NAGE - NASDAQ

Hello and thank you for standing by. My name is Regina and I'll be your conference operator today. At this time, I'd like to welcome everyone to the ChromaDex Corporation Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there’ll be a question and answer session. [Operator Instructions]. I would now like to turn the conference over to Kendall Knysch, Head of Public Relations and partnerships. Please go ahead.

Thank you. Good afternoon and welcome to ChromaDex Corporation's third quarter 2023 results investor call. With us today are ChromaDex's Chief Executive Officer, Rob Fried, Chief Financial Officer, Brianna Gerber, and Senior Vice President of Scientific and Regulatory Affairs, Dr. Andrew Shao, who will join the call for Q&A. Today's conference call may include forward-looking statements, including statements related to ChromaDex's research and development and clinical trial plans and the timing and results of such trials, the timing of future regulatory filings, the expansion of the sale of Tru Niagen in new markets, business development opportunities, future financial results, cash needs, operating performance, investor interest, and business prospects and opportunities, as well as anticipated results of operations. Forward-looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause ChromaDex’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These risk factors include those contained in ChromaDex’s quarterly reports on Form 10-Q most recently filed with the SEC, including results of operations, financial condition, cash flows, adverse 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 the forward-looking statements, actual results, or to changes in its expectations. In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company's earnings presentation and earnings press release, which were issued this afternoon and are available on the company's website, presents reconciliations to the appropriate GAAP measures. Finally, this conference call is being recorded via webcast. The webcast will be available at the Investor Relations section of our website at www.chromadex.com. With that, it is now my pleasure to turn the call over to our Chief Executive Officer, Rob Fried.

Thanks, Kendall. Good afternoon, everyone. And thank you for joining us on today's investor call. For the third quarter we delivered another solid quarter with $19.5 million in revenue a 14% increase year-over-year, coupled with another quarter of positive adjusted EBITDA of $500,000 and net positive operating cash flow of $400,000. Year-to-date revenues are up 22% and we have generated $6.5 million of positive cash flow from operations. We ended the third quarter with $26.8 million in cash and no debt. These continued achievements are a testament to our commitment in maintaining fiscal discipline and driving profitable growth for the business. The E-commerce business continues to be our largest and most consistent source of revenue. E-commerce net revenue is up 13% year-over-year as our marketing team continues to focus on initiatives and campaigns that drive direct and efficient returns. For the total company sales and marketing expense was 31% of net revenues, which was down sequentially and a significant reduction from 34.4% in the prior year quarter. We recognize that building a strong subscription based on our own website is critical to driving long term customer value and we have identified important fundamental changes to rebuild this growth engine for business. To deliver on this key objective for 2024, we will look to increase resources to optimize our retention strategy, our content and our social media presence. Beginning in the fourth quarter. We will also look to increase resources to support the launch of new innovations in 2024. Of course, with any transition it will take time for the improvements in strategy and execution to be reflected in the net revenues and further efficiencies, we remain committed to being disciplined in our investments. And we believe that the resources we are investing in will amplify our message and our vision that ChromaDex is the gold standard in the NAD space and Tru Niagen continues to be the best NAD product on the market. Turning to our strategic partnerships, Watson's remains a strong contributor to growth with third quarter revenues of $3.1million, a 19% increase year-over-year. As I mentioned last quarter, Watson's has been promoting the stacking concept which involves combining Tru Niagen with Tru Niagen immune and or Tru Niagen beauty. This continues to be an effective message for consumers. We're exploring the opportunity to better implement the staffing concept in other markets to similarly promote the Tru Niagen immune product. The partnership with Sinopharm in China remains one of great opportunity and importance, the process to pursue Blue Hat approval continues to take longer than anticipated. But that is not stopping our teams from continuing to work closely with Sinopharm to execute campaigns and initiatives to capture the market opportunity in the country, encouragingly, last month, Tru Niagen was featured as the best NR supplement in 2023. In an article to Health Products Association, China. Last quarter, I highlighted our new partnership with iHerb. While the partnership is still in the early stages of growth, we have been pleased with the performance so far. As expected around 80% of Tru Niagen’s sales through iHerb has been to international consumers. We continue to be optimistic in the partnership with iHerb to drive expands an international presence for Tru Niagen and are actively working with them on campaigns to feature our brand more prominently on the platform. With our Niagen ingredient partners, there are two significant milestones I'd like to announce. First, we are partnering with

