ChromaDex Corporation
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to ChromaDex Corporation’s Fourth Quarter 2020 Earnings Conference Call. My name is Chris, and I’ll be the conference operator today. At this time, all participants are in a listen-only mode. This afternoon, ChromaDex issued a news release announcing the Company’s financial results for the fourth quarter of 2020. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex’s website at www.chromadex.com.

[Brianna Gerber:]

Thank you. Good afternoon and welcome to ChromaDex Corporation’s fourth quarter 2020 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 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, future financial results, business development opportunities, future cash needs, ChromaDex’s operating performance in the future, and future investor interests that are subject to risks and uncertainties related to ChromaDex’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 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 Report on Form 10-Q most recently filed with the SEC, including the effect of COVID-19 pandemic on our business, results of operation, financial condition and cash flow. 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 present 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 now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

[Rob Fried:]

Thank you, Brianna and good afternoon, everyone and thank you for joining our fourth quarter 2020 investor call. I’d like to begin by welcoming those of you that are joining us for the very first time. This is an exciting time at ChromaDex and we look forward to sharing our story with you. I’d also like to express appreciation to the investors, partners, employees that were supportive of ChromaDex during 2020. As for all companies, this is a challenging year and I’m proud of how this company navigated. We not only achieved record financial performance, but made a positive scientific contribution to the global crisis. We begin 2021 stronger than ever and excited for the future. ChromaDex had another strong quarter and delivered on our financial outlook for the year. Total company sales grew 9% sequentially and 18% year-over-year. E-commerce sales also grew by 9% sequentially and 20% year-over-year. Total company net sales were nearly $60 million and Tru Niagen net sales were $47 million for the year. This is a meaningful achievement considering we only launched the Tru Niagen brand as a consumer product in 2017. The fourth quarter adjusted EBITDA, which we define as EBITDA excluding legal expense was a loss of $1.1 million. Adjusted EBITDA improved by $1 million year-over-year. In February, we raised $25 million of cash with EverFund, a new international investor, who is quite excited about the large addressable market for Niagen globally. While cash flow break-even continues to remain a key priority for the company, this incremental capital will enable us to expand the scientific research on Niagen and other NAD precursors in order to accelerate our product pipeline as well as selectively increase investment in marketing to drive growth in the Tru Niagen business. The science on Niagen remains very strong in published research, which Frank will discuss in a moment, continues to validate its importance in several areas of human health. We now have over 225 research agreements, collaborations with leading institutions around the world. They are studying cardiovascular and neurological, immunity, health issues as well as many other areas, all associated with aging. This research has led to over 100 published preclinical studies and 11 published clinical studies. 2020 was a great year for scientific research at ChromaDex. We expect more of the same in 2021. In addition to these partnerships with leading research institutions around the world, I am proud of our business partnerships with A.S. Watson Group, Nestlé Health Science, Matakana Health and W.R. Grace among many others. They see the potential in Niagen and we are grateful for their commitment to bring our science and product to the world.

[Frank Jaksch:]

Thank you, Rob. 2021 is setting up to be an exciting year for ChromaDex. Eleven peer-reviewed published clinical studies to-date have validated the safety and/or efficacy of nicotinamide riboside or NR as an NAD precursor. In 2020 and in early 2021, the published clinical studies extended two important areas of human health, including a pilot study, indicating that NR may reduce inflammatory cytokines in the white blood cells of Stage D heart failure patients. The second clinical study focused on potential cardiovascular benefits of NR supplementation. A Phase 2 study demonstrating a nutritional protocol, including NR reduces liver fat and improves liver function and the double-blind placebo controlled Phase 3 study of 309 patients in Turkey with mild-to-moderate COVID-19 symptoms, finding that the same nutritional protocol, including NR reduced recovery time by 38% in that population.

[Kevin Farr:]

Thank you, Frank. ChromaDex ended the year strong and delivered on our latest financial outlook to investors across all metrics. for full year 2020, we delivered total net sales of $59.3 million, a 28% year-over-year increase with Tru Niagen growth of 31%. gross margins of 60%, up approximately 400 basis points year-over-year, lower selling and marketing expense as a percentage of net sales and an increase of only $2.7 million versus our outlook of $3 million to $5 million, a decrease in general administrative expense of approximately 500,000 versus our outlook of an increase of $1 million to $2 million. The underlying business as measured by adjusted EBITDA, excluding legal expense, a non-GAAP metric posted a full-year loss of only $1 million compared to the loss of $8.8 million in full year 2019. This is a significant achievement for the company demonstrating our operational and financial discipline on the path to achieving cash flow break-even.

