ImmuCell Corp (ICCC) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the ImmuCell Corporation Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions) Please note that today's event is being recorded.

I would now like to turn the conference over to Mr. Joe Diaz. Please go ahead.

Thank you, Andrea, and thanks to all of you for joining us today to review the 2017 unaudited financial results of ImmuCell Corporation. My name is Joe Diaz. I'm with Lytham Partners. We are the Investor Relations consultant firm for ImmuCell.

Before we get started, let me say that statements made by the management of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements that are subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Words such as believe, expect, anticipate, intend, estimate, will and other similar words or statements of expectation identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties detailed from time to time in the filings the company submits to the Securities and Exchange Commission. Investors are cautioned that forward-looking statements made during the course of this conference call are based on management's analysis as of today, and actual results could differ materially from the statements made. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. A more complete safe harbor statement was included in the press release that was filed by the company today.

With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation. After which, we will open up the call for your questions. Michael?

Thank you all for taking the time to join today's call. The full details to our fourth quarter and annual financial results are available in the press release that we filed earlier today. I would like to highlight some key financial points and then review the current state of the business.

So during the quarter ended December 31, 2017, total product sales increased by approximately $919,000 to $3.1 million compared to $2.2 million during the same period in 2016, an increase of 42%. This was a huge quarter.

During the year ended December 31, 2017, total product sales increased by approximately $887,000 to $10.4 million compared to $9.5 million during 2016, an increase of 9%. The total product sales in 2017 included $97,000 sales of the topical wipes product line that was discontinued during the first quarter of 2017 in comparison to $350,000 in sales of that product line during 2016. So we covered a net drop of $252,000 in sales of the discontinued product line between the periods and we're still up $887,000 for the year.

Sales of the First Defense product line increased by 42% and 11% during the quarter and the year ended December 31, 2017, respectively, in comparison to 2016. The First Defense product line comprised 94% and 93% of our total sales during the years ended December 31, '17 and '16, respectively. My point is that this is the product to watch to monitor the health of our core business.

Depreciation and amortization expenses were $904,000 during the year ended December 31, 2017, in comparison to $802,000 during the year ended 12/31/16. We do expect this noncash expense to increase as we go into 2018 and begin to depreciate our $21 million Nisin plant investment.

Cash provided by operating activities was approximately $1.2 million during the year ended December 31, 2017, in comparison to cash used for operating activities of $324,000 during the year ended December 31, '16. I see this as an important financial metric to watch going forward. Cash is king. I'm not too concerned about the increasing noncash depreciation expenses.

Our net loss was $195,000 or $0.04 per share for the fourth quarter of 2017 in comparison to net income of $30,000 or $0.01 per diluted share during the fourth quarter of 2016. The fourth quarter of 2017 results did include a onetime licensing fee of $150,000 to the Baylor College of Medicine for the rotavirus vaccine technology underlying our new product.

Our net loss was $168,000 or $0.03 per share during the year ended December 31, '17, in comparison to net income of $508,000 or $0.12 per diluted share during the year ended December 31, '16. I would like to point out that our noncash depreciation expense is far larger than our net loss for 2017.

Product development expenses were $2,047,000 in the year ended December 31, 2017, in comparison to $1,244,000 during the year ended 12/31/16. That's an increase of about $802,000. We are paying the bills to bring our new products to market.

Because it is about more than just the numbers, I would like now to discuss our new product and the Beyond Vaccination marketing strategy. You may have seen our November 2017 press release announcing the USDA approval of First Defense Tri-Shield, adding a rotavirus claim to our product line. We are pleased with the initial sales of our new product. It's a game changer for the way that we treat scours in the dairy and beef industries. For years, we have competed primarily against products that are given to newborn calves to prevent scours. That calf-level market is worth something like $17 million per year.

The market for vaccines that are given to the mother cow, known as dam-level vaccines, for the purpose of improving the colostrum that she produces, which is then fed to the newborns, is about double that size. Previously, we could not compete effectively for those sales because the vaccines include the rotavirus claim that we did not have until just now. Now we are in this bigger game with First Defense Tri-Shield.

