ImmuCell Corp (ICCC) 2018 Q1 法說會逐字稿

Good day, and welcome to the ImmuCell Corporation First Quarter Fiscal Year 2018 Financial Results Conference Call.

(Operator Instructions) Please note this event is being recorded.

At this time, I would like to turn the conference over to Joe Diaz of Lytham Partners.

Please go ahead, sir.

Thank you, Denise, and I thank all of you for joining us today to review the unaudited financial results of ImmuCell Corporation for the first quarter of 2018, which ended on March 31, 2018.

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 management during the course of this call include forward-looking statements.

Actual results could differ materially from what is discussed in those forward-looking statements.

Additional information on factors that could cause such differences is available in the company's most recent filings with the Securities and Exchange Commission on forms 10-Q and 10-K as well as with today's press release.

I should also note that the full details to the company's first quarter financial results are available in its quarterly report on Form 10-Q and the summary press release that were both filed earlier today.

With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation.

After which, we'll open the call for your questions.

Michael?

Thank you all for taking the time to join today's call.

I would like to highlight some key financial points and then review the current state of our business.

Though customer demand for our products is up, however, orders shipped during the first quarter of 2018 were well below our expectations.

We could not meet 16% increase in demand that we experienced during the peak selling season over the record first quarter of 2017 because of some production limitations that I will explain later.

We ended the first quarter with a $1.2 million backlog of orders for the First Defense product line, which was comprised of about $900,000 of our legacy bivalent products and about $300,000 of our newly released Tri-Shield First Defense.

The 2 most important causes for this shortfall are: First, the output of the entire First Defense product line was reduced by a decrease in the biological yield from our expanded supply of colostrum.

Second, production difficulties in scaling up the new vaccine used in the manufacture of Tri-Shield have limited our supply of vaccines, which in turn limits our supply of inventory.

We have promptly reacted to both problems by addressing the science behind the vaccine manufacturing issue, improving quality control processes, modifying production methods to increase yields and implementing manufacturing redundancies.

Since March 31, the backlog for the legacy formats of the First Defense product line, that is excluding Tri-Shield, has been cut by approximately 41% to approximately $536,000.

We expect to clear this backlog in June and proceed forward with adequate inventory.

It will be closer to year-end for Tri-Shield.

These production challenges have also resulted in higher cost of goods sold, reducing our gross margin, which is something that we expect our actions noted just above will correct going forward.

On the good news side, the market's response to the newly introduced Tri-Shield has been very strong, which is a good indication that dairy and beef producers value the ability to protect newborn calves with immediate immunity against the 3 most common scours-causing pathogens, E. coli, coronavirus and rotavirus, in one preventative treatment at birth.

In the short time our product has been on the market, we have gained substantial traction with our Beyond Vaccination message that positions Tri-Shield as a viable substitute for traditional dam-level scours vaccine programs.

That is a large new market opportunity for us.

The calf level market is worth something like $17 million per year, the dam-level market for vaccines that are given to the mother cow for the purpose of improving the colostrum that is fed to the newborn calves to protect them from scours is about double that size.

Previously, we could not compete effectively for these sales because the vaccines include the rotavirus claim that we did not have until late last year.

Now we are in this bigger game with Tri-Shield and producers are responsive to the compelling benefits of our product, which includes reducing stress on cows caused by needle injections of certain vaccines, among other benefits.

Tri-Shield we are able to supply this year, is getting into the hands of large, influential dairy operations and veterinarians.

They are the market segment that we want to strengthen relationships with since they will also be the target when we launch our purified Nisin product in the coming years.

Obviously, the significant backlog had a very negative impact on our top and bottom line results for the first quarter.

It is important to note that if we had sufficient inventory to fulfill all orders on hand as of March 31, 2018, sales would have been up 16% during the first quarter of 2018, in comparison to the record sales during the first quarter of 2017, and up 9% during the rolling 12 months ended March 21, 2018, in comparison to the same periods ended March 31, 2017.

Being able to compare our results with the 6-month period ending June 30, 2018, to the same period last year, will better demonstrate the health of our business without the confusion caused by the timing of when the backlog of orders is shipped.

However, on a GAAP basis, meaning product shipped to customers, total product sales decreased by approximately $663,000 to $2.9 million during the first quarter of 2018 compared to $3.5 million during the same period in 2017, a decrease of 19%.

Also on a GAAP basis, total product sales decreased by approximately $333,000 to $9.8 million during the rolling 12 months ended March 31, 2018 compared to $10.1 million during the same period ended March 31, 2017, a decrease of 3%.

