Edited Transcript of CDXC earnings conference call or presentation 11-May-20 8:30pm GMT – Yahoo Finance

Posted: May 12, 2020 at 1:00 pm

Irvine May 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Chromadex Corp earnings conference call or presentation Monday, May 11, 2020 at 8:30:00pm GMT

* Kevin M. Farr

* Robert N. Fried

H.C. Wainwright & Co, LLC, Research Division - Equity Research Associate

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

B. Riley FBR, Inc., Research Division - Senior Analyst

Ladies and gentlemen, thank you for standing by, and welcome to ChromaDex Corporation's First Quarter 2020 Earnings Conference Call. My name is Julianne, and I will be the conference operator today. (Operator Instructions) 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 2020. If you have not reviewed this information, both are available within the Investor Relations section of ChromaDex's website at http://www.chromadex.com.

I would now like to turn the conference over to Brianna Gerber, Vice President of FP&A and Investor Relations. Please go ahead, Ms. Gerber.

Thank you. Good afternoon, and welcome to ChromaDex Corporation's First 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 interest that are subject to risks and uncertainties relating to ChromaDex's future 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 report on Form 10-Q most recently filed with the SEC. 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 http://www.chromadex.com.

With that, it's now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried. Rob?

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Robert N. Fried, ChromaDex Corporation - CEO & Director [3]

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Thank you, Brianna. Good afternoon, everyone, and thank you for joining our first quarter 2020 investor call. I hope everyone listening is navigating well these troubling times.

ChromaDex had another strong quarter with total net sales of $14.3 million. Overall sales increased 10% sequentially and 43% year-over-year. TRU NIAGEN net sales were $11.1 million, a 10% increase sequentially and a 50% increase year-over-year.

Sales to Watsons were down slightly compared to the prior quarter due to the impact of the coronavirus and the protests on retail traffic in Hong Kong stores.

Importantly, our efforts in reducing costs continued to show positive results as adjusted EBITDA, excluding total legal costs was a net loss of $316,000.

ChromaDex reacted swiftly when the coronavirus hit. We already understood that there is an impact on NAD when viruses are present, but we immediately initiated preclinical research in the area in the first quarter, led by our Chief Scientific Adviser, Dr. Charles Brenner. And as you may have noticed, Dr. Brenner published promising results in the initial preclinical study last month. Further research is required and further research is underway.

Additionally, we adjusted our marketing messaging in the first quarter to include the impact that lifestyle, viral and age-related stressors have on our NAD levels and our cellular health. This, in addition to the existing messages of cellular energy, cellular repair and aging.

And finally, we stepped up our ongoing efforts to streamline costs.

With regard to the overall outlook for the year. It is still not clear if COVID '19 will be positive or negative for our business. We're currently expecting a reduction in our top line growth, but improvement in the bottom line results relative to the outlook presented last quarter. This includes some recent changes to our organization as well as some ongoing initiatives across our supply chain. Kevin will provide additional context when he discusses our financial outlook for the year.

Let's now get to the 3 pillars of our business strategy: build a global brand, to own the science, and to focus on the fundamentals. First, the brand. As mentioned, global TRU NIAGEN net sales were $11.1 million in the quarter, a 10% increase sequentially and a 50% increase year-over-year. TRU NIAGEN represented 78% of the $14.3 million in the quarter.

International sales for TRU NIAGEN represented approximately 29% in the first quarter. This includes sales to Watsons in Hong Kong and Singapore, but also cross-border sales in China, Japan, Europe and sales to our partners in Australia, New Zealand, U.K. and Canada.

Sales to Watsons were $1.8 million in the first quarter, a slight decrease versus the previous quarter. Lower sales in the base business in the first quarter were largely offset by shipments for TRU NIAGEN Beauty, which launched in stores in late April. TRU NIAGEN beauty builds on the success of the TRU NIAGEN brand is an award-winning and best-selling health product among Watsons' Hong Kong loyalty members as well as driver of their health care category. The NIAGEN Beauty will allow us to reach new demographics seeking our science-based solutions for their beauty routines. We're pleased to extend our product portfolio with a strong partner like Watsons.