We talked to customers and challenged the need to stick another needle in a cow, save that vaccine challenge for the real cow health issues. We argue that it is better for the productivity of the cow and also that we can do better for the calf by delivering the measured dose of protective antibodies directly to the newborn rather than relying on protection from colostrum that we know is always variable even in the best-managed program.

I could go on, but I will leave it there and simply say that our sales team is working to introduce our new technology to 4 different customer groups: First, existing First Defense customers that want to add rotavirus protection; two, those that did not previously use scours preventative at all; three, those that have been using a competitive product at the calf-level instead of First Defense because that product provided the rotavirus claim that we previously could not offer; and finally, those that use a vaccine on the mother cow to improve the quality of the colostrum that she produces for her newborn as I just discussed in greater detail.

So back to the financials. Let me return to our bottom line results. Costs associated with the initial production batches of First Defense Tri-Shield were higher and production output was lower than we expect once this new product is in full production mode. These are pretty typical challenges as we scale up the production process and learn about customer demand during new product launch. At the same time, we were incurring these higher initial production costs. We also experienced a decline in the biological yield for the capsule format of First Defense, which does happen from time to time for a product like ours. Our production process is very complicated. It's a very complicated 6-month cycle from vaccine to cow to cheese to finished dose. That offers a form of competitive protection for us, but it can also be costly when the biology goes against us.

During the fourth quarter, these negative factors drove gross margin and bottom line results lower than our historical and projected norm. We plan to increase production output and expect yields to improve during the first half of 2018.

Lastly, let's talk about the status of our Nisin product development program. As you may know, we initiated construction of our $21 million Nisin production facility during the third quarter of 2016 and obtained a Certificate of Occupancy from the City of Portland, Maine during the fourth quarter of 2017. Approximately $19.2 million have been spent on this project as of December 31, 2017. Our $3.8 million of cash on hand as of December 31, 2017, and the $694,000 of available bank debt, plus our cash flows from operations are more than sufficient to fund the remaining $1.8 million of budget expenditures on this project that was unpaid as of December 31, 2017.

Our groundbreaking product innovation is unlike all other antibiotic treatments on the market today. Our goal is to revolutionize the mastitis -- the way mastitis is treated by making the treatment of subclinical infections economically feasible by not requiring a milk discard or meat withhold during or for a period time after treatment. No other product can offer this value proposition.

Nisin, the active ingredient, is a bacteriocin, is not used in human medicines, it would not contribute to the growing concern that the widespread use of antibiotics encourages the growth of antibiotic-resistant bacteria or superbugs. Inherent to our anticipated time line could lead to a potential product approval by the end of 2019 with subsequent market launch.

That said, let's have Andrea open the lines for your questions.

(Operator Instructions) Our first question comes from Kevin Ellich of Craig-Hallum.

Michael, got a few questions for you. I guess, first, let's talk about gross margin. I appreciate the comments on the higher costs associated with the initial batches and lower production. But I guess, what are you doing to fix that? And how quickly do we think gross margins is going to recover?

Yes. So it is kind of a two-pronged, a double-whammy, if you will. So just pure volume over fixed costs and on the Tri-Shield side, we'll be scaling up as we go. We've been essentially doing some, in the market, commercial test marketing. And we're, as I said, pleased with the initial sales of Tri-Shield. So we could have avoided this problem -- part of this problem with higher volume and launched with a lot of inventory, tied up a lot of cash, and could have been the other side of the equation here with a lot of inventory that wasn't moving. So we're on this side. We're a little short. So our volume's a little low. Our yield is low, and we'll catch up. I don't think it's realistic to expect all that to come through in the first quarter. I think over the first 6 months, as we scale up, we'll fix the Tri-Shield side of the equation. Then back to the other issue, this unrelated, but just both hit at the same time, the biological yield on our bivalent product in the capsule. That does come up and down over time. A lot of different factors going on there: season, cows, health, vaccine response, immunology. That is something that we have a pretty good handle on, and that -- I think that fix are going to come a little quicker, but we're still working through a lot. As I said, it's a 6-month cycle, so we're not going to toss out this milk that it may be of a lower titer. It's still got valuable doses in it. We need to work that through the system into the first quarter and into the second quarter. So I think that one fix is a little quicker as we "process out the bad milk and process better titer milk, higher doses per cow." I just think we need to watch this first quarter carefully because these things are long lead, there's a little lag, and I'm more comfortable with a 6-month view than expecting it all to just turn around real quickly here in the first quarter.

