ChromaDex Corporation
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation's First Quarter 2021 Earnings Conference Call. My name is Stephanie and I will be your conference operator today. At this time all participants are in a listen only mode. 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 2021. If you have not reviewed this information, both are available within the investor relations section at chrome indexes website at www.chromadex.com. I would now like to turn the conference over to Brianna Gerber, Vice President of Finance and Investor Relations. Please go ahead Miss Gerber.

[Brianna Gerber:]

Thank you. Good afternoon and welcome to ChromaDex Corporation first quarter 2021 results investor call. With us today are ChromaDex's Chief Executive Officer, Rob Fried; Founder and Executive Chairman, Frank Jaksch; and Chief Financial Officer Kevin Farr. Today's conference may include forward looking statements, including statements related to criminal acts as 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 and a new market future financial results, business opportunities future cash needs. ChromaDex's operating performance in the future and future investor interests that are subject to risks and uncertainties relating to chromebit X's future business prospects and opportunities as well as anticipated results of operation. 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 kermadec, says actual results to differ materially from the activities and results anticipated in forward looking statements. These risk factors include those contained in crema Texas quarterly reports on form 10 Q, most recently filed with the SEC, including the effect of the COVID-19 pandemic 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 expectation. 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 reconciliation to the appropriate gap measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the investor relations section of our [e-mail]. With that it's now my pleasure to turn the call over to our Chief Executive Officer Rob Fried. Rob.

[Robert Fried:]

Thank you, Brianna. Good afternoon, everyone. And thank you for joining our first quarter 2021 investor call. This has been a very exciting time strategically for Chrome in the past few months we added $25 million to the balance sheet. We announced important scientific research findings. We concluded three tentpole agreements with Walmart, H&H Group and with row we added a talented Chief Marketing Officer and Fadi Karam. The man for Tru Niagen continues to be strong and growing.

[Frank Jaksch:]

Thank you, Rob. As I mentioned in our last call, the research on nicotinamide right beside or NR continues to extend to important areas of human health. Since our last update, ChromaDex deepened its connections with scientific experts in the field of NTD. Research and partners through its external research program with leading institutions to explore important areas of research on that are in March, we announced the new research initiative with the Citron foundation to study the effects of NR and Citron deficiency. This is a rare life threatening genetic disorder that can cause failure to thrive and children or later in life, causing a host of neurological problems hyperlipidemia and severely impaired liver function. The first study will be led by scientists at Duke University and the National University of Singapore. While there are no known cures, we understand that Citron deficiency impairs mitochondrial function and disrupts the NAD system. We are committed to understanding the role and our supplementation can play in this understudied disorder to new clinical studies registered in March; both investigating the potential impact of NR on patients with or recovering from COVID-19.

[Kevin Farr:]

Thank you, Frank. ChromaDex delivered a solid first quarter and continue to demonstrate financial discipline, while making important investments to protect our intellectual property. Total net sales were 14 point 7 million up 2% year-over-year, despite short-term supply chain disruptions that impacted shipments the Watsons we delivered gross margins of 62.9%, a record for the company and the underlying business as measured by adjusted Eva excluding legal expense. A non GAAP metric posted a loss of approximately 700,000 a 400,000 improvements sequentially and down slightly year over year to increased investments in selling it and marketing to deliver on the opportunity ahead of us.

[Operator:]

Your first question comes from Jeff Van Sinderen with B Riley.

[Unidentified Analyst:]

Hello, this is Richard Magnussen in for Jeff Van Sinderen. Thank you for taking our call. With the rollout of Walmart about a month away. What more can you tell us about how that is setting up? And what are you doing in terms of advertising to let customers know that the product will be available at Walmart?

[Robert Fried:]

Thank you for the question, Richard. As you know, we just added a Chief Marketing Officer Fadi Quran, who has excellent experience with Walmart and other mass retail outlets globally. We've said in the past that our expectations are not to expect anything dramatic initially with regard to Walmart. And so it's going to be a slow build. And that we are gradually going to be increasing the amount of brand level of marketing, brand awareness marketing, as well as expansion of distribution channels beyond just conventional digital media channels, who include television, radio, and perhaps print and other areas. We have a true believers campaign, which we've had for a couple of years. Now we plan to expand that and add some additional true believers to that campaign. There may be more additions in the in the near future, and maybe even some significantly larger celebrity additions. And in conjunction with that, we will begin rolling out more aggressive television related campaigns. But as I said nothing in the short run, there'll be a gradual steady increase in awareness. We're also working with Walmart to try to create some Walmart's specific campaigns in store things, promotion things, e-mail campaigns. But once again, this is not something that we're expecting to dramatically launch right away in June.