[Operator:]

Our first question comes from Brian Nagel with Oppenheimer. Your line is open.

[Brian Nagel:]

Hi, good afternoon.

[Rob Fried:]

Hi, Brian.

[Kevin Farr:]

Hi, Brian.

[Brian Nagel:]

Nice quarter. Congratulations.

[Rob Fried:]

Thank you.

[Brian Nagel:]

So, why don’t you basically start with my questions on the announcement today with Walmart? And so I’m just going to kind of put a few questions together, but I think it’s an extraordinarily exciting to step these, congratulations on that. In the release, you mentioned, you made – or you made mention of some type of special pricing and packaging, so maybe, some more details on that with regard to Walmart. And is there any initial thought on – what is the stocking in Walmart, from a ChromaDex standpoint; is there any financial commitment to get the supply rated to stock Walmart by June? And then stepping back, this is obviously not your first retail partnership, but how does – what you’re doing with Walmart compared with what you say you’ve done with Watsons overseas? Thanks.

[Rob Fried:]

Sure. We plan to have a skew with a lower dose and lower price point for Walmart. We think that there are some of – there is some overlap between Walmart customer base and our existing customer base, but not a lot. So, we are offering a new skew that we haven’t offered before that we think might be of appeal to that customer base and we did so with the advice and consultation of Walmart. Yes. We do have very successful experience with – in Hong Kong with Watsons and retail. This is different for a number of reasons. One is it’s a mass retail in the United States. There are small specialty retail partners that we have in the U.S., but just a handful of stores, nothing significant. This is 3,000 stores. So, this is a much more important effort and requires a different type of marketing campaign. In Hong Kong, the nature of the relationship is a bit different with Watsons, as well as they bear the brunt of the advertising responsibility. In this particular case, the onus will be on us to create the awareness. With regard to supply chain?

[Frank Jaksch:]

Yes. I think with regard to 2021, we think this is going to be a small contributor overall sales and growth in 2021. We are loading into a 3,000 stores, but it’s a couple of facings. So, with regard to that load in, it’s not going to be a huge amount of revenues, but obviously, as we ship it in, it will be filling shelf space and we’ll be filling their distribution centers to support what are, I think conservative numbers for 2021 as we launch it and also want to make sure that we’re getting the right velocity and sell through for Walmart in 2021.

[Brian Nagel:]

Got it. I appreciate the color. I’ll let someone else ask the question. Thank you.

[Rob Fried:]

Thanks, Brian.

[Operator:]

Our next question is from Ram Selvaraju with H.C. Wainwright. Your line is open.

[Thomas Yip:]

Hi, Rob, Frank and Kevin, this is Thomas, speaking on behalf of Ram. We were very interested in your COVID-19 trial in Turkey. I’ll group some of our COVID questions get together. We were interested in investor interest over the past several weeks do you invest to catalyze by the potential of Tru Niagen in COVID-19? And then in terms of the total study, how applicable is the standard of care in Turkey versus the U.S. and then in terms of a trial, what’s the development plan for COVID-19 in the U.S. is a kind of plan and then if other characteristics are in the consideration as well for COVID-19. Thank you.

[Rob Fried:]

I’ll talk about the overall strategic. You could get into any details about the studies of the scientific. So, we’ve – there are a number of studies that have been announced, or that are in discussion in the United States relating to COVID-19. There were two studies that were preclinical that we made public. There was an NIH preclinical study that we announced had commenced and is not yet complete. There is another clinical study that I – that is underway and another clinical study that is in discussion right now. So, there is work being done – a fair amount of work being done on nicotinamide riboside in COVID-19. the studies that we made public last year indicate what we had expected, which is when COVID-19 – when the virus attaches to a cell NAD levels, dramatically go down right away and this is intuitive, because the cell is fighting off the invader. And what we’ve also shown is that when nicotinamide riboside is added to the solution that is pre – it shows a protective benefit. So, we weren’t surprised by the phase 2 or phase 3 results that came out of Turkey. Of course, that study was done in conjunction that the cocktail that was offered was Tru Niagen plus three other dietary supplements. So, we can’t say that it was Tru Niagen per se that caused such a dramatic result. But the result is consistent with the preclinical studies that we’ve seen thus far. The standard of care in Turkey, in the phase 2 was hydroxychloroquine and during the phase 3 was hydroxychloroquine and plus one other – I can’t remember, plus another ingredient that neither of us can recall.

[Frank Jaksch:]

I can’t remember the other drug, but yeah, the standard of care is different.

[Rob Fried:]

Yes. I don’t think there is a standard of care across the U.S. at this point. I think it’s…

[Frank Jaksch:]

Not like that there, they required that to be part of the trial.

