ImmuCell Corporation (ICCC) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the ImmuCell Corporation third quarter of fiscal year 2015 financial results conference call. [Operator Instructions] I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead, sir.

Thank you, Denise. And thank all of you for joining us today to review the financial results of ImmuCell Corporation for the third quarter of fiscal year 2015, which ended on September 30, 2015. As the conference call operator indicated, my name is Joe Diaz. I'm with Lytham Partners. We are the investor relations consulting firm for ImmuCell. With us on the call representing the company today is Mr. Michael Brigham, President and Chief Executive Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of today's press release or the Form 10-Q, you can retrieve them from the company's website at immucell.com or through various financial sites on the internet. Before we begin with prepared remarks, we submit for the record the following Safe Harbor statement. Statements made by the management team of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. Words such as believe, expect, anticipate, 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 filings the company submits to the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q, its Annual Reports on Form 10-K and its current reports on Form 8-K. Investors are cautioned that forward-looking statements made during the course of this conference call are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those statements. The company disclaims any obligations to update forward-looking statements. A more complete Safe Harbor statement was included in today's press release and on the Form 10-Q that was filed today with the Securities and Exchange Commission. With that, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation. Michael?

Thank you, Joe. And thanks to all of you participating on today's call. All of us, at ImmuCell, greatly appreciate your time and interest. I have a few prepared remarks and observations before turning to the Q&A. This was a very positive quarter for us. I feel that our business continues to be headed in the right direction. As you may know, we provide significant disclosures about the company and our financial results in our SEC filings. I encourage you to review these reports for full details, but I do want to touch on five important highlights with you during this call. First, we'll talk about sales growth. 40% is the number. Sales were up 40% for the three months, 40% for the nine months and 40% for the 12 month period ended September 30, 2015. In addition to these sales out our door, we also had a backlog of orders aggregating approximately $1.55 million as of September 30, 2015. We are proud of the significant and consistent sales growth. More specifically, third quarter 2015 total sales were up by $702,000 to $2.47 million. The year-to-date through September 20, 2015, sales were up by $2.14 million to $7.53 million. During the 12 month period ended September 30, 2015, total product sales increased by $2.79 million to $9.74 million in comparison to $6.95 million during the same period in the September 30, 2014. This trailing 12 month sales figure of $9.74 million compares very favorably to just under $7.6 million for the year ended December 31, 2014. Clearly, First Defense is creating a sales growth. First Defense made up 92% of our total product sales during the nine-month period ended September 30, 2015 compared to 90% of total product sales for the nine month period ended September 30, 2014. This was our 13 quarter in a row of First Defense growth. That makes 19 out of 20 quarters in comparison to the same quarters of the prior years. Our investment to increase our First Defense liquid processing capacity by 50% is now complete. Our investment to increase our First Defense freeze-drying capacity by a 100% is on schedule to be completed before the end of the first quarter of 2016. Number two, while clearly the sales growth is very important to us, it is perhaps more important to see our gross margin up at the same time, both as a percentage of sales and in terms of total gross margin dollars. The gross margin percentage of total product sales was 61% for the nine months ended September 30, 2015, versus 58% for the nine months ended September 30, 2014. The gross margin dollars were $4.59 million for the nine months through September '15 versus $3.11 million for the nine months through September '14. The gross margin percentage of total product sales was 61% for the 12 months ended September 30, 2015, versus 53% for the 12 months ended September 30, 2014. These gross margin dollars were $5.94 million for the 12 month ended September 2015 versus $3.71 million for the 12 months ended September 30, 2014. Thirdly, product development expenses were down as expected and anticipated. During the third quarter of 2014, we completed significant investment in our small-scale Nisin plant, and we have been profitable since this investment was completed. So for the third quarter of '15, our product development expenses were down just $59,000 or 16% in comparison of third quarter '14. Year-to-date, these product development expenses were down $812,000 or 47% in comparison to the year-to-date figure in 2014. Product development expenses aggregated about 12% of total product sales for the nine month period ended September '15 versus 32% of total product sales for the nine months ended September 30, 2014. Fourth, let's talk a bit about the bottomline. This increase in sales and increase in gross margin and decrease in product development expenses, resulted in improved profitability. So for the third quarter of 2015, our net profit was $351,000 or $0.11 per diluted share that compares to $10,000 or less than $0.01 per share during the third quarter of 2014. Our year-to-date 2015 through September 30 net income was $924,000 or $0.29 per diluted share, this contrast to a net loss of $298,000 or $0.10 per share during the nine months ended September 30, 2014. Fifth, and lastly, our balance sheet has been strengthened. During the third quarter, we closed on a $2.5 million secured debt financing, principally as a result of this new debt in our continued profitability with cash and investment of $6.68 million and equity of $10.3 million as of September 30, 2015. Keep in mind, we have just over 3 million shares outstanding. We are taking the initial steps for constructing our own facility for the commercial scale production of Nisin for Mast Out. We expect to close on the purchase of land intended for this building by the end of the year. Our registration statement on Form S-3 became effective this week for this new tool in our strategic basket. We intend to monitor market conditions to see if there is an opportunistic time to raise equity, while we explore debt options to secure the financing needed to complete the development of Mast Out. So to summarize, we continued to execute on the two core components of our business strategy. As to our first quarter strategic action, we are expanding the market penetration of First Defense, our best-in-class treatment for calf scours. The addition of a bovine rotavirus claim to our existing claims against E. coli and coronavirus infections could allow us to bring the first passive antibody product with this breadth of disease claims to the market in 2016. I believe our sales growth is attributable to three principal factors. I would lead with the sales team. We've increased our team to six people in the field now. They are located in the major dairy pockets in the U.S. They're doing a very effective job, introducing First Defense to new customers and communicating how First Defense provides immediate immunity and generates a dependable return on investment for dairy producers. Preventing calves from getting sick with scours, helps them reach to the genetic potential and reduces the need to use antibiotic treatments. Number two, there has been a temporarily interrupted supply of a competitive product and I know we've benefited from that. And three, the beef market is strong, more value on a bull calf and dairy to justify the approximately $6.50 investment in build to First Defense. As to our second core strategic action, we are advancing the development of Mast Out, our novel treatment for subclinical mastitis in lactating dairy cows. Our groundbreaking product innovation is unlike all other mastitis treatments on the market today, and they're all sold subject to a milk discard period. Our goal is to revolutionize the way mastitis is treated by making earlier treatment and subclinical infections economically feasible by not requiring a milk discard or meat withhold during or for a period of time after treatment. No other product presently in the market can offer this value proposition. Work is underway to complete the two remaining technical sections required for approval of the new animal drug application for Mast Out by the U.S. Food and Drug Administration is presently uncertain, when FDA approval of this product will be achieved. But we have disclosed a timeline of events that could lead to our achieving this approval during late-2018 or 2019. Again, we have provided extensive additional details in our press release and in our Form 10-Q. I encourage interested investors to review these filings. With that, I would like to move to the Q&A. Let's open up the call for your questions. Operator, could you help us with that?

