ProPhase Labs (NASDAQ:PRPH) Q4 2015 Earnings Conference Call March 29, 2016 11:00 AM ET
Ted Karkus - CEO
Bob Cuddihy - CFO
Good morning. My name is Ginny and I will be your conference operator today. At this time, I would like to welcome everyone to the ProPhase Labs Financial Results for the Fourth Quarter and Year-Ended December 31, 2015. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions].
Thank you, Mr. Ted Karkus, CEO of ProPhase Labs. Sir, you may begin.
Thank you very much, and greetings to all and thank you for joining us for the ProPhase Labs shareholders update. We have not had one of these in quite some time primarily because various litigation issues in the past which are now behind us. So, thank you for joining us for the call and thanks for the opportunity to update everyone on what’s going on with our Company.
As you know, I am Ted Karkus and I am joined by Bob Cuddihy, and other members of our senior team. We will be available to answer any questions following a short presentation. Please don’t hesitate to ask questions, I will not be available this afternoon to call and ask questions later, so I don’t -- please ask them now it's a great way to inform other shareholders who may be thinking about and wondering about the same types of questions.
I will try to be as open with everyone as possible. I really believe in all shareholders being as informed as possible about our Company. My only hesitation or limitation will be in the fact that we have competitors who may listen to our call from time-to-time. We do find from time to time that they imitate us as it relates to our advertising and marketing initiatives and product development initiatives. So I have to careful from that point of view. But otherwise, I will be as open as possible, as transparent as possible to all of our shareholders.
Also we consider your time to be important, therefore it doesn’t make sense for Bob and me to read the quotes and financials from our earnings press release. Those quotes and the financials of course are readily available online. If you haven’t done so already, I encourage you to review our press release, which has all the numbers and some insights from us.
Bob is required to read the forward-looking statements disclaimer. I will then provide a review of our Company and then open it up to questions. So Bob, why don’t you take it away?
Thank you, Ted. At this point, I will read the forward-looking statements that are contained in today’s press release on the Investor Relations section of our Company Web site and on our 10-Q and 10-K filings with the Securities and Exchange Commission.
Except for the historical information contained herein, certain statements in our press release and on today’s call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the launch of our new line of products TK Supplements and our new product Legendz XL. Management believes that these forward-looking statements are reasonable as and when made. However, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those projected in the forward-looking statements.
These risks and uncertainties include, but are not limited to, the difficulty of predicting the acceptance and demand of our products, the impact of competitive pricing and products, costs involved with the manufacturing and marketing of products, the timely development and launch of new products, and the risk factors listed from time-to-time in our annual report on Form 10-K, quarterly reports on Form 10-Q, and any subsequent SEC filings.
Additionally, we would like to advise you that the statements made during this call are made as of this date, and listeners to any replay should understand that the passage of time of itself and by itself will diminish the quality of these statements.
Without any further ado, I will turn the floor back over to Mr. Karkus.
Thanks Bob. So, let me start with a brief review. We inherited a Company that we believe five or six years ago was headed for bankruptcy. We restructured the Company. We bottomed out sales, turned around sales while turning around the Company, cut a couple of million dollars of overhead out of the Company. Since the bottoming of sales even with this weak cold season, our sales are still up about 50% from the bottom. This is far outpaced the category and our competitors over this period of time.
I believe that we create a lot of value for the Company over these past years. If you bought our stock at the bottom a few years ago, you may be happy, but for the rest of us including me, this certainly isn’t very satisfying, whether our stock is trading at a dollar and change. This past season in particular, I’ve eluded to this in the past, the incidents of upper respiratory illness was down double digits year-over-year for virtually the entire season. As I’ve always mentioned, Cold-EEZE sales and all cough cold product sales are highly correlated to the incidents of upper respiratory illness. It's pretty obvious when people are sick, they buy cough cold products, when they’re not sick they don’t. So with the incidents of upper respiratory illness down about -- down double-digits and in some weeks they were down as much as 25% year-over-year.
The fact that our sales were down less than double-digits is actually a great feat on our part, but unfortunately that doesn’t mean that our sales were up and that unfortunately doesn’t mean that we had the type of performance that we would like. So it’s a moral victory, but by no means is it satisfactory in my mind and our senior team’s mind.
On the bright side, we recently visited with approximately 80 retailers at ECRM, this is something we do every year, where we review the past, discuss the present and introduce new products for next season. I can report to you all that these meetings went extremely well.