Thank you Rob. Now that we've covered the broader strategic landscape and operational overview, I'm excited to delve into the specifics of our third quarter financial results, which showcase our commitment to balance top and bottom line growth and overall operational discipline. Highlighting the key metrics of our third quarter performance, ChromaDex delivered total net sales as $19.5 million up 14% robust gross margins of 61.4%, a reduction in overall operating expenses and a net loss of only $1 million. Additionally, our adjusted EBITDA a non-GAAP metric was a positive $0.5 million a $1.7 million improvement year-over-year. Net sales are up 22% year-to-date, with an adjusted EBITDA $0.7 million and positive operating cash flow of $6.5 million. Our performance this quarter underscores our relentless pursuit as efficiency across the organization to position the business for sustainable growth and profitability. The consistent results we have achieved speak to the resilience of our business model, and we are proud of the progress we've made today. With that, let's turn to the third quarter financials in more detail. As I said total net sales in the third quarter of 2023 were up 14% year-over-year, as compared to the third quarter of 2022, with a 19% increase in Tru Niagen driven by 13% growth in E-commerce sales, fueled by continued growth on Amazon, including a strong performance on Prime Day, paired with 43% growth in combined Watson's and other B2B sales. Watson sales were higher year-over-year as the COVID-19 and macroeconomic challenges abated coupled with reorders for Tru Niagen immune following a positive initial launch response from consumers last quarter. We also benefited from sales with new partners like iHerb and ShopHQ which were not in the prior year period. On that note, ShopHQ parent company iMedia brand has successfully been acquired by IV Media LLC. The new owner has conveyed an interest in sustaining a partnership with ChromaDex and continues to purchase in the third and fourth quarter. We have formally asserted a claim for the past due amount totaling approximately $930,000 in the bankruptcy court. Given the uncertainty of the bankruptcy process and our assessment of collectability we placed a reserve on remaining balance of trade receivable with ShopHQ this quarter, which was not material to our overall financial results. We have now reserved the full $930,000 outstanding receivable. In the context of these developments we are currently supplying to them only on pre-payment terms to sustain the business and mitigate risks to ChromaDex while negotiating with the new owner. As we navigate through this transition the continued success of ShopHQ, TV retail model for Tru Niagen makes us optimistic about a continued partnership. The increased sales from our Tru Niagen business were partially offset by lower Niagen ingredient sales down 21% year-over-year. As you may recall, are ingredient sales surged in the first half of the year, due to the addition of new partners and continued sales from existing partners. Year-to-date, Niagen ingredient sales were up 78% compared to the prior year, and we maintain a positive outlook for Niagen ingredients sales growth for a full year 2023. Despite some quarter-to-quarter variability. Of note, we face our most challenging ingredient sales comparison in the fourth quarter, since the prior year results included a $2 million upfront minimum purchase from Nestle. Gross margins increased by 160 basis points reaching 61.4%, compared to 59.8% in the third quarter of 2022. The elevated gross margin in the quarter was primarily a result of higher overall sales, allowing us to more efficiently leverage fixed supply chain costs, including labor and other overhead. Additionally, we continue to drive cost savings across the supply chain through optimization efforts and shipping and procurement as well as improvements in yield loss with BMO [ph]. As Rob mentioned, selling and marketing expense as a percentage of net sales decreased the 31% improving 340 basis points compared to 34.4% in the third quarter of 2022. Research and development expense remain stable compared to the prior year quarter. However, there were two offsetting drivers. First, we had increased investments of approximately $0.4 million to support important R&D initiatives, which were largely offset by a $0.3 million refund related to a discontinued R&D project. We anticipate a further uptick in these R&D investments during the fourth quarter as we ramp up R&D projects, paving the way for new commercial opportunities for ChromaDex in 2024 and beyond. As reported, general and administrative expense decreased $0.3 million compared to the prior year period. The reduction was primarily attributable to lower legal expense, as well as lower severance and restructuring expense. For the third quarter of 2023. Our operating loss was $1.1 million versus a $3.1 million loss in the third quarter of 2022, an improvement of $1.9 million, largely driven by higher net sales. The net loss attributable to common stockholders for the third quarter of 2023 was $1 million or a loss of $0.01 per share consistent with a net loss of $1 million and a loss of $0.01 per share in the third quarter of 2022. The prior year quarter included a one-time recognition in other income for the employee retention tax credit or ERTC. When the ERTC is excluded, net loss improved $2.1 million, which highlights a clear fundamental improvement in profitability this quarter. Moving to the balance sheet and cash flow, our balance sheet remains strong. We ended the quarter with $26.8 million in cash and no debt. For the nine months ended September 30 2023 net cash provided by operations was $6.5 million a significant turnaround from the $14.8 million cash outflow in the same period last year. The difference year-over-year was largely driven by improvements in our net loss of $10.1 million. So with changes in working capital primarily related to inventory and prepaid in other assets, which provided positive impacts of $4.1 million and $3 million respectively year-to-date. With shrinking cash flow year-to-date related to inventory was the result of stronger sell through to Try Naigen in our E-commerce channels and to key partners, higher volume of Niagen ingredients sales and more efficient production management. The change in prepaid and other assets is linked to the employee retention tax credit receivable, booked in the prior year period, coupled with collections against these receivable balance in the current year. For the full year we expect an increase in cash, driven by reduce net loss and improvements in working capital. The trends in the fourth quarter may not be as strong as recent performance, as there is always quarterly variability in investments, inventory production and overall working capital management. As it relates to our 2023 full year P&L outlook, detailed information on key profit and loss metrics can be found in our earnings press release and accompanied by presentation. Overall, all key metrics remain consistent with last quarter's outlook. But we have narrowed our revenue projection as we close out the year and maintaining a conservative approach to our top line outlook, we now expect a 14% to 16% revenue growth year-over-year, driven by our global e-commerce business. Steady growth from new and existing partnerships, upside realized from new partnerships in the first nine months of 2023, and realistic opportunities in the fourth quarter. This reflects a slight adjustment from our prior guidance of at least 15% primarily to account for a slower recovery of our own website business, as we attempt to scale our spend from the low levels last year while maintaining targeted efficiencies. In addition, we have a pipeline of new business development opportunities with partners as well as an exciting new commercial opportunity of our own, this upside is taking longer to materialize and is more likely to contribute to 2024 results. As it relates to adjusted EBITDA, we remain committed to achieving sustainable profitability, for balancing important strategic investments to drive growth. For the first nine months of the year, we sustained adjusted EBITDA breakeven or better each quarter and delivered positive $700,000 year-to-date. Looking to the fourth quarter of 2023, we expect negative adjusted EBITDA as we continue to invest in important R&D initiatives, as well as investments in our marketing team to position us for accelerated growth in 2024 and beyond. We anticipate that adjusted EBITDA will be close to breakeven on a full year basis. In summary, this quarter underscores the strength of our resilient business model with double digit net revenue growth, over 60% gross margins and overall cost reductions as we emphasize increased efficiency. Further, it again highlights our capability of delivering cash flow breakeven, having done so for three consecutive quarters and our significantly improved cash position with $26.8 million on our balance sheet and no debt and truly inspired by our achievements in a short amount of time. I'm confident we can build upon this progress and unlock new revenue opportunities in 2024, which, when coupled with new cost savings initiatives, will enable us to sustain positive adjusted EBITDA. Operator, we are now ready to take questions.