At this time, there are no plans to extend TRU NIAGEN Beauty beyond the region. E-commerce net sales were $8.2 million, a 4% increase sequentially and a 39% increase year-over-year. Sales from returning customers in the U.S. continue to outpace the new customer sales.

In addition, we have cross-border sales in the U.K., Japan, Korea, Germany, France and China, which grew 179% year-over-year. Currently expanding distribution to include 2 of China's largest online retailers, Kaola and JD.com in the second quarter. These platforms will complement our existing Tmall presence in China.

We also added 2 European cross-border markets in the first quarter following the EFSA approval, France and Germany.

Additionally, we're continuing to build our brand with strong global partnerships. We shipped initial orders to the Australia, U.K. and Persona Nutritions in the first quarter, expanding our partnerships with Matakana Superdrug in the U.K., a division of the A.S. Watson Group and Nestl Health Science, respectively.

In late April, we announced that our U.K. partner is Superdrug, a leading health and beauty retailer with over 800 stores in the U.K. and a member of the A.S. Watson Group. This represents our entry into the European market, and we're proud to expand our partnership with the A.S. Watsons Group. As mentioned last quarter, the initial launch is a small test launch in 200 Superdrug stores across the U.K. as well as superdrug.com. We very much applaud the efforts of Superdrug and Watsons for keeping essential items such as TRU NIAGEN available to customers worldwide during this unprecedented time.

We built upon our relationship with Matakana to include exclusive distribution rights in Australia in online and retail channels. Matakana is an established dietary supplement manufacturer and distributor with more than 90 lines of organic and Superfood products. TRU NIAGEN complements, Matakana's existing portfolio of products and their broad distribution as well as knowledge of our science-based product, this positions the brand for strong growth in Australia. We are partnering with them on a number of influencers, social media and earned media initiatives to drive awareness and sales in the market.

We're very much looking forward to the Nestl Health Science, TRU NIAGEN product later this year, which will emphasize the importance of cellular nutrition. As I previously said, the initial test launch will be in loose powder format, and Nestl plans to begin initial marketing efforts next month.

Persona Nutrition, the division of Nestl Health Science launched TRU NIAGEN in the first quarter. Persona is the leader in the fast-growing area of personalized nutrition. We believe it is a growth opportunity for TRU NIAGEN and one that also helps build the brand.

Our second core objective is to own the science. We are confident in the science behind NIAGEN and are actively tracking the increasing volume of research on the molecule that is currently underway. Several new studies have been registered and published since our last update. Frank will summarize in a moment.

Recently, we announced the first round of results of a combination issue, an in vitro study led by Dr. Charles Brenner, our Chief Scientific Officer; one of the world's foremost experts in NAD research as well as Dr. Stan Perlman, one of the leading experts on coronavirus. Dr. Brenner's preclinical study showed 2 key findings: one, a COVID-19 introduction to the studied cells caused greater than threefold reduction in NAD; and two, these infected cells specifically sought out nicotinamide riboside, NIAGEN in an attempt to replenish NAD levels in the face of the viral infection. We expect additional research from Dr. Brenner to be made public soon.

The next phase of his preclinical research will explore whether introducing nicotinamide riboside, or NIAGEN, may support cells innate immune response to coronaviruses and other viruses. We will publicly share the findings of this research when appropriate. We are also exploring additional preclinical research on nicotinamide riboside, or NIAGEN and COVID-19 through our industry-leading ChromaDex external research program.

We also continue to build upon and protect our intellectual property, which includes our ongoing litigation against Elysium Health. A May 12 trial date for the California Litigation was postponed due to court closures in the wake of the coronavirus outbreak. We recently submitted a written joint status report, and the court granted our request for a status conference in June.