We are in a tough category, we are in a contracting category, shelf space is at an all-time premium, most of our competitors are getting facings or products kicked off the shelf. But I can report to you that I believe that for the coming cough cold season, we will be flat or in all likelihood actually gain shelf space in terms of facings, we have a great R&D product innovation effort here at ProPhase Labs that’s headed by Dr. Rob Cuddihy, who is really done a great job in formulating virtually anything that we ask him to formulate and I believe really formulates the best products in the market for whatever new forms and active ingredients, and whatever it is that we’re looking for that we believe, the consumers want Dr. Cuddihy somehow seems to be able to formulate it.
So we have some great new products that we’re introducing for this season. I don’t want to go into too many details yet. Again I’m not interested in informing competitors about what we’re doing. But I can tell you the retailers responded incredibly well and not only did they not cut back our shelf space, but in some cases improved or increased our shelf space and will be giving us additional facing for our new products.
So therefore I’m also pleased to announce that I expect that our revenues, our Cold-EEZE based revenues will grow this year. We will also have some contract manufacturing revenues that will grow as well. So I’m looking for a growth year in 2016 versus 2015. I touched on our Cold-EEZE liquids previously or in prior press releases. One initiative we have is to develop a new line of Cold-EEZE products are not homeopathic that go after the more traditional brands like Robitussin and Tylenol and Alka-Seltzer and so forth.
And our thought is if a brand name like Alka-Seltzer can get into the cough cold business and do well, why can’t Cold-EEZE. I give prior management a lot of credit for creating the Cold-EEZE brand name, I think it’s a great name for our category and I’d like to see that expand. So we introduced Cold-EEZE liquids this past cold season in food stores. As you know we’re in food drug and mass, but the liquids, we initially started introducing them just in food. They did very well there, we are looking to expand upon our distribution this season, the jury still out. The biggest issue is that retailers as I mentioned, they love new product innovation, they hate sort of copycat products, in the case of our Cold-EEZE liquids. They are in line with the other liquids like Robitussin and Tylenol and Alka-Seltzer as I mentioned.
The difference is, number one, we have the Cold-EEZE brand. Number two, we manufacture them incredibly efficiently. Dr. Cuddihy actually developed a relationship with one of the low class manufactures in the world of our liquids and we believe that we offer a value proposition to consumers for the liquids, we can actually offer these liquids, Cold-EEZE liquids to consumers at a lower price than any of our competitors, while our retail partners can make better profit margin. So to me and to us it seems like a win-win and we’re working and gathering momentum there, we had a good for season and we expect to build on that.
Separately as I mentioned, we also have two new Cold-EEZE branded products that we’re introducing one is actually in the new form that I’m really excited about. And again the retailers were really impressed and virtually every one of them will be taking our Cold-EEZE product in our new form. And again I apologize for not giving more details.
So for 2016, we’re looking at some nice upside potential in growing the Cold-EEZE brand. Like to touch on marketing just a little bit. As I’ve always said, I’m a big believer that when it comes to marketing, there are two things that are incredibly important. The first is developing and effective message, if you don’t have an effective message, it doesn’t matter how many times the consumer sees it, they’re not going to purchase the product.
Once develop an effective message, it’s very important to distribute it to consumers as efficiently as possible, you want to spend as little money as possible reaching as many people as possible. I happen to believe that in our Company, our messages are at least as effective anyone else’s and I believe that we distribute them more efficiently than anybody else in our industry. We make a small budget look like a very large budget competing against competitor that are three, five times our size. We produced some great new Cold-EEZE TV commercials this season, and in fact I just learned yesterday that our TV commercials won some big awards for best commercials in cough cold category, actually I haven't even mentioned that to anybody in our company yet, so I'm really excited about that.
I talked to our director and producer and I said, when do I get to go up on stage and they said unfortunately nobody is going up on stage. I said, I want to be on the stage next time. But anyway we did receive some awards for them. All of our Cold-EEZE commercials have tested very high every year and these were no exceptions. So, I'm really proud of the work that we've done on the marketing side to grow the Cold-EEZE brand.