[Unidentified Analyst:]

Okay, and then regarding the agreement with the health and happiness group, this is we use global nutrition brand as a presence in four continents, so to Niagen and ultimately be available in all four continents or is the agreement more limited than that?

[Robert Fried:]

The agreement is more limited than that initially. We are excited about H&H. It's a very, very impressive team. Not only their R&D team, but their marketing team as well. They are very strong in certain countries. Initially, we will be working with them cross border into China, as well as Australia, Italy. We are developing with them unique formulations of nitrogen in combination with other ingredients for their initial launch. They don't expect to launch a product in the market prior to fourth quarter of this year. But they're very impressive. We're very excited to be working with them and we think the potential is there to grow something very significant.

[Unidentified Analyst:]

Okay. And then, my last question, I believe you said there was no Nestle revenue in the first quarter with this expected or some pushed out.

[Robert Fried:]

Yes. Again, H&H and Nestle, as well as row, the new announcement that we made and life extension, the other company. This is all we have always said that on a selective basis, we will supply nitrogen as an ingredient to certain companies that we consider to be responsible companies, excellent companies, Blue Chip companies that have an existing customer base, as opposed to using our ingredient to create a customer base. And in all, in all cases, we endeavor to co brand if possible. Nestle obviously is the world's leading food company. They released Celltrient, as a product is over. It's a very slow and gradual release. It's the way they go about doing it. Step-by-step process. It's initially simply just an online distribution channel. But there are other divisions within Nestle that are interesting to us as well, including persona, which we started doing business with persona last year. This is a personalized dietary supplement division that they own. There are other divisions at Nestle with whom we are also having conversations and at some point, we might expand the relationship to include some of these other divisions, in addition to Celltrient and Persona. So, we're not surprised because we always anticipated that Celltrient would be a slow rollout. It we expect it to grow with time and but we expect the relationship with Nestle in time to expand to go beyond simply just Celltrient.

[Unidentified Analyst:]

Thank you very much. And I'll jump back into question to you. Thank you.

[Operator:]

Your next question comes from Jeffrey Cohen with Lindenberg Bellman.

[Unidentified Analyst:]

Hi, this is actually Destiny on for Jeff, thank you for taking my question. I'm just curious. Continuing with our or your discussion of H nation row. What exactly will the financials be to that? Will it be similar to that of Nestle with an upfront payment? And then, royalties or is it a bit different?

[Robert Fried:]

The steel is more of a conventional supply agreement deal that does not include royalties. It's more like our business with the two other IP class, which is now wholly life extension. So, it's, they're purchasing it at a price per kilogram.

[Unidentified Analyst:]

Got it? Okay, thank you for clearing that up for me. And then, specifically for Row, is there a particular category within the Roman portfolio that they'll be targeting? And why? Perhaps I should ask this a little differently. Is there an intention to move into the RORI portfolio as well? Or is it just going to be focused on men's health in the Roman portfolio, their initial launch will be with Roman, but they are interested in expanding beyond Roman that which is the Men's Health brand.

[Robert Fried:]

The CEO of Row had given us a call several months back and said that they were interested in creating a an aging product, and was very clear that they had done the research and realize that if you were going to create one it should be with only with nicotine or mydrive aside and the only legal way to buy and safe way to get nicotine in my driver's side was with ChromaDex. And what he clearly said is, if you guys are willing to do a deal with us, we will release a longevity, health span type product and if you are not, we are not going to release one at all, which I was impressed with and I agree that is the right way to approach it if you care about your consumers. So, they it will be a formulation product, they will combine it with certain other ingredients and hope to see it released within the next quarter or two. You're working on that presently. One of the things we liked about Roe as I explained before is that they have an existing customer base, they are not using our ingredient to create their business. They have an existing an impressive customer base. And they this would be an upsell to their existing customer base.

[Unidentified Analyst:]

Okay, thank you for clearing that up. I appreciate it. And then, I was just wondering if briefly you could provide any update on the HCP segment and how that is going now that restrictions have lifted or lightened in several states.