Because I would rather move ahead to your questions, I will not read out other financial numbers on this call that you can access in today's press release and in our Form 10-Q, but I would like to highlight a few figures that, I believe, are important to follow going forward.

Product development expenses have increased as we complete the development of our purified Nisin product, but this is a controllable expense that we can reduce in the future.

Depreciation expense is increasing, as we begin to depreciate the Nisin facility, this will affect our bottom line but has no effect on cash flows.

Interest expense is increasing as we service the debt we incurred to finance our Nisin facility, given the debt and equity we raised during 2016 and 2017, we can afford to fund these strategic investments in our future growth.

Lastly, let's talk about the development status of our Nisin-based, intramammary treatment for subclinical mastitis.

As many of you know, our goal is to revolutionize the way mastitis is treated by making the treatment of subclinical infections economically feasible by eliminating the standard requirement to withhold milk and meat during and for a period of time after treatment.

No other product on the market can offer this value proposition.

Nisin, the active ingredient, is a bacteriocin that is not used in human medicines and would not contribute to the growing concern that the widespread use of antibiotics encourages the growth of antibiotic-resistant bacteria known as superbugs.

We are making consistent progress towards meeting the final requirements for FDA approval, but first phased Nisin Drug Substance CMC Technical Section submission to the FDA is anticipated during the third quarter of 2018.

A second phased submission, which would include responses to the first phased review, is expected to be filed during the first half of 2019.

Adherence to this anticipated time line supports obtaining FDA approval by late 2019 or early 2020, with subsequent market launch.

We had paid approximately $20,450,000 to construct and equip the Nisin facility as of March 31, 2018, leaving us just $550,000 of budget expenditures remaining to fund.

As of March 31, 2018, we have $3,060,000 of cash on hand and $426,000 of available bank debt in addition to our $500,000 line of credit.

So while our financial results for the 3 months may be off, I am already eager to report the results for the 6-month period ending June 30, 2018, to show that -- to show how that periods stacks up against the 6-months ended June, 30, 2017, without the confusion of the backlog's impact on reported sales.

Our most immediate objective for the balance of the year is to increase our production yield and output, regain any lost customers and position ImmuCell for consistent growth going forward.

We believe that 2018 will be an important year that sets the stage for our success in the future.

With that said, let's have the operator open up the lines for your questions, please.

(Operator Instructions) The first question will come from [Tom Fox], a private investor.

My question is about the backlog.

I'm having a little trouble understanding.

Was this a -- what I believe it -- was this an issue that you just weren't prepared for the amount of sales that you experienced during the quarter because of the Tri-Shield production?

If you can just, kind of, elaborate on that.

Yes.

Thanks, [Tom].

Sure.

So yes, but only in part.

I mean, the sales aren't up so much that we -- beyond our expectations and then we planned for growth.

Tri-Shield did throw something new at us.

So yes, in part, Tri-Shield definitely had an impact, as it took time and took place in the facility, in the production plant.

But really, the overriding issue here is this biological yield.

We -- as we grew, we took on a lot of milk that did not yield as many doses.

So we were producing batches that per plan, would have been bigger, but in reality, there were fewer doses.

So we had -- that's what we had to correct and we had to correct it back at the beginning with these new farms and the growth in our colostrum supply, and we had to get better yield.

So it's the same amount of time for every batch, but we needed to get -- we now have gotten back to getting the better number of doses, the expected number of doses out of that same production time.

But that hit us hard, right as we went into peak season.

And we were stuck with just very small, very low-yielding doses that when coupled with the Tri-Shield challenges, that just threw us way behind.

And I guess I would add just one more thought, which is, I don't know what that sounds like to you as far as biological yield and control of the process, but keep in mind, all of those challenges and all of those fixes need to be applied through a 6-month production cycle.

So it just doesn't turn on a dime, it's 6 months from our vaccine to a USDA-released dose.

So we were lagging and now we're gaining as we're back on track.

Did that help, Tom ?

Mr. [Fox] has disconnected, unfortunately, sir.

(Operator Instructions) And your next question will come from Sam Rebotsky of SER Asset Management.

As far as dealing with the problem, the reason there were fewer doses, it was that you weren't familiar with the herds of cattle that you got the colostrum from?

Or these were newer animals you were getting the colostrum from?

Or what was the reason for the -- I didn't understand the reason why the fewer doses.

Why does it change?

Yes.