[Operator Instructions] Our first question will come from the line of Ram Selvaraju with H.C. Wainwright. Please go ahead.

Hi. Thanks very much for taking my questions. And congrats on all the progress on the quarter.

Thank you, Ram.

I wanted to ask, firstly about your top line revenue guidance. And if you expect, A, a meaningful increase quarter-over-quarter with respect to the fourth quarter versus the third quarter, if you're already seeing trends, that would be the case. And then if you anticipate sequential quarter-over-quarter revenue growth from here on in, or if we should continue to expect some seasonality to some degree as we look ahead to 2024, if you have any feelings on that?

Thanks. Ram Yes, so it implied in our guidance, I think you'd probably get to the range of revenues, which is what you're looking at, which does imply our fourth quarter sequential uptick. There's a couple things that drive that seasonally, as you pointed out Niagen ingredient is typically higher in the fourth quarter. So we're expecting that trend to continue some of our longer term partners in relative to the third of note year-over-year, the reason the growth rates guide is not as strong as the $2 million upfront from Nestle without impact year-over-year. But you were asking sequentially, ecommerce, no as always continues to be a steady source of performance for us. The website taking a bit longer to turn the trend, Amazon's growing nicely. And we are looking to build upon that going into the third quarter and into 2024. Into 2024, a bit early and looking at quarterly commentary. And we'll give you our fulsome outlook in March. We do see some building blocks we touched on new commercial opportunities, new partnerships, taking a bit longer, that can ladder up to some acceleration and growth on a full year basis, quarterly that seasonality does tend to play out a little bit for us. But more so it's about when we have newer partnerships that are ramping and timing of new ingredient partnerships as an example, or Tru Niagen, it can be lumpy quarter-to-quarter on that part of the business like we've seen this year. I don't know if you wanted to add.

The last few years, the first quarter has been our strong quarter.

Got it. And then just very quickly you mentioned moving into the companion animal space, the veterinary space so to speak particularly on the aging side, and I was just wondering if you could contextualize the potential market opportunity there for the Niagen brand, as well as whether you expect this could be either kind of primarily focused on canine exclusively focused on canine or broadly speaking across multiple companion animal categories.

We do expect it to go broader than just canine. We think the global supplement space for pets is approaching $2 billion, but growing rapidly, one of the fastest growing segments of the supplement space. We do expect to have our own brand and in the marketplace, perhaps next year and they've gotten

Thank you so much.