[Frank Jaksch:]

We see the ACP market as a very, very important market for this company. We do have one partner in the space. And we also sell directly to hcps. We do use one distributor. And we also distribute ourselves. We see this as an area for expansion for the company. And we'll be investing more in this area. Not only do we see it as a growth area on a P&L basis, but we also think it's strategic, because we're targeting the influence of physicians, chiropractors, nutritionists, nurse practitioners, healthcare practitioners, it's important to educate them, the more they get educated about the value of an Ad to general health and nicotinamide Dr. Aside are specifically nitrogen as a way to elevate and add, the more they read, the more they read the science, the more they realize that the best way to manage that is with true nitrogen. So, we think the ACP space is an important strategic one for us.

[Unidentified Analyst:]

Okay, thank you. And if I may just sneak one more in could you remind us how we should be thinking about margin throughout 2021? And perhaps 2022, as well?

[Robert Fried:]

Yes, I think basically, this quarter, we did achieve almost a 63% margin. And I think as we've updated our financial outlook, we think we're going to be slightly better than 60% in 2021. I do think that will continue over the near term, to improve margins each year as we sell more true knowledge and on e-commerce, as well as at retail, and as well as we continue to gain scale. And we continue to look for cost savings opportunities in our supply chain in our design and development of product.

[Unidentified Analyst:]

Got it. Thank you for the reminder, I'll have back and cue.

[Operator:]

Your next question is from the line of Ron with HC Wainwright.

[Ron:]

For the upgrade, this is Marzano platform offered by Row is really interesting for you to have access to the NAV+ diagnostics, they may do oxygenation prescribing data. It's interesting to you.

[Frank Jaksch:]

I'm sorry, the connection wasn't great. I think you're asking if we would have access to their NAD diagnostic test. For Right, yes. Would this data be interesting to you? Yes, we are very interested in and many, there are many companies that are proposing NHD diagnostic tests, we've done some work on it ourselves. At this point, we haven't found what the ones that we feel comfortable meets are the scientific criteria that we require. But there are several that are interesting. The reliable and ad diagnostic tests that exists right now require a great deal of blood. And it's an implant that needs to be frozen immediately to create reliable data. But there are several companies that claim to have developed other systems and we are examining those systems and are in discussions with several. We do think in the long term, that's an important area. And we also think that access to customer data from customers like row or H&H or Nestle, or life extension, in addition to our large customer base would be important.

[Robert Fried:]

Frank, I don't know if you have anything you'd like to add to that? Yes, the only other thing I'll add to it is that.

[Frank Jaksch:]

Although Rob mentioned that there are a few out there that are that are sort of promoting an ad test. I'm not we're not entirely convinced that the tests that are currently being offered are reliable for reporting and ad status and any usable or meaningful way. So, we are on top of it and looking at developing, our own solution on that front. As you know, we've been testing reliably testing NAV as part of our clinical trial program for many years now. So, nobody knows more about testing an Ad and other NAV metabolome than we do at this point. So, and I wasn't aware that row even had an Ad test I did you were you just thinking about it in context of them as a part of the regular program, or how did you come to that, that they had that? Well, I don't know that they have specific NAV paths, it's just part of the implant system where they, have a diagnostic platform, generally speaking.

[Robert Fried:]

Got it, okay. Well, that makes more sense. Okay. So, an Ad is not a central feature of standard testing, and blood labs right now. So, it's one that we hope to make it push forward at some point but one step at a time and obtaining reliable tests to be suitable for that. So. Okay, great, very interesting. Just switching gears to Nestle, how have they shown any change in demeanor or level of interest in ChromaDex, since the announcement of the acquisition of bountiful company brands, they have expressed a great deal of interest in, in not only in our but all of our molecules that we have in development and are interested in our successes as an e-commerce company. We speak to them frequently the relationship is strong, which is why we're talking to other divisions of Nestle about ways to do business.

[Frank Jaksch:]

Okay, great. I'm just finally regarding the COVID-19 trials. Do you know if remdesivir, and dexamethasone will be benchmarked against in these trials? At this point, the trials that we've completed, there's no additional trials that are under way at this time. In the trials that we have completed, don't look at REM disappear. So, right now, there are no plans to look beyond what we've already recorded.

[Ron:]

Okay, thanks for the call. And thanks for taking our questions.

[Frank Jaksch:]

Thank you.

[Operator:]

Your next question comes from the line of J. P. Mark, Farmhouse Equity Research.