Okay, great. And then you talked about you're happy with the ramp on First -- or your First Defense Tri-Shield. Any more color beyond that? How much did it -- have you guys generated in revenue? And what type of growth should we be expecting from Tri-Shield?

Yes. I think it's a little early to really have a good answer to that because, again, we are -- our sales are limited by the available inventory for one, and two, it's early. And three, what's most important to me and in our disclosures going forward is going to be the product line growth because I'm not going to be able to track exactly. I mentioned those 4 customer groups. Two of them are brand-new market, brand-new opportunity, brand-new sales. People that weren't using anything, the people that were using these dam vaccines, that's all new to us. But the extent of our current customers that convert from a bolus over to the Tri-Shield is much, much -- I don't have that tracking data. So I don't really care if they do switch because they're buying up in price and in value, so it's good. So I don't see it as negative cannibalization, but I don't know how many people did that switch. What I want to see is with all those customer categories that the total product line is growing. And -- but certainly, that fourth quarter -- that strong fourth quarter was influenced by this new -- the new product sales.

Sure. And then last question for me. Let's talk about the Nisin plan. I guess, where are we at now with the construction process and the cost associated? Are you through most of that? What are the costs we have left? And then also walk us through the time line on the next steps before you guys get that plant up and running.

Yes. So on the CapEx side, that number, $1.8 million, and we're talking as of 12/31, is mostly equipment, the $1.8 million left to spend. I see us -- our original budget here was $20 million. We did revise that budget up by 5% to $21 million. I see us coming in on that budget. We're pretty late in the game for any surprises, but that cut off at year-end left $1.8 million to spend here in '18. So most of the spending is done. All of the construction is done. Most of the -- all the equipment's on site, in place. Most of the connections are done, so the time line forward is, over the next couple of months, is we transition from plumbing and connections, there's a lot of -- it's not just pipe plumbing, it's a lot of computer work. These tanks and these systems are all computer-driven. So all the programming and all the controlling that we move -- validation. Then we start making a couple of practice batches. So somewhere around the middle of '18, the earlier, the better, and we'll give clarity to that as we go forward. But we make our first submission to the FDA. That's because we've, at this point, made 3 validation batches. That's really the core -- the big nugget to the manufacturing technical section to the CMC. It's called the CMC to the FDA. That includes these 3 batches. We give them all the data. They're going to review that for 6 months. So we go from the middle of '18, to the latter part of '18, to the beginning of '19. We do anticipate they'll come back with an incomplete. It almost always happens. We think we're in pretty good contact with the FDA. We think there are no big surprises here. So we take a month or 2 to answer their questions. Kind of they give us a to-do list. We resubmit. It's subject to the same 6-month time line, same 6-month review. We would expect at that point a complete because we've answered -- we don't submit until we answer the questions they have, so now we're out to the latter -- second half of '19. There's a 60-day administrative review at that point. We get a Technical Section Complete Letter, we hope. The 60-day review is kind of administrative, but that's the time line that if we could stick to that gets us to FDA approval. At the end of '19, we launch right away. Those validation batches, they're sellable product. We would build inventory as we go forward for launch.

Our next question comes from Sam Rebotsky of SER Asset Management.

It's an accomplishment to finish the year. Now as far as the Tri-Shield and the First Defense, do we find from the customers that have received both, are they happy? Do you see more customers needing to get the product? And what's their expectations?