[Rob Fried:]

Right. Okay. The other question you asked had to do with investor interests as a result of making the results of that.

[Thomas Yip:]

Yes.

[Rob Fried:]

of course, you’re far more of an expert on that particular question than I, or any of us here. we don’t know. We saw that there was a lot of trading activity around the stock. Soon after that press release went out, we don’t really know why or what the expectations were. from day-to-day, we focus on running our business. We think we’ve done a pretty good job of building a foundation, establishing a brand. What we see for the future is very exciting. We have a lot of confidence, but sometimes, there’s a direct relationship to the stock price and sometimes there is not.

[Thomas Yip:]

Okay. And then in terms of cryo plans in the U.S., then if you’re exploring another territory as well?

[Rob Fried:]

Well, I mean the only one I think we can talk about is the one that posted with Harvard, which is basically looking at long haulers. so that’s not necessarily looking at COVID itself, but it’s looking at the potential of nicotinamide riboside to repair NAD function related to these people that are having these long hauler sort of side effects post-COVID. So that’s one area and we are exploring a couple other trials. I don’t think we’re really prepared to talk about those at least at this point.

[Thomas Yip:]

Okay. That’s really helpful color. I’ll ask one follow-up if I may, and then I’ll jump back in the queue. We were curious about what other contexts might prove beneficial for combining ingredient with Tru Niagen with other supplements or other related minerals, for example.

[Rob Fried:]

Well, I think that the Scandi, the collaboration that we’ve had with ScandiBio goes beyond COVID. I mean, they had actually started with studies of that cocktail in liver, and we reported results on that earlier this year, and they’ve also been looking at other neurodegenerative disorders with the same cocktail as well. And their – I think their plan is to continue to go to do follow-on clinical studies to further develop those indications. So – and we’re still working with them on Turkey as it relates to – Turkey as it relates to the results from this COVID study. So, but we don’t have anything to report on that yet. So generally, yes, I mean the potential of nicotinamide riboside, working in cocktail – as a cocktail with other things, I think is interesting. I think it’s also important for us to understand what nicotinamide riboside does on its own, so that we understand clearly, where it would fit. There were liver studies that were performed with nicotinamide riboside by itself, before it was done in a cocktail. So, we know nicotinamide riboside is important. Alzheimer’s is the same. So, mild cognitive impairment, neurodegenerative disorders and Alzheimer’s have also been evaluated with nicotinamide riboside by itself before they started evaluating it as a cocktail. So, I think it’s important for us to understand what nicotinamide riboside does on its own, as well as in combination with other things like ScandiBio has been working on.

[Thomas Yip:]

Very helpful and fascinating. thanks and I’ll jump back in the queue.

[Rob Fried:]

Thanks very much.

[Operator:]

Our next question is from Jeffrey Cohen with Ladenburg Thalmann. your line is open.

[Destiny Buch:]

Hi, this is actually, destiny on for Jeff. I hope you are all are well, and thank you for taking the questions. I’ll make mine brief here. I’m just wondering if you could provide any additional color into the changes in your marketing strategy and investment through 2021, especially given your previous commentary about the minimal overlap between your messaging for Walmart and then your messaging for your current customer base. And I guess I would be curious to know how the messaging is different, and if you’re going to continue to use influencers as heavily as you have in the past.

[Rob Fried:]

We will continue to use influencers as we have in the past. It’s a growing group of influencers. There are professional celebrity influencers and then there are non-celebrity influencers on social media. We use both. effectively, we expect to continue to use both and to grow the group of true believers. It’s not necessarily a change in message. It’s a change in cohorts. ChromaDex has developed a fairly sophisticated understanding of the various cohort groups that purchase our product in Hawaii . So, there are some people that buy Tru Niagen specifically for aging. there are some that purchase it for fitness. There are some that purchase it for energy metabolism. There are some cohort groups that believe that it is therapeutic for a specific condition that they are managing and they purchase it for that reason. There are also variations in demographic data. So, we endeavor to target those different cohort groups with slightly different channels of distribution and slightly different ad creative materials. We believe that if we are going to mass retail at Walmart, there is a slight variation in the demographics and the cohort interest levels of those – that customer base versus the existing customer base. That will mean a variation in the channels. So, suggestion that that might be a slight increase in, for example, television or radio versus digital marketing spend. It would be an example of how that would impact. We don’t yet know exactly what the Walmart customer is looking for when they purchase Tru Niagen and the likelihood is aging, aging and energy metabolism, but we will test that thesis and find out. And if that’s where we find success, we will press that narrative more to that cohort group.