[J. P. Mark:]

Hi, good afternoon. Thanks for taking my call, couple of quick questions here. I wanted to know more about the supply chain disruption and the magnitude if you can talk a little bit about sort of what happened and it's likely to occur again, and how you might mitigate the possibility.

[Frank Jaksch:]

Sure, the supply chain disruptions are not all that uncommon during this year of COVID. And, and we experienced that and we generally don't operate the business quarter to quarter, it doesn't reflect a reduction in demand. For true nitrogen demand is very strong, and continuing to grow. In Hong Kong, in particular, you have to understand that there's only 7 million people in Hong Kong. And we last year did seven plus million dollars of sales directly to Watson's in Hong Kong, and which they then mark up and sell at retail. So, the penetration rate in Hong Kong is rather extraordinary. Part of that has to do with tourists that come from Mainland China into Hong Kong. And during the COVID year, there have been some restrictions, quarantine requirements and others about travel into Hong Kong, we've seen that gradually get lifted. And we've seen sell through improve. But there is still these headwinds related to COVID in the in the operation. So, they have sufficient inventory there. It wasn't crucial that we rushed to solve this problem for them. But we are solving the problem and they will make up the loss sales in the in the upcoming quarters. Let me hand to Kevin Yes, let me just tell you about what the supply chain issue was. In the first quarter, we experienced delays due to global packaging shortages for our consumer products across our supply chain. We had some delays also from CMOS with regard to product that was supposed to be made in the first quarter, and it pushed up the second quarter. These have been addressed in the second quarter, or maintaining adequate safety stock of both component parts and packaging, as well as finished goods so that we don't have this issue again in the future.

[J. P. Mark:]

Okay, that's super helpful. And one other question for you, Rob. I believe you are by far the best spokesman for your product in the company. And I've wondering if you're going to be doing more podcasts in the future? And if you have those lined up at this point.

[Robert Fried:]

Well, thank you for that. I appreciate your saying that. I love to talk about true nitrogen and nicotine and mydrive aside because my own personal experience and the experience of my family and my friends, and my coworkers has been fairly dramatic and remarkable. And I genuinely believe as do pretty much everybody who works at ChromaDex that when you take two nights and you improve your ability to deal with physiological stress. And incidentally, incidentally, I take a certain amount of it every day, it's more than the recommended dose. But when I'm feeling some sort of physiological stress, I increase my dose and it seems to work as a way for to manage it. We have an excellent marketing department in earned media department. And whenever they book an interview or a podcast, I am willing to do it. I think they have several upcoming and I look forward to do it and enjoy doing it. So, yes, I believe that I will be out there more. That'd be great. If you could cover size, or I was going to interject with regard to the supply chain disruption, do the impact to COVID-19. That relative to about a million dollar shortfall in shipments, the Watsons in the first quarter. And looking at historical trends, we expect to see baseline demand of about 2.1 million, we expect the first quarter shortfall to ship over the next two quarters in addition to the baseline demand.

[J. P. Mark:]

Alright, that's great. Thank you, very much.

[Operator:]

Your next question comes from Michel Pinero with Sturdevant.

[Michel Pinero:]

Hey, good afternoon. I'd like to look at the commerce business. So it was up sequentially. But what, on a year over year basis, the growth rates been slowing there.

[Robert Fried:]

And just curious, like is this? Was there any, any anything in particular in the quarter that would have a little bit of a slowdown in e-commerce. And if you could also talk about whether new customer growth versus existing customer. Know, e-commerce looks really strong. New customer acquisition is also increasing and retention has been steady. So, a couple of things about what you said is that it was up quarter to quarter, and it was up 17%, I believe year over year. First, let me comment on that, yes, it was up 17% year over year, really should be doing better than 17%. My expectation is that in the future quarters that will do better than 17%. But you do have to remember that the first quarter of last year was pre-COVID. And it is at the end of March, particularly in April, we saw real slowdown in e commerce sales, and then it gradually started picking up again. So, where you're comparing it to the period right before that economic downfall and the issues that happened right away with COVID. But when I look at the conversion numbers and the retention numbers, they're very, very strong and improving. So, e-commerce e commerce business looks healthy. With regard to the quarter of the sequential growth. We look at the daily numbers. And the daily numbers are quite strong, especially compared to the last quarter. But certain things existed in the fourth quarter that didn't exist in the first quarter that that that made maybe cumulatively look like it was less gross than it actually was. One thing is, we include the cross border into China. And there's a significant promotion cross border into China on 1111, and then even another on 1212, November 11, and December 12. And those represent a huge percentage of the entire year sales. So, those trend China cross border sales, we've been we had the benefit of that in the fourth quarter and not the first quarter. And similarly, there's Amazon Prime Day, right after Thanksgiving, which is also a very big day. So, when you compare first quarter, the fourth quarter, you're excluding all those significant days. Second, there are literally two less days in the first quarter than the fourth quarter and that is significant when you're talking about a nine or $10 million business that could be two percentage points right there. And then finally, we think that at Amazon in the first quarter, there was a slight delay in the in supply chain and that that, so the accumulation of orders to shift has increased slightly in the first quarter from the previous quarter. So, in actual fact, the first quarter versus the fourth quarter the way we see it when we look at daily actual sales was much stronger. And when we compare first quarter to last quarter we also see it as strong and then so we the e-commerce business is healthy and looking Very good. And we expect greater year over year growth in the coming quarters.