Then I've discussed this in the past, the goal here is to not just grow the Cold-EEZE brand, we have a really efficient infrastructure in place, however across a certain number of millions of dollars to support this infrastructure. The Cold-EEZE brand supports the infrastructure but unfortunately it doesn't generate enough in revenue to both support the infrastructure and generate a profit, our goal here is to figure out how to grow revenues at the company because if we grow revenues with high profit margin products then dollars will start to flow to the bottom line and we can become incredibly profitable, very quickly, just with a little bit of leverage and so our goal is both to grow the Cold-EEZE brand as well as introduce new products.
So our first foray into going outside the cough cold category which as I've mentioned is a very tough category and that's to go into the dietary supplement category which is a large and growing category. We have developed and when I say we, this is of course have been led by Dr. Cuddihy, I keep mentioning his name because of all the great things he is doing with our product development, but he developed some really great products under the banner or brand TK Supplements, this is a new line of dietary supplement, our leading product is for men's libido, sexual health.
We have a lot of fun talking about these products in the board room and we've done a lot of work to research and come up with the best products, we've done clinical studies which are ongoing and unlike competitors we conduct clinical studies on the whole product. We don't simply add ingredients that others have provided some clinical studies just on their one ingredient which was then put into the product, our product works really well. We already have a clinically shown claim that we can make our own products, I can tell you that the products work great and I’m looking forward to success with our libido product.
We decided to start the introduction process to consumers with direct response to TV, the idea here is, if we can optimize an infomercial that’s successful enough to generate more revenues than what it costs to air on TV, so that we can at least breakeven, then we can spend many millions of dollars on advertising, breaking even which will create tremendous brand awareness, we can then go to the next step which would be the leverage our infrastructure and our distribution platform for Cold-EEZE with all of our relationships, with all of our retailers around the country and introduce our product by the way is called Legendz XL and we’ve introduced Legendz XL to the retailers.
We are starting the process of introducing Legendz XL already in the convenience line of retailers that don't necessarily require national advertising. These are products that in this line of distribution is primarily purchase based on impulse, when you stand in that counter, you will purchase the product, but to go into the major retailers like Walgreens or Walmart or CVS and so for, if you don't have brand awareness, the retailers will take our product on the shelf but within six or nine months they’ll be kicking it right back off the shelf. I'm not interest in introducing a new product or brand just to have one year of success followed by millions of dollars in write-offs.
We really are trying to build this new line of products to right way, we're trying to do by building a brand awareness first, we're trying to build the brand awareness in a cost effective manner and that cost effective manner, initially is with direct response TV, the frustrating part is the length of time it takes to optimize a TV spot. So we already did a test, we’ll do a two weeks passed on TV, maybe we'll spend $15,000 or $20,000 to $25,000 on that test. We'll then spend a week to analyze the results, we'll then discuss as a team, how to improve upon the TV spot, that takes a weak or two, we then improve the spot, it goes into the editing process, we create new TV spots that has to be distributed back to networks, the networks then has to approve them and then it has to go back on air.
So the whole turnaround time from beginning to end between the two weeks of airing and then six weeks of turnaround turns out to be an eight week process, just to do one round of edits, so we're into probably our third round of edits on TV. But again we're advertising in a minimal way, these are just tests, so you probably haven't seen the TV spot yet, but if we're successful I promise you, you will and you will see it a lot.
So we’re varying -- there are a number of things that we vary, we don’t want to change too many variables at one time or we won’t know which changes are positive and which changes are negative. So it's important to only add a couple of variables at a time, see how it performs and then move on from there. But despite the process to be honest with you I understand P90X which most of you have probably seen, which turned out to be a billion dollar campaign. That took seven years to optimize.
Now I don’t wanted to depress you, I don’t expect us to take seven years. But I do expect that it could take the better part of this year for us to optimize our TV campaign. And again once we optimize it then we’ll go hog wild, we’ll spend a lot of money advertising, breaking even or better. And then as we generate that brand awareness we’ll get into retail stores. So that’s a little bit about our marketing, a little bit about our TK Supplements effort.
I would like to now spend about five minutes talking about the value proposition of our Company. I don’t do this often, but then again we haven’t done a conference call in quite some time. So, I just want to provide a little bit of perspective with regards to Cold-EEZE as an investment, in fact I don’t think I’ve done this in all of the years that I’ve been here. But I think it's important that our shareholders have my perspective. I think if you’ve read the filings, you can see I’ve been a major supporter of our Company. I’ve purchased millions of shares of stock, mostly in the open market over the last several years. I am big believer in our Company, I am big believer on Cold-EEZE and I am a big believer in the value of our Company.