New York, discovery has been extended by 4 months due to restrictions on taking depositions in the wake of the coronavirus. And in Delaware, regarding patent infringement by Elysium, it has been scheduled for trial on September 27, 2021. Moving forward following the recent Court of Appeals decision that upheld the validity of the Dartmouth patent, which is licensed by ChromaDex.

To remind everyone, Elysium could not appeal the rejection of their challenge to the 807 patent. Now that Elysium lost their appeal of the PTAB decision validating the 086 patent. Elysium cannot raise those same arguments in the patent infringement lawsuit regarding any claims on the 086 patent. We remain confident in the facts of all 3 cases and are eager to get to trial.

In the meantime, we expect lower near-term legal expense with delays attributable to the coronavirus.

Our third strategic pillar is to focus on fundamentals. It is our mission to lead by example of this industry. During the time when the world is looking for new solutions to maintain their health, we strongly encourage consumers to choose trusted brands, supported by published scientific data with regulatory approvals. We continue our basic philosophy of science-based marketing and conservative financial management. We recently announced the $5 million capital raise to provide some further strength to the already strong balance sheet.

In summary, in the wake of the coronavirus, we are successfully driving the business forward. We are leading important research in the field, delivering on incremental growth opportunities and adjusting our cost structure, maintaining a strong balance sheet. I believe ChromaDex will be even stronger once this global macroeconomic crisis is behind us.

And now I will pass the call over to our Chairman, Frank Jaksch, for an update on scientific research. Frank?

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Frank Louis Jaksch, ChromaDex Corporation - Co-Founder & Executive Chairman [4]

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Thank you, Rob. As Rob stated, one of our core objectives is to own the science. We are committed to remaining a global scientific authority on NR and NAD research as well as setting the standard for excellence in the industry with our commitment to science, safety and quality.

Last call, publication of research on NR and NAD has continued to accelerate with the publication of the Ninth Human Trial and multiple preclinical studies.

As Rob mentioned earlier, Dr. Brenner and scientists from the University of Iowa, Oregon Health and Science University and the University of Kansas recently published preliminary preclinical research on the potential impact coronavirus has on NAD levels in cell, animal and human tissue. The findings were published on BioArchive, a preprint server. The researchers characterized the key steps in what happens in a coronavirus infected cell and the impact it has on a innate immunity.

Before moving on, I want to briefly discuss the concept of a innate versus acquired or adaptive immunity. Acquired immunity is where the body's immune cells have developed specific antibodies after being exposed to a virus and they can quickly seek out the virus and destroy it before it can spread infection. This is how vaccines work using the acquired or adaptive immune response to protect us from viruses.

In contrast, innate immunity is where the cells go to work to fight off the infection when it is first introduced to the body. The body mobilizes immune cells to seek out, attack and destroy the virus. What we've learned from these early publications is that NAD is important for the initial innate or nonspecific response. However, further preclinical research is required in those preclinical studies are underway.

There are 40 ongoing, completed and published clinical trials currently registered on clinicaltrials.gov to investigate the pharmacokinetics and the therapeutic effects of NR. This is 1 more than our last update. An additional 9 clinical trials are registered to test NR in combination with other ingredients for a total of 49. We finished the quarter with 195 signed research collaborations, up by approximately 10 compared to last quarter.

I highlighted an interesting recent published study on NR since we last spoke. In April, a preclinical study demonstrating the effects of both niacinamide and our product, nicotinamide riboside. Supplementation on cardiac electrophysiology was published in the Journal of Molecular and Cellular Cardiology. Researchers from the University of Iowa were able to demonstrate that both NR and NAM increased NAD and NADH levels. However, only NR indicated a potential cardiovascular effect. These results reinforce earlier preclinical findings that suggest increased NAD levels may have a beneficial impact on cardiac conditions and arrhythmias. The researchers concluded that the results warrant further investigation into NR as a potential therapy for cardiac arrhythmic disorders.