[Operator Instructions] And we have a question from Sam Rebotsky of SER Asset Management.

This is a phenomenal achievement to profitability and preparing to increase the sales of First Defense. In the fourth quarter with the increase of the -- will you be able to eliminate your backlog, will you be prepared to increase the sales of First Defense in the fourth quarter based on your new equipment available?

So this backlog is we've got a big bulls eye out there and targeted there on. But you'll notice it's about the same level at the September 30, as it was [technical difficulty]. So key to solving that is to increase the production capacity, so we are doing that. The big step there on the liquid process is done, the other one to be done shortly. So the answer to your question really depends on how many new orders we bring in, but we're gaining. When sales are up 40%, we're gaining on that backlog. And our goal is to put that behind us and never go back, because that timing and that is a little hard to predict, because I don't know exactly the rate of the incoming orders, but that I do know we're doing to get production ahead of what we anticipate for 2016.

And as far as the interrupted your competitor is, are they back in the market or are they still interrupted?

We've seen them come back. I'm referring to a product that's sold by Elanco called bovine equalizer. So a very interrupted, pretty much all of the market, early part of this year. Towards the middle of the year, we've seen them come back. So we consider that they're back and we're going to have to maintain the sales we already achieved from them, and compete for the rest of them that, that may be the good old fashion way, head to head technology against technology with what we see as our superior technology. So I don't think they're going to come back and go away. I think the fact that they came back means that they're in the market.