So, let's talk about the value proposition. I am just looking at a couple of notes here. The Cold-EEZE brand has value and what are the things that go into having a valuable brand. First and foremost it's having a high gross profit margins, Cold-EEZE has a very high gross profit margin, it’s in the 60s. Anytime I talk to anybody about the brand, it's the first thing they say, they are usually jealous about our high profit margins. To put this in perspective a food product might have profit margins in the 20s. I am actually invested enough of the Company that it has profit margin around 5%. So for us to have gross profit margins in the 60s makes the Cold-EEZE brand a very valuable brand. It may not look on it because -- look like it on the face of it when you analyze our financials because our earnings aren’t there, but the brand by itself for instance to an acquirer would be very valuable brand because of those high profit margins.
Other things that are important, our revenues in Cold-EEZE have achieved critical mass. What that means is, we can conduct and afford national advertising. If you think about it, if a brand is doing, $2 million, $3 million, $4 million, $5 million, you can’t spend money to produce a quality TV spot much less advertise it nationally. You need a budget in order to do that. So, Cold-EEZE has that critical mass of revenues, it has high gross profit margins, it's stood the test the time we’ve been in business, Cold-EEZE been in business for over 20 years, so it's a solid brand it's not going anywhere.
We also have not only the original clinical studies that were done in the 1990s and ’92 and ’96, but we’ve had additional studies conducted since then. We’ve gotten a lot of great press regarding zinc that maybe six to 10 years ago, there are a lot of question marks around zinc. But these days the amounts of positive press regarding zinc has really bolstered the case for Cold-EEZE being a valuable brand and for consumer purchasing zinc products for the cold. Of course if you know anything about the Cold-EEZE brand, Cold-EEZE releases zinc ions in your mouth, which are absorbed by the upper respiratory track to literally block the cold virus from replicating, that is the scientific theory. But it is a fact that it does release zinc ions in your mouth, which is very different from all the other zinc products out there that you swallow that get digested and may -- the zinc may, provide some immune support going through your blood systems. It's very different from a product that goes to work directly fighting your cold.
Some other things that I’ve mentioned about Cold-EEZE, people, consumers who purchase Cold-EEZE tend to spend a lot more in what we call the shoppers basket when they go into the store to purchase Cold-EEZE they’re purchasing other products at checkout. The consumer that has Cold-EEZE in their basket is spending probably twice what some of the other brands represent in shopper’s basket. This is a nuance, but it's very important to retailers and it is certainly important to acquirer.
I talk about an acquirer only from the point of view of looking at the Cold-EEZE brand and its value, I am not interested in selling the brand right now. I know shareholders have asked me from time-to-time what my thoughts are and that’s why I am addressing it. Number one, our sales were down this year, it wouldn’t be a good idea to sell a brand when our sales are down. Number two, I think that our sales are going to grow this year and number three, I happen to think that we have a great infrastructure in place and we have a really valuable distribution platform. As I said, we’re in over 40,000 stores around the country. We have great relationships with all the major retailers.
It would be a shame to sell the Cold-EEZE brand and allow our infrastructure and distribution platform essentially to just be written off because it does have so much value. And so our goal this year really is to start to leverage that distribution platform and infrastructure.
Some other things I’ve mentioned, we inherited an enormous amount of legal fees and litigation in the first years of managing the Company. Some of those major litigation efforts wrapped up this past year. We have one arbitration, which frankly I’m responsible for, it’s probably the one mistake I made back five, six years ago, when I was starting here. Our arbitration is virtually wrapped up, pending a decision. Most of that was expense last year, there will be some legal expenses related to the arbitration in the first quarter this year.
Going beyond the first quarter, I anticipate that for this year, our legal expenses will be down, I’m also paying very close attention to our marketing expenses. As I’ve mentioned now many times we’ve turnaround the Cold-EEZE brand it’s on solid footing, I’m looking to -- I’ll just say watch our marketing budget as it relates to Cold-EEZE very, very carefully, so that our P&L can start to improve.
The one place where we are investing is a new products, it is in our TK Supplement, so it’s in our Legendz XL, it’s in other products under development. I just want to put this into a little bit of perspective. I actually, not that many months ago, was presented with an opportunity to acquire a brand that was priced at $30 million, developing and introducing over the last three years and they were looking to tell us for under 10 million. That’s exactly what type of initiative, we don’t want to be responsible for here with the case of Legendz XL I think we have the best dietary supplement, sexual health product for men on the market.