As we -- and so both, new farms, new cows and more milk, but just not optimal milk.

So while we're getting doses out of the milk, we weren't getting in the standard or enough doses out of that milk.

So that milk was essentially not potent, not concentrated enough, not filled with enough antibodies to be efficient in this liquid processing plant.

So at this point in time, you've indicated as of May 11, you've gotten -- you've reduced the backlog and the doses and the yield has increased, where they were what you had expected?

Or are they just you have more animals to produce?

No.

We've really -- I mean, getting more animals is part of the fix, but then we've got to control the -- our measured doses per cow, concentration of that milk.

So yes, I feel confident making the projections, those forward-looking projections we made about both the problem, but more about the fix.

So May 11 was to show -- as we went to filing last Friday, was it growing or was it shrinking?

It shrunk a bunch.

And then we went one step further and say, "We can see those next batches even in their preliminary stage, where they're going to come out and that gets us clear in June." So not a good thing, but at least it's not a long-term thing.

We -- those fixes that we've put in place as soon as these problems started to arise are real, are working and that's how we can make those projections available as of May 11, and where we'll be in June.

Okay.

Does it seem possible, to the extent -- as you work on getting your backlog reduced, so sort of come out with some kind of press release indicating, to the extent you might have reduced it going forward, before the June -- or at the time you end your June 30 period?

Or I'm not sure if you've discussed that or if that's advisable?

Yes.

One way I would look at it, Sam, is I'm confident.

And remember, that projection was about the bivalent format of the First Defense.

Because Tri-Shield is on a different schedule and different track.

But when we say June, it's June.

I would be more obligated to -- if that doesn't happen, I would have to report some bad news.

That's going to happen.

And we've made that forward-looking projection.

I think we should go forward confident of that.

And if something were to develop to the negative, I'm obligated to update about our projection.

Okay.

Okay.

Now the Tri-Shield, it's a matter of the learning process and do you feel we know enough to, sort of, increase the production based on the substantial demand we have for Tri-Shields and get it more in line?

Yes.

Yes, so that is a -- that's exactly it.

I mean, it's a nice problem to have because the alternative is the market doesn't want to the product and we're not on backlog.

So demand is very strong.

That's the good news.

But the Tri-Shield, kind of, basically takes it as a double whack because it suffers from the same -- that yield issue, that doses per cow issue is across the board, that affects bivalent and trivalent.

But then as I said, most importantly on Tri-Shield is the vaccine.

So that did not scale to plan, that did not get us the quantity we needed as quick as we needed it.

And there -- thereby -- there comes the 6-month time line, I feel like we're in a good shape now, and that's why we've made the projection for around year-end because it's going to take that 6-month cycle to take that fix and then run it all the way through the 6-month production cycle.

So that's the -- that's why that one is different, it will lag the bivalent.

The fix on that Tri-Shield backlog will lag the June 6 on the bivalent backlog.

So with the 2 freezers that we have, are we able to have more -- get more colostrum and build up our inventory to go forward so that we're -- as the demand keeps increasing that we have a larger inventory to deal with the demand, which would hopefully continue to build up?

I mean, absolutely.

Not having that second freezer, we're a different company.

With that second freezer, the answer to your question is yes.

But again, the key here is there's like certain number of trays in a load, in a freeze dryer load, and until you do the assay, it's a volume of milk.

What we need is more doses in that milk and that fixed cycle and that fixed volume and that fixed time cycle and that's where we get back to the quality of the milk and the concentration of antibodies.

So that when we shut the door and turn that thing on, it's producing more doses.

It's always processing the same volume of milk.

Okay.

Do we need to still get more cows to produce this?

Or do we need to work any longer hours?

Or is it just we're doing the right thing to get what we need going forward?

Yes, the cows are going to work out.

So it's the right number of cows.

We just need better purity per cow, if you will.

So that growth was right in numbers, it just wasn't growth -- it wasn't right in concentration.

So we feel good on the cow supply.

And I do feel good as far as more hours.

I mean, these -- some of these cycles run overnight.

We run a pretty full schedule.

It's enough to handle what we have on for projected sales '18, '19, down the road.

We're always looking at what's the next level of capacity running closer to 100%.

Once you get to 100%, you're looking at a third freeze dryer.

I think those kind of investments are a little bit out in front of us.

The cash we need to make right now in the relaunch of Tri-Shield and that catch on bivalent is going to be handled by current labor and current equipment.

That sounds good.

Now, the Mast Out, which we expect to submit to the FDA, you described submitting it in 2 batches of ability.