But it would appear based on your consistent delivery you should be able to keep increasing your sales and be prepared to sell more and that would appear to be the case.

Yes. I would be uncomfortable supporting that just based on the first quarter alone, because that's a short period of time. But what strikes me is very positive is the consistency that's going pass the first quarter. And there was always a seasonally slower season second quarter, third quarter, and just seeing that 40% level without completely filling that backlogs in that 40% level over those three, nine and 12-month period. So that longer period time gives me a lot of the optimism and enthusiasm.

And with your effectiveness of this shelf registration, that seems to be wonderful, because I believe ImmuCell was a hidden gem to be discovered and the availability of stock, and as people hear about what you're doing, you should be able to sell this at a much higher price, because there seems to be an awful lot of demand in the animal health industry, especially if you complete Mast Out.

Well, with all respect to First Defense, it pays a lot of bills, but it won't pay all the bills for that we would need to pay for Mast Out. So it's just a three-headed financial strategy: continued growth of First Defense on that and super strong gross margin; and then we look at our debt option, and then we watch the market; and with that effectiveness where we have the flexibility and the ability to raise some equity if the market conditions are right for us.

And as far as the ability to go to 2020 that you signed up to prepare the product that you'll be using to prepare the Mast Out with Plas-Pak the syringe is that seems to be very good. So you're sort of on-track to get everything through, but I'm sort of disappointed about late 2018 early 2019, is there any way where this can be short circuited and gotten through faster?

Well, here is the rub on that, Sam. Yes, that not with a lot of inventory for sales. So the shift here is to focus on a commercial scale launch and that's going to require most or all of that time. I think, what you may have seen in the past is a sooner expectation for a small-scale FDA approval, which would have been very interesting as far as validating the regulatory risk, but at the end of the day we would have an approval with very close to no inventory to sell. So I'd rather go with that realistic timeline and go with the commercial scale than a sooner timeline at a very small scale.

That seems to be a unique opportunity to the extent there is state of California has eliminated antibiotics for animals et cetera, and hopefully other states can do this, so that Mast Out, when it's approved can be ready to go for a lot to satisfy being a non-traditional antibiotic et cetera?

I don't think anyone is ever going to eliminate the use of antibiotics, but I think our goal is to participate in the current momentum and current public favor or public opinion to reduce the use of antibiotics. So we'll save those antibiotics for the real necessary cases and bring alternatives to market, so that we can reduce the use in animals, consistent with public opinion, consistent with FDA and state level regulations. And that really runs across both of our products, because as I mentioned that we focus so much on Mast Out as being a real direct alternative to penicillin and cephalosporin. The First Defense has its own role to play and to keep that calf from getting sick the producer does not need to use treatment antibiotics on that calf when she does get sick.

The next question will comes from Paul Nouri of Noble Equity Fund.

Do you know how much money you'll need to raise for Mast Out over the next six to 12 months?

Well, I could come at that couple of different ways. I think the total investment that we disclosed is in the range of $10 million to $15 million, but keep in mind, we have almost $7 million in cash. We have this continual First Defense generating cash as we go. And I don't think it needs to all be raised in equity. I think some combination of debt and equity. I also know our S-3 limits us to $10 million total and there is also a -- it's $10 million on the S-3 subject to certain limitations and those limitations are based on the share price and I see the calculation that's currently putting us in the range of the $5 million or $6 million as far as one-third of our market capitalization held by non-affiliate. So is that helpful to put the answer in perspective.

And for operating expenses, do you see that trending up at all over the next couple of quarters or is this about $1 million level give or take a good level to think of now?

Yes, the biggest variable on our expense line is product development expenses. So the biggest expense -- well, there are two big. All the clinical expenses were done several years ago. The more recent big expense was completed in '14 to build the small-scale plant. That's what I mentioned to Sam, we may not use that plant to get FDA approval, but it's been invaluable as far as process optimization, yield improvement, impurity investigation, just all those things that we can do at small-scale that would be more expensive due to large scale, but that expense is behind us in '14. So product development expenses is one that can go up and down as opposed to admin and sales, sales expense as proportion of sales. Revenue is pretty steady. So I'm just trying to figure, admin and sales are pretty steady and PD not seen a big ticket item coming forward for us like it did in 2014. And I say that because this facility that we planned work to build them and it would be capitalize as a fixed asset.