We are trying to figure out the most cost effective way to introduce this for the market and it won’t be for tens of millions of dollars. We spend two years in development, we spend maybe in the low millions developing it and at most we’ll spend in the low millions ramping it up and launch it and with the low millions that will be spent in ramping it up and launching, hopefully there will be some sales that will offset some of those expenses. So we’re doing this is efficiently, as effectively as possible and I think that both Cold-EEZE and our TK Supplements, Legendz XL products have really nice potential and upside for this year.
I’m just going to review, my notes see if there is anything that I missed, I’ve been talking for quite a while now. I’m about to open this up for Q&A. I think, I covered quite a bit of material. Again, I have not asked anyone to ask any questions or to call in with any soft ball [ph] questions. I don’t want to have a false conference call, that wasn’t the purpose. The purpose really was to update shareholders, make sure we’re all on the same page here. If you do have any questions, I’d love to hear them.
Operator I’d like to turn it over back to you.
[Operator Instructions]. Your first question comes from the line of Fred McDonald [ph].
Ted, can you project when Legendz will hit store shelves?
I’m sorry. Fred, thank you for asking your question, but you breakable a little bit. Could you repeat that please?
Any projections on when Legendz might hit shelf?
Sure. So right now we’re on TV, that’s going to continue for the better part of this year. The goal ultimately, hopefully is that we actually have a profitable campaign on TV. If we do, that will be our primary focus, will be to really ramp it up on TV. There are plenty company’s brands and products that only advertise through direct response TV and they do incredibly well. Of course a percentage of those that do well is small, but the ones that achieve success make an awful lot of money, that certainly is one objective or possibility for Legendz.
However, since we have the infrastructure in place, while I don’t want to go to our traditional food drug and mass retailers. We are working with convenient stores now, there is the possibility that we’re going to create, while we have already created a convenience ties package for convenient stores. It’s a lengthy process of introducing the product to the convenient stores for the convenient store channels.
Having them accept them and then they have to distribute them and then they have shown up on the shelf, I would -- there is -- clearly there is no guarantee that they will even accept them. I never want to state that a retailer is going to accept the product until I actually see the order vacant. But I can tell you that initial indications are that convenience stores are very interested in the product.
One reason they’re interested in the product is because we make a clinically shown claim, most of the other products in the men health, sexual health category are fly-by-night companies with really questionable ingredients. We have a clinically shown product and even by saying clinically shown that’s a conservative way of saying that we have some really great clinical studies that we’ve conducted and have more ongoing.
So we have some strong claims that we've already developed for the product, we have more that we're coming and so the convenient stores are very interested, if it was to show up in convenient stores, I'd would say before year-end, we would started accepting orders and shipping product again thinking about the forward looking statements disclaimer, there are no guarantees, but I'm hopeful that convenient stores will start to accept the product in their stores before year-end.
As far as retailers are concerned, to put that in perspective with our traditional food, drug and mass, we just met at ECRM, these are retailers that are now planning for the cough cold products that will show up in shelves in September. So if you think of that type of a timeframe, dietary supplements because it doesn't have the seasonality as the cough cold category has, we may not have as longer a timeframe, but you have to assume from the time that we would first introduce the product to the major retailers, to the time that they would accept the product and then place an order and then it would have to go through the distribution centers and then have to actually get distributed to the individual stores and put on the shelves, we have to assume it's a six to nine month process, we have not started that process yet, I don't want to start that process until we gain some momentum on TV. I hope that answers your question. I'm happy to answer another one.
Thank you, Ted. My next question with the clinical study that was done on Legendz, can you talk about a little bit? Was it a double blind placebo study or just what done?
Sure, great question. So, yes, virtually all of our studies are double blind placebo controlled studies. That's the gold standard as it relates to the FDA, FTC and to those class action attorneys out there. The first claim that we are marking is clinically shown to promote blood flow within 60 minutes, we conducted a couple of initial studies that showed very positive results, we actually felt that the initial studies were strong enough to support that claim. We actually spoke to our regulatory experts and they said, well, if it is strong enough for FDA and FTC, but you never know class action attorney is going to come along and make a claim anyway against us whether it's founded or unfounded.
And so we went a step further by building an even larger clinical study having even more patients in it, so that we're on really solid footing on making that claims. I like that claim for several reasons, number one the fact that it’s double blind placebo controlled, the fact that we say it’s clinically shown, the fact that we say it promotes blood flow, people understand, man understand when you say promotes blood flow, they know what that means. And when we say within 60 minute.