[Destiny Buch:]

Okay. I got it. So, less about the messaging, more about the channels. Okay. I’m just going to ask one follow-up here. You referred to your product pipeline a couple of times, as well as an investment in R&D. So I’m just curious, would this include, or could this include new formulations or improvements to the existing product, or is it something that would be a complimentary? Thank you.

[Rob Fried:]

That’s a very good question. And the answer to the question is both. as you know, ChromaDex has a very deep understanding of NAD, and we have a fairly developed patent portfolio on precursors besides NR and we are investing in R&D in developing those next generation precursors that we think are complimentary to NR that perhaps in combination with NR or perhaps even better than NR. In addition, we are investigating combination products of NR in addition to something else and the purpose of that would be to either to create a more therapeutic benefit or to improve health claims. If it’s an ingredient that comes with it some significant efficacy, as well as health claims, we are studying it and researching it. So, we are looking at both of those types of product extensions, and we’re also looking at alternative ways of delivering NR as just – as opposed to simply just capsules. These are all product extensions that we’re looking at. As you know, we do have a powder form of NR presently. We’re looking at other delivery mechanisms as well. Thank you for that question.

[Destiny Buch:]

Yes. Thank you.

[Operator:]

Our next question is from Mitch Pinheiro with Sturdivant & Co. Your line is open.

[Mitch Pinheiro:]

Hi, good afternoon. Hey, just to follow up on Walmart, I’m curious of two things; one, how did that relationship start? Did you approach them? They approached you?

[Rob Fried:]

Walmart approached us.

[Mitch Pinheiro:]

And when you’re dealing with Walmart, the product can’t fit on the shelf, right. That just won’t happen for long. So, are you – is your support in Walmart going to be in-store support in addition you’re going to be – are there going to be special Walmart circular deals? How much do you think you’re going to have to spend as part of the launch, I mean, you’ve talking significant amounts that to kind of get it going, or can you talk a little bit to those questions?

[Rob Fried:]

Well, Kevin suggested, this is going to be a brick-by-brick one-step-at-a-time approach. We’re not going to do anything very major, very dramatic at launch. We’re going to place it in the stores. We’re going to do some advertising in conjunction, but we’re going to be measuring the data and then making decisions after that.

[Kevin Farr:]

I’d add to that. I think we and Walmart are aligned on the launch expectations and they’re committed to building this business overtime. So, as Rob said, it is a brick-by-brick build to the business and I think the buyer really believes in Tru Niagen, and I believe it’s a Tru Niagen.

[Rob Fried:]

And Walmart was very persuasive. They spent a fair amount of time trying to persuade us to offer the product in Walmart. As you know, it’s not part of our core U.S. distribution strategy or wasn’t, but they understood the product extremely well, had spent a great deal of time researching it and were frankly consumers of it. And we thought made a convincing case for why it would succeed there. But also, as Kevin is saying that we don’t expect it to be, the expectations are not high in the short run. We’re going to take it one-step-at-a-time, so that we are successful with this launch.

[Mitch Pinheiro:]

Well, I mean just last on Walmart, will there be any – so obviously, you can buy the product at Walmart. Would there be a reason for that customer to shift channel that to – you’re either through Amazon or let’s say, is there something to be some sort of – is there a tie in at all longer terms between the channels or how do you approach that?

[Rob Fried:]

We don’t have a plan for that. It is our hope that it is extremely successful at Walmart for ChromaDex and for Walmart.

[Mitch Pinheiro:]

Okay. One more question. So, you had nice sequential growth of nice entering the quarter, what – can you talk about new customer versus your existing customer growth rates, any color around that would be helpful?

[Rob Fried:]

We’re not showing the actual growth rate, but what we can tell you is that the new customer increase was substantial in the fourth quarter, which is encouraging for us, because we had seen that flattening out during 2020.

[Mitch Pinheiro:]

Okay. Thank you for your time.

[Rob Fried:]

Thank you.

[Kevin Farr:]

Thanks, Mitch.

[Operator:]

Our next question is from Jeff Van Sinderen with B. Riley. Your line is open.

[Jeff Van Sinderen:]

First, let me add my congratulations. Walmart is a terrific partner. I’m really happy to see that. I guess my question is, how are you thinking about, or how are you approaching perhaps adding other retailers in the future? How are you thinking about a timeframe for that, would it make sense for you to go into the drugstore channel or perhaps other retailers? Just wondering how you’re thinking about that at this point?