And everything, I assume, is working according to -- as you tested, as you go along, everything is meeting all the requirements?

Or what do you have to do?

What are you -- what do you need to do to get to produce what you need to submit to the FDA?

It's really the same endpoint as when we first broke ground.

It's really the same endpoint from before we broke ground when we were looking at a CMO to make the Nisin product for us or potentially a partner.

The endpoint, the objective is to make 3 validation batches.

So for quite some time, we've been saying construction will be complete and it was October of '17, equipment installation, validation, to get us in the position of making that first submission, having produced 3 validation batches middle of '18.

So the update today is middle of '18 does not include June, it's third quarter.

It's still middle of '18, but it -- I would look at second and third quarter as the middle of the year as this is going to be third quarter from where we stand today.

But generally, on track to the middle of '18.

Once those 3 batches are made, then the submission goes in.

So, another -- all -- are all 3 batches made it the same?

Do you have some knowledge of, say, batch 1?

Whether it's -- whether you're satisfied with what you produced or do they get all produced at the same time?

No, they're sequential.

It will be 1, 2, 3 during the third -- it will be all the third quarter.

1, 2, 3 type sequential production and immediate submission.

I see.

I see.

Okay.

I'm going to step out and come back to the queue and see if there's anybody else that has any questions.

Hang on just a second because I can see on the screen, Sam -- Denise, the next number on -- I'll keep talking to Sam?

I don't see anybody in the queue.

Is that correct?

Please proceed, sir, that is correct.

Okay.

So I guess, there -- do you plan to -- I mean, it's -- the important thing right now is dealing with the problem.

For some reason, the stock had moved up and is there any thought on -- to tell the story a bit, even with the problem you have, which you expect to resolve or do you wait until the problem is -- or you have better visibility that the problem is solved before you go out on the road and tell the story?

No.

I think I'd stay active with Joe and Lytham Partners.

I think we designed today's disclosures to give you and others the information so that I can go talk to new investors of -- all on equal and fair disclosure basis.

So yes, no hold back on that.

We're generally out and about after each quarterly release.

I think we keep that going and really use the press release.

And there's quite a bit more detail in the Q as a script and as a Reg FD, sort of a clearing hurdle, if you will.

We can talk very openly about -- these are the same discussions I have with my board.

I'm coming right out of the MD&A and the Q.

And Michael -- Sam, this is Joe Diaz with Lytham Partners.

I might direct you to the ImmuCell website, where the new slide deck has loaded up today that has all the most current information and that information will be used when we speak to investors on a one-on-one basis.

So there's complete transparency on every topic that may very well be [broached] in a one-on-one meeting.

So the information is there, and please make use of it.

Michael, I'm 100% behind you're getting out on the road and telling your story because this is really transformative what you've been doing and this is -- and the fact that you have the substantial demand for your product, the Tri-Shield, and that's what you have to do.

And it appears to me, it's just going to take the time.

And the sooner you end June and get your -- get things done and meet your requirements, it's not a long time, you should be able to get...

I've never done that before.

Usually, I end the quarter and take a breath.

But this one is really different.

It's like how quickly can we get the June numbers together because it is awkward.

And that's why there's just extra -- you get it, Sam, but if you don't follow closely and you don't read the detail, you might get confused by what I see as a timing difference in this backlog.

And so we just put the numbers out there.

We put the details out there, what it is, why it is and what the timing is.

And like Joe just said, we'll go talk about it.

And he's good to remind us about that slide deck because, yes, there's nothing in there that isn't covered by an FD disclosure in the Q or press release, but it really helps me present and it's worth a flip of those slides because that's how we tell the story.

And I think we continue to subscribe to the -- whether it's good news or bad news, get all the news.

And I think that's what we really tried to do this quarter so the backlog thing doesn't become a -- I mean, I'm not trying to dodge it.

I don't want a backlog, it's not a good thing, but it's -- it is better than the alternative, but as -- I like where the demand is and production will catch up.

Well, that's clear, Michael.

And I think the more you talk about it, the more comfortable everything will become.

And with the time of increasing the production, this will resolve.

And to the extent the farmers are happy with your product, which they have been relative to increasing the backlog on the Tri-Shield, and you'll get there, and then as it competes with the other products in the market, it will happen.

So -- I mean, you've been doing an awful a lot, so that's one of the reasons on dealing with this new situation.

Michael, good luck, and we'll talk again soon.

Good, Sam.

I see a couple other questions coming up so I'll grab those.

