Sprouts Farmers Market and Vitamin Shoppe. Tru Niagen will be available in over 400 locations in Sprouts Farmers Market as the first major grocery chain to carry Tru Niagen and Tru Niagen Immune. Tru Niagen will also be available on the retail shelves of over 700 Vitamin Shoppe locations. Our new partnerships with Sprouts and Vitamin Shoppe broadens and diversifies the access of Tru Niagen to a larger health and wellness focused consumer base and aligns with our vision to help as many people as possible transform the way they age.

I am proud that the teams at ChromaDex continue to expand our network of partners who all share a passion to bringing solutions to consumers who wish to promote health span. We believe we are and have always been the gold standard of the NAD industry. With over 30 peer reviewed published human studies and over 100 published scientific studies, our ChromaDex external research program, which we call CERP, continues to be key in establishing clinical studies to explore for the numerous health benefits Niagen can have on the human body. Since our last quarterly update, a number of preclinical trials have been completed that I want to highlight. First, a recent preclinical study was designed to assess the effectiveness of liposome based delivery of NR for treating cerebral ischemia.

The study utilized liposome encapsulated NR chloride given through IV injections in healthy mice and in cerebral ischemia model mice and examined its pharmacokinetics, organ distribution and therapeutic impact between the mice models. The results demonstrated potential for NR liposomes for broader clinical application of neuroprotective agents beyond standard stroke therapy. The second preclinical study examined the impact of the combination of NR with resveratrol, the healing of diabetic ulcers caused by inflammation in a diabetic rat model. The results highlighted the potential of NR and resveratrol in accelerating wound healing. Another preclinical study investigated the causes of miscarriages, congenital malformations, particularly the role of NAD deficiency using a mice model.

Interestingly, researchers found that the risk of NAD deficiency is elevated during pregnancy. And results suggest that a sufficient NAD supply is required to ensure normal embryonic development. Of course, further studies in human trials are needed to validate these observations, but the few preclinical study results I just highlighted are just some of many that illustrate the boundless potential positive health benefits NR Niagen can provide. I do not know of another dietary supplement company that has an innovation pipeline of NAD precursors that may have such profound therapeutic or prophylactic value in the pharmaceutical space as does ChromaDex. We continue to invest in our science to further our understanding of the potential for Niagen and to further develop innovative ways Niagen can benefit longevity and healthy aging.

As some of you may know, our partner Juvenis, has launched a portfolio of skincare products powered by Niagen in South Korea and is looking into plans to launch in the United States. Additionally, we continue to work with Zesty Paws to further research innovative products in the pet supplement market. As mentioned last quarter, we are increasingly close to announcing a new vertical for Niagen that will illustrate ChromaDex’s unique position in the industry. While I acknowledge the development process has been long, I am proud of the teams at ChromaDex for being diligent and thorough in the proper studies on safety and efficacy, compliance with regulatory value and establishment of our supply chain infrastructure. As the global authority in NAD science, our mission at ChromaDex is to improve as many lives as possible.

Our unwavering commitment to this mission continues to drive our innovation pipeline to develop new NAD boosting products and delivery mechanisms that benefit the way humans age. This includes products that extend beyond dietary supplements. As I mentioned earlier, every one of us at ChromaDex believes we represent gold standard in the NAD industry. We will continue to represent the highest level of scientific integrity and use our position in the industry as a trusted partner to researchers, regulatory authorities and world class business partners to drive innovation. We recognize that research and development to support innovation takes some time. It may take more time than originally anticipated. While we are not yet ready to make any announcements, we look forward to sharing more details in our next update.

And I would like to now turn the call over to Brianna to discuss the quarter’s results in more 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 team members who have joined us today. As it relates to the key highlights of our first quarter performance, ChromaDex delivered total net sales of $22.2 million, solid gross margins of 60.7%, a $1.3 million reduction in overall operating expenses and a net loss of $0.5 million. Additionally, we achieved positive $0.7 million of adjusted EBITDA, a non-GAAP metric, and we yet again generated positive operating cash flows. Our performance this quarter demonstrates our strong financial management across the organization, which has enabled us to increase investments and growth. Specifically and as anticipated, we ramped R&D investments this quarter to support strategic initiatives and new launches planned for the second half of this year.

With that, let’s turn to the first quarter financials in more detail. As I said, total net sales in the first quarter of 2024 were $22.2 million, a 2% decline compared to the first quarter of 2023. This was primarily driven by a 2% decrease in Tru Niagen, a 5% growth in e-commerce was overshadowed by a 17% reduction in combined Watsons and other B2B sales, largely due to timing of those sales. As a quick reminder, in mid March of the previous year, we invested in a brand building event with the Amazon homepage takeover, which helped boost sales during that period. This event created a more challenging year-over-year comparison, especially as we did not undertake a similar brand building event in the current quarter. Instead, we remain focused on marketing efficiency while developing an influencer and social media strategy that we expect will broaden awareness of Tru Niagen beginning later this year.