Finally, I'll briefly touch on the newly registered clinical studies, all of which were registered in April. First, a study was registered by Ko University Hospital in Turkey to establish metabolic improvements in obese patients with nonalcoholic fatty liver disease, or NAFLD. Through dietary supplementation of NR with the combination of serine, L-carnitine and N-cacetylcysteine. Previous studies have suggested that each of these nutrients decrease liver fat. Thus, the researchers hypothesized that supplementation of a combination of these ingredients, including NR, will stimulate pathways to enhance hepatic oxidation, resulting in decreased liver fat.

Additionally, a pilot study was registered by the Cleveland Clinic, a comprehensive cancer care center to investigate the effects of nicotinamide riboside supplementation in allogeneic hematopoietic cell transplantation. The objective is to find a safe and tolerable way to improve engraftment after transplant. Research studies have shown that adding NR to donor cells has the potential to increase blood stem cell numbers and potentially decrease the time to engraftment.

Before turning the call over to Kevin, I'd like to briefly discuss our new framework for categorizing the areas of ongoing research on NR. In the past, I have discussed studies categorized by various health conditions such as heart health or cardiovascular health, brain health or neurological health, liver health as well as many others. At ChromaDex, we've begun to frame the discussion in the context of a new way of looking at health called intrinsic capacity, which is part of the World Health Organization's framework for healthy aging.

According to WHO, intrinsic capacity is the composite of all mental and physical capacities that a person can draw on, including their ability to walk, think, see, hear and remember. It is an indicator of one's ability to cope with physiological stress and still maintain these functions. We categorize these concepts into 5 domains of intrinsic capacity, vitality, cognition, locomotion, sensory and psychological. In other words, intrinsic capacity is defined by the underlying health of our cells. Nutritional solutions such as NR represent an opportunity to help maintain or even improve intrinsic capacity.

We've included a slide in our earnings presentation, illustrating how cellular health supports intrinsic capacity. Going forward, I'll be presenting the summary of ongoing clinical studies in these intrinsic capacity domains consistent with our internal framework.

In summary, ChromaDex is committed to remaining the leader in the NR, NAD and cellular health conversation. As Rob mentioned, Dr. Brenner's preclinical research is ongoing, and we will provide updates when appropriate.

With that, I'll pass the call over to Kevin Farr. Kevin?

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Kevin M. Farr, ChromaDex Corporation - CFO [5]

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Thank you, Frank. Let's look at our financial results for the first quarter of 2020, which reflected continued progress against our key financial objectives and strong underlying business performance. The underlying business is measured by adjusted EBITDA, excluding total legal expense, approached breakeven in the first quarter with a loss of $316,000. This was a $1.8 million improvement sequentially and a $2.4 million improvement year-over-year. Compared to the fourth quarter of 2019, we delivered strong sequential top line growth, higher gross margins, significant lower advertising expense as a percentage of net sales and lower general administrative expenses primarily driven by the absence of Elysium-related debt expense in the current quarter, partially offset by higher severance and restructuring charges, which are related to cost savings initiatives.

In April, we strengthened our balance sheet with a $5 million common stock raise from existing strategic investors. While there was not an immediate need for the additional capital, we believe it's prudent given the current economic uncertainty. We're always opportunistic if an investor wants to invest capital into the company, and it benefits all of our shareholders.

With this additional $5 million, based upon our current outlook, we believe we have enough cash to reach cash flow breakeven and defend our intellectual property, excluding our $7 million committed line of credit. The line of credit provides additional financial flexibility.

Moving to the first quarter results. For the 3 months ended March 31, 2020, ChromaDex reported net sales of $14.3 million up 10% compared to the $13.1 million in the fourth quarter of 2019. Year-over-year net sales were up 43% compared to the first quarter of 2019.