[Rob Fried:]

Yes. that’s a good question. As you know, we do get frequent phone calls from potential partners and retail has not been part of our core strategy. But the Walmart people are very smart and very persuasive. And of course, Walmart is a great company. Ultimately, what we decided is that everybody deserves to age better and benefit from nicotinamide riboside, not just people who can afford an extremely expensive product online. So, we understand that it is our mission to get as many people exposed to Tru Niagen as possible, and hopefully, getting as many taking it as possible. We think it improves their health, particularly, as they age or when they’re under physiological stress. And of course, as many of us know, growing older is a physiological stress. So, it is conceivable that at some point, we will expand to other retail partners, but we don’t have plans for that right now. We’d like to succeed with what is there and then take it one step at a time.

[Jeff Van Sinderen:]

Okay, fair enough. Well, for what it’s worth, I think it’s a brilliant plan with Walmart making it more accessible at lower price point. I think that’s going to be extremely successful. Just any update, you can give us on Nestlé, any metrics there to speak about, and I guess the outlook around working with Nestlé and then also, how are you thinking about working with potential new partners for similar products inclusion in the future?

[Rob Fried:]

As I mentioned, we do get quite a few phone calls from potential partners, but we’re very, very careful and we’re very, very selective. We are in business with some great companies right now. We think Nestlé is one. We think Walmart is one. We think Watsons is one. We love our partnership with grace. There are other companies with whom we have had and are having conversations, but much to the chagrin of many. We’re very careful and very deliberate and very slow. So, it has to fit in strategically and it has to make sense for our shareholders to do a deal like that. But yes, it is possible that you could see another deal like the Nestlé deal with another partner. Generally, our primary goal is to build a global brand. So, we’re building a global consumer brand. So, if it’s a partner that has their own consumer brand, it’s very delicate situation. We want them to succeed with their brands and at the same time, we need to further our strategic goals. So sometimes these can be difficult negotiating points to work out. The other question was how’s it going with Nestlé?

[Jeff Van Sinderen:]

Correct.

[Rob Fried:]

So, the Nestlé relationship, I would describe as excellent. We speak to them frequently, in fact, more frequently now than ever before they did sit – they did launch their brand Celltrient. There is a great deal of interest at Nestlé and NR, in fact, many of the things that ChromaDex is doing, and there have been discussions on ways to expand the relationship, help them to – help both companies to succeed. As you know, we did a deal with Persona, that’s another division of Nestlé, where we supply Tru Niagen as finished capsules to that division of Nestlé called Persona. There are other areas at the nest and within the Nestlé family with whom we have a relationship and I’ve had discussions, but there is nothing eminent and there are no announcements that we are about to make.

[Jeff Van Sinderen:]

Okay. Thanks for taking my questions. I’ll take the rest offline.

[Rob Fried:]

Sure.

[Kevin Farr:]

Okay. Thanks, Jeff.

[Rob Fried:]

Thanks, Jeff.

[Operator:]

Our next question is from Bill Dezellem with Tieton Capital Management. Your line is open.

[Bill Dezellem:]

Thank you. I’ll ask one Walmart question and then a couple of numbers questions, please. Relative to Walmart, will you be selling under the Tru Niagen name and will the bottle look the same, have the same color scheme, et cetera?

[Rob Fried:]

Yes. To both.

[Bill Dezellem:]

Thank you. And then G&A jumped up a fair amount in the fourth quarter versus the third quarter. What was driving that?

[Kevin Farr:]

Yes. I think as I said in my comments that the big driver was that from an incentive calculation perspective, we exceeded what we expected to do in the full year for the fourth quarter. And that would be a bigger incentive accrual, and there were some other accounting fees and recruiting fees that were in that number in the fourth quarter.

[Bill Dezellem:]

Great. And then last one, you did mention that you expect legal expense to increase in the first half of this year. What’s the magnitude of the increased it we should anticipate?

[Kevin Farr:]

Yes. I think, when you look at it, this year in 2020, it was a bit lower, because we didn’t go to trial. Next year, we think it’s going to be higher. This year was 8.5, next year, I think it’s going to be consistent what we’ve said before $2 million to $3 million a quarter, and the court cases are happening, the Delaware case in September, the California case in September and I think the judge in the New York case said to be ready in August. So, it’s more likely, it’s going to be in to the high end of the range. And maybe, you referenced back to 2019, where we were working on all three cases, but none of those went to trial in 2019.

[Bill Dezellem:]

Great. Thank you, both.

[Kevin Farr:]

Thank you.

[Operator:]

And ladies and gentlemen, this is all the time we have for today. I’ll now turn the call back over to Ms. Gerber for any closing remarks.

[Brianna Gerber:]

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

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.