[Frank Jaksch:]

Because I'd like to let me take this opportunity, Mitch, also to comment on something else that you may be asking, about to ask about. Because I know you like to ask mark, generally marketing questions. But we view the addition of our new chief marketing officer as an important event at the company. Because we have a very strong immerse engine in this company and a very strong digital marketing operation at this company. But digital marketing and e commerce is largely a performance marketing business, where it's constantly optimized, it's almost like a trading room, where you, you test, you test an ad, and then you opt if it if that Ad is converting, you press it more. And if it's not, you hit the brakes on it. And it's an optimization engine. But it is slightly separate from the engine of actual consumer brand, and separately separate from the engine that creates overall awareness. Fadi is a very interesting town, because he has outstanding experience and intellectual understanding of brand building consumer brand building on a global level, but also an interesting understanding of data analytics, and e-commerce in general, when we see this is important for us as a company, not only for continued growth on the already fairly strong e commerce engine, but also building overall consumer awareness and brand awareness for true nitrogen.

[Michel Pinero:]

Okay, that was very helpful. Thank you. I guess one more question. Well, as you were saying, on e-commerce, when we look getting, we're five weeks into, we're five weeks into the second quarter, Okay, and that was very helpful. Thank you. I guess one more question. Well, as you were saying, on e-commerce, when we look getting, we're five weeks into, we're five weeks into the second quarter.

[Frank Jaksch:]

But it's not the way we think the way we think is brick-by-brick, step-by-step day-by-day. And we look at the conversion metrics and the retention metrics. Sure, if suddenly a major celebrity, if there are so many major celebrities, politicians, athletes, actors that we know, take to Niger, and if one of them chose to go public on their own, and talk about how it's impacted their performance, it might have a dramatic impact. But the way we're doing it is gradual increases in our marketing, spend gradual increases in our true believer campaign, gradual extensions in the channels of distribution, gradual expansion in territories, and gradual improvement. And that's generally been reflected in the performance. If there is an inflection point that we hit, it won't be because we forced it to happen.

[Robert Fried:]

Thank you. Well, one last question. Maybe Frank, back to the NAV cache. How confident are you that this is achievable to your, baby to your standards and how fast does that happen? This is something that's going to take several years to pan out. Are we talking six months? I don't really understand what the how difficult work or not this is. So, you have to look at it. Technically, I'm comfortable that we have testing already that is, is good, it's accurate. It's just not scalable, we need something a little bit more scalable, and the more usable form Robin mentioned in his comment that you need a lot of blood to be able to accurately test that. So, if Chroma if we wanted to offer an at home test, for instance, you're not going to be able to do that by sending them a survey a needle so that they can stick themselves to draw to the blood. So, we know that we have that but really it's translating what we know and what we have Today into something that's going to be an easier to use format. And that's what we're working on. And I'm happy with the progress that we've made. And I've seen some data that looks really compelling that things are going in the right direction for that. So, I don't want to I don't think its years away. But I would, I wouldn't necessarily give you a firm commitment in terms of exactly how long it's going to take, because I don't think we really know exactly how long it's going to take. But we're we've made great progress on that front. And I think we're going in the right direction with it right now.

[Michel Pinero:]

Okay, thank you so much for your time. Thank you.

[Operator:]

At this time, there looks to be no further questions. I'd like to turn it back over to Brianna Gerber for closing remarks.

[Brianna Gerber:]

Thank you, Stephanie. There will be a replay of this call beginning at 4

[Operator:]

Thank you. This conclude today’s conference. You may now disconnect.