TRU NIAGEN net sales were up 10% sequentially and grew by 50% year-over-year with diversified growth across U.S. e-commerce, Watsons and international cross-border launches year-over-year. Watsons' sales remained solid at $1.8 million in the quarter, but were down slightly versus last quarter. As expected, Watsons' experienced softer consumer takeaway in the first quarter due to store closures in the wake of the coronavirus. As the economy began to reopen in March, these trends improved, but have yet returned to prior levels. As Rob mentioned, we also shipped our new product TRU NIAGEN Beauty in the quarter, which aligned with Watsons' late April launch. We expect continued impact on sales to Watsons in the second quarter due to the coronavirus.

Total NIAGEN-related net sales were up 8% sequentially and 53% year-over-year. We've experienced strong demand for NIAGEN from our customers.

Turning to the rest of the P&L. On a sequential basis, our gross margin was up 90 basis points from 57.0% in the fourth quarter of 2019 to 57.9% in the first quarter of 2020. Year-over-year gross margin increased by 520 basis points to 57.9% compared to 52.8% in the first quarter of 2019.

As a reminder, last year, we recorded a 250 basis point charge related to the wind down of our purple corn ingredient sales. Product cost savings initiative and overall scale in our supply chain drove the improvement in gross margins. We believe both factors as well as favorable mix from growing TRU NIAGEN consumer product sales represent a tailwind to gross margins in 2020.

On a sequential basis, our total operating expenses for the first quarter of 2020 was $14.2 million, down $2.1 million compared to the fourth quarter of 2019. As a reminder, the fourth quarter of 2019 included a onetime bad debt charge of $2.2 million related to the full write-off of our Elysium receivable.

Our selling and marketing expenses were down $0.7 million to $4.4 million in the first quarter of 2020 compared to $5.1 million in the fourth quarter of 2019. As a percentage of net sales, this expenditure was down 800 basis points in the first quarter of 2020 versus the fourth quarter of 2019.

We made continued progress, improving marketing efficiency in our TRU NIAGEN business driven by strong returning customer growth while investing in initiatives to drive new customer growth, both in the U.S. and internationally. We continue to monitor daily e-commerce metrics such as customer acquisition costs to adjust messaging and spending, which is increasingly important in this fluid environment.

As reported, G&A expense was down $1.3 million to $8.8 million in the first quarter of 2020 versus $10.1 million in the fourth quarter of 2019. This included $2.4 million of legal fees and $1.0 million of severance and restructuring expenses in the current quarter. Excluding legal fees, severance, restructuring and equity compensation expense, first quarter 2020 G&A expense was lowered by $0.1 million versus the fourth quarter of 2019 comparable G&A expense, which also excluded Elysium-related bad debt expense.

Legal expense was up slightly compared to the fourth quarter of 2019. Motions for summary judgment when we decided following hearings in the California matter during the first quarter, and discovery accelerated in the New York litigation.

Sequentially, the trial was delayed in California case due to the suspension of all jury trials caused by the coronavirus. For the same reason, deposition discovery was delayed in New York.

As a result, we expect legal expense to be lower in the second quarter of 2020 despite ongoing investments in the Delaware patent infringement case in preparation for the Markman Hearing in December 2020, and the trial in September 2021.

For the first quarter of 2020, our operating loss was $5.9 million versus $8.9 million in the fourth quarter of 2019, which included the $2.2 million bad debt write-off. The net loss attributable to common shareholders for the first quarter of 2020 was $5.9 million or a loss of $0.10 per share as compared to the net loss of $8.9 million or a loss of $0.15 per share for the fourth quarter of 2019. The fourth quarter of 2019 net loss per share included the $0.04 per share bad debt expense.

As we said, we believe it's important to focus on sequential trends in our business to demonstrate progress towards cash flow breakeven. To help investors better engage the underlying performance of our business in the second quarter of 2019, we introduced a new non-GAAP measure adjusted EBITDA, excluding total legal expense. ChromaDex defines adjusted EBITDA, excluding total legal expense as net income or loss, which is adjusted for income tax, interest, depreciation, amortization, noncash stock compensation costs, bad debt expense related to Elysium, severance and restructuring expenses and total legal spending. We have included a reconciliation to the appropriate GAAP measures in our earnings release slide.