Now I’ll briefly touch on Watsons and other B2B sales. As with all partnerships, timing of sales can vary. And it’s worth noting that the first quarter of 2023 saw the highest sales volumes to Watsons last year, including shipping for their Tru Niagen Immune launch. On a full year basis, last year’s growth was driven by the launch of Tru Niagen Immune with the base business being steady. In addition, while total ingredient sales were flat year-over-year, we had moderate growth of $0.2 million in Niagen ingredient sales, which was offset by an equal decline in sales of other ingredients. Gross margins increased by 80 basis points to 60.7% compared to 59.9% in the first quarter of 2023, primarily driven by shifts in our business mix. Specifically, e-commerce sales constituted 58% of our total net sales in the current quarter, up from 54% in the prior year quarter.

Selling and marketing expense as a percentage of net sales decreased to 30.4%, improving 450 basis points compared to 34.9% in the first quarter of 2023. As discussed earlier, we invested in a large brand building event last year and did not have a similar campaign this year, which drove the improvement in overall efficiency. As anticipated, research and development expenses increased $0.9 million year-over-year as we invest to commercialize our new vertical in 2024 along with new NAD precursor development. As reported, general and administrative expense decreased $1.1 million year-over-year, primarily due to reductions in executive and other administrative headcount expenses, bad debt expense, severance and restructuring expense and share based compensation expense.

For the first quarter of 2024, our operating loss was $0.7 million versus a $2 million loss in the first quarter of 2023, an improvement of $1.2 million, driven by lower total operating expenses. The net loss attributable to common stockholders for the first quarter of 2024 was $0.5 million or a loss of $0.01 per share compared to a net loss of $1.9 million and a loss of $0.03 per share in the first quarter of 2023. Moving to the balance sheet and cash flow. Our balance sheet remains strong. We ended the quarter with $27.6 million in cash and no debt. For the three months ended March 31, 2024, net cash provided by operations was $0.3 million compared to a $2.8 million cash inflow in the same period last year. The difference year-over-year was largely driven by changes in working capital related to relatively greater reductions in accounts payable of $1.6 million and smaller reductions in inventory and prepaid expenses and other assets of $0.7 million and $0.5 million respectively.

Finally, while it does not impact our first quarter financials, based on our determination that a loss is not yet probable, I wanted to briefly comment on a recent ruling in the Delaware litigation. In March, the district court judge granted Elysium’s motion for attorney fees and costs. [indiscernible] intends to appeal this decision, and if successful, nothing would be owed. However, we disclosed an estimate of the maximum liability in our 10-Q report. As it relates to our 2024 full year P&L outlook, detailed information on key financial metrics can be found in our earnings press release and accompanying slide presentation. In short, all key metrics remain consistent with last quarter’s outlook. As a reminder, our top line outlook includes revenues from new product launches, partnerships and other opportunities that are in our pipeline.

Of note, the launch of the new vertical we discussed last quarter is taking longer than initially anticipated, but it continues to be part of our growth plan for 2024 and beyond. Furthermore, we continue to anticipate that the first half of the year will include heavier investments, particularly in R&D to prepare for new launches. Accordingly, revenues will ramp in the second half. At the same time, R&D investments will moderate. In summary, we made important strides this quarter to advance our strategic roadmap for 2024 while delivering solid bottom line results. Our ability to maintain positive operating cash flows and robust balance sheet is evidence of the strong financial foundation we have created while continuing to invest in growth initiatives.

We also strengthened our market position with new partnerships, which Rob mentioned, allowing us to expand our customer reach to new retail and grocery store locations. I’m excited about the momentum we’ve built and the new revenue opportunities that we expect to unlock later this year. Operator, we are now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Ram Selvaraju with H.C. Wainwright.

Ram Selvaraju: Congrats on an excellent start to the year. I was wondering if you could talk a little bit about gross margin evolution and how you see that being driven by the overall product channel mix. In particular, with respect to the role that e-commerce is likely to play in the future revenue base? And if increasing percentage of the revenue coming from e-commerce is necessary to maintain gross margin improvement or if you can achieve gross margin improvements even if other channels start to contribute more than they have in the past?

Brianna Gerber: So gross margins, if you look recently, we’ve been trending between 60% and 61%. When we trend a bit higher it’s when we have quarters with a higher e-commerce mix. And so I think that speaks to your point, e-commerce margins, generally, we set are in the low 70s and the more B2B side and the low mid-50s. So there is a mix impact there. That said, while mix is a contributor, we do have ongoing cost savings initiatives. We have targets every year. We executed many of these last year that will continue into this year and some things set up for the second half that should contribute to the overall slight improvement we expect on a full year basis versus the 60.8% gross margin last year.