Your next question comes from the line up Mitch Pinheiro with Sturdivant, please go ahead.

Just wanted to follow up on the guidance for the fourth quarter. So on a year-over-year basis, however, it's going to be flat. And it looks is it just simply maybe a tougher comparison against Watson's last year and the ingredient businesses. Any concerns around ecommerce growth rates?

Yes, it is a tougher comparison on ingredient with Nestle that $2 million last year with ecom.

It's not Watson’s, it's Nestle. That was a one-time large purchase in the fourth quarter of last year. E-commerce looks looks very strong for us.

Yes, I mean, when I look at, like the efficiency it's not a perfect look. But your efficiencies been growing for the last four or five quarters, your marketing spend what drives your total e-commerce. And I just a little confused, why you call out that your website is having a tough return than Amazon, just elaborate?

We've put many more much more resources over the last two years into Amazon than we have our own website Shopify. So Amazon has actually become more efficient than Shopify over the last couple years, but we've begun to turn that around. And what we are now doing is putting more of our resources into Shopify, and we expect to be Shopify to be a more significant engine for growth for us in the future. And when I say Shopify, I'm referring to our website than Amazon. So the team that we're building the team, we're putting more advertising revenues into it, we're optimizing the site. We see there’s an opportunity. And I know we've said that before. So that's what we mean when we say it's taking a little bit longer, but we are seeing some significant progress in important KPIs performance metrics, in the website.

Okay, and then just one more question. Just one Watson's. Can you talk a little bit more about Watson's in terms of like how many stores were in? And then are there plans to expand beyond the Hong Kong, Singapore, and Taiwan area in 2024?

They are considering two additional territories, but they have not committed to it yet. So we don't know.

But given it seems like they're pretty happy with the product is what's sort of the gating factor for further store growth?

It has to do with the structure of Watson's as a company. These are independently operated businesses. So it's not really centralized. The separate countries. I think more realistic would be expansion within the existing stores have expanded product offerings, which they are interested in doing.

All right. Well, thank you. I appreciate the question.

Your next question will come from the line at the JP Mark, with Farmhouse Equity Research. Please go ahead.

Hi, Rob and Briana. Question for you about the Tru Niagen pro product which I was delighted to see you had recently launched and wanted to know what your expectations are for the rollout of that and I saw that you had it's been certified for Sport by the NSF International. Are you kind of leading with MLB and NHO hoping that they'll kind of be using the product or is that just incidental?

No, it's not incidental. There are many professional athletes that take Tru Niagen today, as you probably know, and there are several teams that give it out to each of their players, and they're giving out 1000 milligrams. There are also most of the studies that get published if you've seen our on 1000 milligrams and we all take 1000 milligrams. So we thought we'd make 1000 milligrams available to the general consumer, since that's what the experts are taking. That's what the research shows. And that's why we launched the product.

And is that going to be going out through -- this is my follow up question, through the channels for physicians and clinics? Is that sort of the main product we'll be selling to them? Or are you already doing that?

Yes, it is.

Okay, thank you very much.

Our final question will come from the line of Matt Dhane with Tieton Capital Management. Please go ahead.

Thank you. I wanted to ask a little bit more about your website, too. You mentioned, Rob that you're starting to see some of the key performance indicators that turn the corner. I was curious. So with those initial signs, what it sort of your expectation for when that's really going to play out and start driving the sales growth that you expect out of your own website?

First question, what are the key indicators. So our conversion rate is actually extremely high on our website. But the amount of traffic, the amount of traffic needs to increase. Now part of the reason why the conversion rate is so high is because we've spent months now optimizing it, targeting cohort groups and targeting the messaging. So it is working. But what it needs to do is scale. I expect it to scale. I'd like to say the first quarter. Hopefully by the first quarter, we'll see some significant growth in the website sales.

Okay, that's helpful. Also did want to ask about the Nestle launch. You may have mentioned this, I missed it. When did they launch their first product? And then what is your expectations around additional product launch insights and what can you share around that?

They have multiple brands at Nestle. They launched with one of their brands called Solgar, which is their very, very high end dietary supplement brand. They launched it two weeks ago. We don't know how they're doing yet. They seem very enthusiastic. I believe they also launched another high end brand pure encapsulations launched the product as well. That's mostly a healthcare practitioner channel that also has some consumer distribution. And we think they have and they've launched that and we think they have plans to launch another very high end brand of their vital proteins.

Okay. That's helpful. Thank you.

With that I'll hand the call back to Brianna for closing remarks.

Thank you, Regina. There will be a replay of this call beginning at 4:30 PM. Pacific time today. The replay number is 1-800-770-2030 and the conference ID is 4126168. Thank you everyone for joining us today and for your continued support at ChromaDex.