Litigation expenses represents the majority of our legal spend today. We are excluding total legal spending from adjusted EBITDA since we expect to decline significantly after the matters are concluded.

In the fourth quarter of 2019, we began excluding severance and restructuring expenses that we expect to deliver measurable, sustainable net cost savings in late 2020 and beyond. We made changes to the organization in the first quarter and completed negotiations as part of our end-to-end supply chain evaluation.

On an annualized basis, we identified at least $2 million of gross savings, with the majority of the savings delivered to be realized in 2021. We incurred $1.2 million of severance and restructuring expenses related to these cost savings initiatives. As is prudent in this uncertain economic environment, we'll continue to evaluate our cost structure and see additional opportunities in our supply chain.

As I previously highlighted, adjusted EBITDA, excluding total legal expense improved by $1.8 million to a loss of $0.3 million in the first quarter of 2020 compared to a loss of $2.1 million in the fourth quarter of 2019.

Year-over-year, we delivered a $2.4 million improvement in the first quarter of 2020 versus a loss of $2.7 million in the first quarter of 2019. The improvement in the first quarter of 2020 was primarily driven by higher sales and gross margins and marketing efficiency.

Moving to the balance sheet and cash flow. We ended the first quarter of 2020 with cash of $13.6 million, down $5.2 million versus the fourth quarter of 2019.

In the first quarter of 2020, our net cash used in operation was a negative $5.2 million versus a negative $0.6 million in the fourth quarter of 2019.

Consistent with our expectation, the higher cash outflows from operations this quarter was driven by working capital, which is a $1.6 million use of cash in the first quarter of 2020 compared to a $3.9 million source of cash in the fourth quarter of 2019. The use of cash in the first quarter was related to an increase in accounts receivable and a decrease in accounts payable, largely due to lower NIAGEN ingredient purchases.

Today, we've successfully navigated the business during the coronavirus pandemic. At this time, we do not expect any supply to change disruptions from coronavirus and have implemented risk assessment strategies to manage this going forward.

As it relates to revenues, the COVID-19 situation remains fluid and difficult to predict. Against this backdrop, we are managing our expenses to mitigate the bottom line impact to the company.

As Rob said, we took a hard look at our 2020 financial plan to ensure we're prioritizing investments with the highest return in the current environment.

For full year 2020, we expect continued top line growth driven by our U.S. e-commerce business, launches in new international markets such as the U.K. and Australia, and launches on new platforms such as Persona Nutrition. As we have said, we anticipate a lower growth rate than the 47% in 2019 due to: a larger revenue base, the impact of the coronavirus and the impact to divesting our Spherix regulatory consulting business, which accounted for roughly $700,000 of 2019 net sales.

As Rob mentioned, we see the coronavirus having impact on Watsons in the second quarter. There has also been a modest impact in our HCP business where some sales are tied to trade shows, which have been canceled.

COVID-19 may also impact our international market launches at retail, but these are incremental opportunities relative to 2019. It's too early to determine the impact of the coronavirus on our e-commerce sales. Consumers are likely to balance concerns about employment, overall macroeconomic weakness with their desire to invest in their health with supplements like TRU NIAGEN.

Based on the trends to date, we're planning for continued growth in this business in 2020. We continue to expect gross margin expansion due to the favorable mix from our growing e-commerce business, the product design changes implemented in late 2019 and additional supply chain cost savings initiatives.

We continue to expect an increase in selling and marketing expense of $3 million to $5 million, including investments in brand awareness and investments in new market launches. We expect continued improvement in selling and marketing expense as a percentage of net sales driven by strong sales growth from returning customers.

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Edited Transcript of CDXC earnings conference call or presentation 11-May-20 8:30pm GMT - Yahoo Finance

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