Ram Selvaraju: Secondly, you had previously talked about the intent to move those customers who already utilized Tru Niagen or those customers who have exhibited adherence to Tru Niagen to higher dosage forms of the product. And I was just wondering if you could comment on how that initiative is going? And to what extent you expect it to contribute to revenue growth in the future?

Rob Fried: That initiative has been successful thus far. I mean, we’ve had some supply chain issues, which we have mostly resolved at this point. But we see that there is a great demand for the 1,000 milligram. People who are taking 1,000 milligram notice the difference sooner and it’s more dramatic. And what has been surprising is that the 1,000 milligram launch has also worked for new-to-brand customers. Our anticipation initially was that it was just going to be existing customers migrating over to 1,000 milligrams. But in fact, it’s been very effective for new-to-brand customers as well. It’s a profitable SKU for us, it’s an effective SKU for us. So we see us moving more in that direction in the future.

Ram Selvaraju: And then lastly, I was wondering if you could comment on two additional aspects of the company’s story for the remainder of 2024. One pertains to what you anticipate maybe value inflection points coming from the existing partnerships that you have, for example, with Nestle Health Sciences and Sinopharm. Do you anticipate any meaningful announcements or developments on either of those fronts over the course of this year? And also, if you could talk a little bit about what you anticipate from the standpoint of clinical assessment of nicotinamide riboside in 2024? And which, in particular, clinical indications, you may be most excited about as we look ahead to the remainder of 2024?

Rob Fried: I’ll start with the second question. We are very much looking forward to seeing the data on the long COVID study that Harvard has been doing. We know that they have completed the actual study, but we haven’t — it’s a blinded study, we have not yet seen the data. We’re excited to see that. We’re also excited about the Parkinson’s study, which should be concluded. We thought it would be done in December. It’s obviously going to get done a little later than that probably first quarter of next year. But it’s fully recruited. It’s just all of those participants are taking a gram a day for a year. So we probably won’t see the data until sometime probably the first half of next year. But obviously, we’re very, very excited about that study as well.

There’s also other work that we’re doing in the orphan disease category. These diseases like ataxia and [indiscernible] that we’re very excited about and we think are important for us for later in this year. With regard to the first question, we don’t anticipate any announcements or exciting news with regard to Sinopharm. We are talking to them regularly about ways to increase the cross border sales into China and are also talking to some other partners to work with Sino and ChromaDex to increase the cross border sales of Tru Niagen into China. But we don’t expect any major announcements. As you know, we have a partner there called H&H and they also sell cross border into China, and they do so extremely successfully. It is possible that we will be expanding the relationship with H&H later in 2024.

That will be other products and other territories. Nestle has now launched with two brands, pure encapsulation. So Niagen exists in, I think, three SKUs with pure encapsulations and also Solgar, another important high end Nestle brand has released the product. We haven’t seen the actual data. We only know anecdotally that they’re very happy with the sales in both, and we’ve seen ads for both. We’re very conservative with our estimates with regard to Nestle, so we’re not expecting any major announcements. But we’re hopeful that they will continue to grow and expand, and that we’ll see more ingredient purchases from Nestle. There are some other partners that we have been talking about. It’s possible in the balance of 2024 that you will read about or hear about other partnerships that would expand the Niagen business with ChromaDex.

Operator: Our next question comes from the line of Mitch Pinheiro with Sturdivant & Co.

Mitch Pinheiro: Just a couple of questions. So with the first quarter revenue to reach 16% growth for the year, it’s going to be a solid, roughly 23% for the last nine months. I’m curious where we should expect that to come from? And is this something — I heard Brianna say revenue is obviously ramped with a new product in the second half. But I’m curious whether the second quarter is going to see any acceleration from Q1 levels?

Brianna Gerber: So we are not baking in any new product revenue in second quarter, which, as you said, is implied in the outlook, the ramp will be in the second half. We’ve been very consistent with that. There’s nothing that I’d point to in terms of a clear catalyst in terms of the second quarter. We’ve delivered steadily. We did reiterate our full year outlook of that at least 16% faster growth than last year, and that includes the combination of this new vertical we’ve been discussing, other new partnerships and product launches. So I’m not going to comment specifically on second quarter but it is a second half as you heard.

Mitch Pinheiro: So to get to 23%, you’re going to have to do some combination of 23% in the back half to reach your 16% kind of growth guidance. So you’re — I guess, you’re comfortable that you’re going to see a strong enough back half to accomplish that, is that what you’re saying in your guidance?