So will the expansion and capacity put any pressure on gross margins in the short-term?

It sure hasn't so far. I was real pleased with those nine months numbers, but these are not huge investments. Our CapEx budget is disclosed in our Q and we've spend in the neighborhood of almost $2 million for the year. That's unusual for us, that's a big spend, but that gets our First Defense production up to, again, basically a double. So that First Defense continues to generate a healthy margin that does pay for those investments.

We do have another question from Steven Farber of Far Ventures.

I was just wondering, if you could give us any color as to how you see the rotavirus version of First Defense ramping out or rolling out and with the timing of some of the hopefully additional sales, how that may play out?

So I think that the first point would be where we are right now with the USDA, is that we've completed the clinical study on effectiveness and they like our data. So we did announced that earlier this year that we've got the USDA concurrence on effectiveness. So they've seen what they want to seen what they want to see and we've met our objectives for effectiveness for a label claim to add to, recall in corona we've had for over 20 years at the rotavirus. So with that we're working on the manufacturing parts of the license application and some of the laboratory pieces. So that manufacture work and lab work will take us into the latter part of '16, but our goal is to launch this three-way product by this time next year, by the end of 2016.

So basically, a year before --

It's about a year out. You happen to -- and I always say about, because you just don't know the USDA. We're estimating turnaround with them. We have a good relationship and we have good track record. We can't hold them to a precise date, but we can hold them to that kind of ballpark that we think we can get to market end of next year.

And we have a follow-up question from Sam Rebotsky of SER Asset Management.

Michael, your inventory at the end of the prior quarter, it was $646,000 has that increased currently or what's your inventory now?

I'm going to give you the right number rather than the number that might in my memory. I'm going to say, not increased a lot, because we're shipping everything that we make right now, of course, with that backlog level. But the answer to your question is $864,000 going back to December, down a little bit from December. We're building a little from June and we're down a little bit from December, $864,000 inventory as of September 30, and of course, that's heavily weighted towards work in process, for raw math, our finished goods go out the door.

You're able to get more colostrum from the farmers, et cetera?

We had a great relationship with these farms and a lot of new farms. So yes, I'm very pleased with that. It's a win-win situation. They like our business, we like their milk. Great team out in the farm, the growing team out in the farm, great work recruiting and collecting, and yes, that's where it needs to be.

And as far as the rotavirus, what would you say this size of that market that you think you could increase or range or whatever?

Well, of course, the topline Sam, you know. Bottomline is we don't know. We have some internal projections that encourage us to keep going up for one number and plenty of that is in our public disclosure. So when we look at Calf Guard, our primary competitor from Zoetis, the old Pfizer, we look at their volume and through the market research we access. And they sell about twice the volume that we sell and their product is very inexpensive, costs what the half of what ours cost. But we know there is a huge volume in that product. And beside the fact that it's inexpensive, like I said about half ours, the biggest thing they have gone for it is that they have a rotavirus claim. So we've been successful, but we'll be more successful in competing for those sales with the rotavirus claim. But we see that that product with a huge market opportunity, once we have the rotavirus claims. So we have E.coli that they don't have, but they have rota that we don't have. And we want to have both and let Bobby and our sales team go at it competitively in the market.

Michael, it seems very exciting. And I think the more you tell your story and more people hear about it, there will be a demand for the stock frankly and the profitability that you've accomplished with spending money on R&D is quite tremendous. And just tell your story and the market will take care of itself.

That's good, Sam. I think Joe Diaz and his team at Lytham Partners has really helped us over the last a year or plus do that more effectively.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Joe Diaz for closing comments. End of Q&A

Thank you, Janice. And we would like to thank all of you for participating on today's call. We certainly appreciate your question and your continued interest in ImmuCell Corporation. So we look forward to chatting with you again at the conclusion of the third quarter. I hope you have a great day. And we'll talk to you then. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.