Yes. That sort of the Beyond Vaccination or the positioning of our product, that story, that product positioning is going very well. I mean, people get it. I think it's something new. It's a new way of thinking, as I said, a game changer. And as we visit farm by farm and try and train distribution to do that with us, people are really intrigued by the idea of, "Yes, 1 less needle." So I think clearly right now, demand is outpacing supply. And so with that sort of market feedback, on the good side of a -- there is a good side of a backlog as opposed to be sitting here with a lot of product that wasn't moving at the launched price point, we're scrambling. We're pushing hard to catch right up and meet that demand. So yes, we've got some people that are frustrated because the supply is under the demand. But I mean, that's not a good thing, but it's less bad than the alternative. So I don't know if answered your question, Sam. I appreciate the question, but it's more we're in catch-up mode. We're pleased with the launch, and we're -- over the first half of the year, we're going to catch up and keep -- the sales team is just having -- they're having a lot of fun and being very successful with that position of the new technology -- positioning of the new technology.

So as far as the supply, we feel we're at the proper quality. And it just -- to manufacture more, you have the proper-sized facility? Previously with the First Defense, we thought we could sell 20 million, and we had inventory of 2.7 million at September, which I assume was mostly the First Defense. So have we reduced that number at December 31? And I guess, I believe we have solved the problem or on the way to solving the problem to get the proper way to manufacture the Tri-Shield and increase the production.

Right. Yes and yes. So the facility is not the limiting factor. I mean, I can -- we would be in a really bad position if we haven't invested in that doubling of capacity. So we need every tank, every freeze dry run, every square foot we have. And so that double in capacity is -- I wouldn't want to be starting that investment right now or we'd be talking about a much longer time -- much longer time line to catch up. So the facility is good, and the technology is better. And now, with the feedback that this is the right price point, this is the right technology, there's value in the product, we -- now, we just double down and run it through. Like I said, from a vaccine, to a cow, to a cheese tank, to a finished dose, 5 or 6 months. We've just got to fill that pipeline -- fill that production pipeline.

Well, that seems reasonable. When you bring a new product, it takes a while, it doesn't happen overnight. Now with the 2 members of the Board of Directors, Bobbi, who is there before, but Mr. Rosgen up in Calgary, and you're speaking of hiring additional people to sell overseas, and with Mr. Rosgen being in Canada, do we see once you could supply enough product, I guess the First Defense, we -- to the extent you have enough product to supply the market for overseas, do you see that Mr. Rosgen helping ImmuCell get to sell overseas? Or what do we see there so that we could sell more product?

Yes. So your question makes sense. Just one clarification. We're not going to hire people in these international markets, but we are more aggressive and more active at finding partners or consultants that can get us there. We will always -- our sales team will be North America-based, and will work with partners that have that sales and marketing presence in these other territories. So there's the regulatory challenge and then the sales challenge, and we'll look to do that with consultants, not employees. Steven Rosgen is a great add to our board. We are pretty successful up in Canada where he is based through Kane. So I'm sure he can help there. He's definitely not going to hurt there. But that market is pretty -- we're pretty well established there. I think what he brings more specifically is just a lot of years of expertise in new product launches, branding, ag space branding. He's going to -- he's jumping in a little bit late on the Tri-Shield launch but working well with Bobbi on that as we go forward and then he'll be right with us up and running as we get up to that new launch with the Nisin product. So good add for our board. The independent member made room for getting Bobbi back on the board as a nonindependent member, which has been important to me and to us. And we're just getting started, but I'm looking forward to working with him.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Joe Diaz for any closing remarks.

Thank you, Andrea. And again, thanks to all of you for participating on today's call. We anticipate completing the audit of our financial statements and filing our annual report on Form 10-K somewhere around the end of March. We look forward to talking with you again at the conclusion of this current first quarter, around mid-May or thereabout. So have a great rest of your week. And again, thank you for taking the time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.