The next question will be from [Jack Daily] of Tyler Technologies.

I would like to note that I am calling in on my personal behalf, not as a Tyler Technologies, but that does happen to be a fellow main growth company.

So definitely, I'm following you guys closely and very exciting prospects.

I've been reading your news too, so good luck and congrats on your -- some good stuff happening there.

Great.

So I just really wanted to jump in with pretty much a softball question, but in your 10-K, you mentioned note prices and how that, kind of -- how the relationship to spending on your products.

And in the recent 2 months, the milk prices -- look at the index from NASDAQ has rallied quite sharply.

So I just was wondering if you could comment on maybe that is a tailwind to spending on your products from the dairy farmers and -- et cetera.

Thanks.

Yes.

We always try to find a relevant industry index.

And I think milk price is one.

I think milk-to-feed ratio is another.

Those are the 2 we're probably most focused on.

So it's not just our numbers drilled out quarter after quarter, but what's going on with our -- what's happening to our customer, what's happening to our market.

And the milk price -- '14 was the boom year.

It down, down, down, and it got pretty low here recently.

And we're just seeing signs and some projections for -- I just saw this morning, literally this morning, some optimism for late '18.

So it's a tricky market.

The bottom line, to me, is -- I think our product is still effective.

I don't want to suggest that people come off it as soon as the milk price drops below a certain level.

They're in for the long haul.

They know that calf is their asset in 2 years coming into milk, that they're going to invest that $6 today, they find a way.

But it's just easier to find that way at a $15, $16 milk than it is a $12, $13 milk.

So I guess, I'm trying to say is -- milk price is relevant and that's why we track it.

The better our customers are doing financially, the better for us, but I don't think it's a direct cutoff.

When milk price goes low, they have to be forward-looking.

They know 2 years later, the milk price will cycle around because it always does, it's driven just simply supply and demand, a huge impact of the export markets.

And yes, you're absolutely right.

We've seen some projections just very currently that put some new optimism on a better milk price later in '18.

Good for everybody.

(Operator Instructions) And the next question will be from Doris Rossiter of Shattemac Capital Management.

I'm working on my model here and just wondering what to do with the gross margin.

In particular, I'm wondering, Mike, it may be early, but do you have a view on the impact that Tri-Shield will have on the gross margin going forward?

Yes, thanks, Doris.

So not a pretty quarter gross margin-wise for all those reasons.

But we did feel confident and sticking with our projection of staying over 50.

So as we blend the 2 products together, you've got additional costs and the initial claim for Tri-Shield, but you got a higher selling price.

So I think the answer is to stick with 50.

And once we get this yield thing figured out -- well, we haven't figured it out.

Once the yield fixed manifests in sole doses, how much over 50 can we get?

We can begin to show that.

But I think we've got enough data to call out the first quarter of, sort of, unusual elaboration, and we're going to stay at 50 and above going forward with both products.

Okay.

I'm just wondering if, in your mind, you expect Tri-Shield to ultimately -- maybe we have to wait 12 months to get there, but ultimately, you think it will be a higher gross margin for Tri-Shield versus First Defense?

Or...

No.

I think we've got to look at -- we've got a price challenge here.

That's a very expensive product.

So it is more costly to make, and we do recover more on the selling price.

But I think that we'd still -- when you blend the 2 together and getting over 50, we have to be careful on Tri-Shield as far as -- we're competing with $2 and $3 vaccines with a product that's retailing $10 to $12.

So that -- we see gross margin neutrality.

I think we're close to achieving it.

What I mean by that is we want the customer to have a choice.

If you want to go over here to the bivalent, you're not concerned about rota, we don't want to see that as a negative.

That's a choice.

You come over to Tri-Shield, you pay a little more, you get a little more and keep it for that 50% on the customer's choice.

(Operator Instructions) And I'm showing no additional questions at this time.

We will conclude the question-and-answer session.

I would like to hand the conference back to Joe Diaz for any closing remarks.

Thank you, Denise.

And I'd like to thank all of you for participating in today's call.

We certainly appreciate your continued interest in the company.

I would like to note that ImmuCell's annual meeting of stockholders is scheduled for Thursday, June 14, at 3 p.m.

Eastern time in Portland, Maine.

You're all welcome and encouraged to attend.

A tour of the company's facilities will be offered following completion of the business matters.

And we'll look forward to talking with you again after the conclusion of the second quarter, sometime around mid-August.

Have a great balance of the week.

Thank you.

Thank you.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.