That basically -- it implies two things, one that the product works, it implies that it works quickly and relative to other products in the category, there were some products, we have to take for three to four weeks particularly in the dietary supplement category, there are some products that takes three to four weeks before they start working. So to avoid confusion, we want to imply very clearly that our product works the first time that we've take it.
So we think that that's a very strong claim. We have other claims coming but we want to wait until all the T’s are crossed, all the I’s are dotted with regards to our clinical studies. The class action law suits out here even if you win, it can cost million dollars to defend, and I'd rather have such strong clinical studies that when these class action attorneys knock on our doors, we have so much data at our support that they'll realized that they're just wasting their time and they’ll leave. That's basically what's happened with us with Cold-EEZE now.
And by the way, I should mention that we have conducted additional clinical studies on Cold-EEZE more recently one of those studies we're looking to publish in the near future, the bottom line is it’s further support that our Cold-EEZE product really works great at reducing the severity and duration of the common cold and further increases the value of the brand while at the same time, should scare away most class action attorneys. Fred, anything else?
Well Ted the only thing else I can think of is, do you have an idea when your next TK Supplement will be released [ph]?
Yes, so we actually have two more products that we've already developed and by the way a lot goes into not only formulating the products, testing the products, but also developing the packaging, the graphics, the brand name. We do a lot of market research, focus groups, online surveys, you name it, we literally spend two years, creating our Legendz packing graphics, brand name, et cetera. I'm really proud on the work that we've done there, we have created two other products., I haven't really discussed them in detail, they happened to be really good products, one is for prostate health, the other is a product for men's energy that I guess you can call it a natural testosterone booster that provides all day energy.
Again the clinical studies have been great, we're trying to figure out the best way to differentiate these two products relative to what's currently available. We think we have the best products in the market, there will be reasonably priced. Our hurdles are from the marketing point of view to create uniqueness in the minds of the consumers. So I am not in a hurry just introduce products that aren’t going to do well, and so my thought is, I really want to build the momentum with Legendz first and then allow the other two products to piggy back on the success of Legendz.
Separate from that we are now also looking at the women’s category. We think it's underserved, we think that there is an even better opportunity on the women’s side and so I’d say Ralph [ph] is actually here for this call, but Ralph has to go back to his office pretty soon and get back to work and formulating those products. But I am actually looking for some women’s products to leverage what we’re doing as well next year.
Thank you very much. I think the future looks very promising for Cold-EEZE. Thank you.
Thanks Fred I really appreciate it. Do we have other questions?
Your next question comes from the line of William Lap [ph].
I want to first of all complement you on the packaging, I have a Target store in Minneapolis, and I thought I saw some -- I like the Cold-EEZE the way you’ve got it on it shelves, but I also thought I saw some competitive Cold-EEZE on the liquid, it was right on the Target shelves, you mentioned it, maybe they weren’t there. But I thought I saw -- like for the liquid Cold, but maybe I am wrong. But the packaging is very nice. Let me ask you this, what is your burn rate? I mean you did 20 million, you’re now at 60% margins, so that left $12 million. But what do you project for your burn for cash flow for this 2016 years? Are you going to lose money on cash?
That’s a great question. To some extent Bob wants to answer that question, but let me just say to some extent we have control over our cash flow because we can control the amount of dollars that we spend on marketing both for Cold-EEZE and the amount of dollars that we spend for Legendz. So, I am trying to be conservative, I am trying -- because I believe that we have an undervalued stock. I am trying really hard not to issue millions and millions of shares of stock and raise $10 million and then burn through it, I am really trying to do this as conservatively as possible.
At the same time, a couple of million dollars of dilution to potentially build a new brand that could be worth $10 million or tens of millions dollars, I think it's worth that endeavor to try and leverage our infrastructure and distribution platform. So, as you can imagine, I can tell you I expect that our cash flow will probably be negative this year but it's well controlled. Our legal expenses are going to be less than what they had been in the past, that’s what we’re projecting. That’s the key figure.
Our marketing is under control because we’ve already turned around and grown the Cold-EEZE brand, we can probably spend a little bit less on advertising this year and still have the same impact. And so between decreasing legal and marketing, while that’s not necessarily going to earn us money, it just take some of the pressure off while we invest in Legendz XL and our other dietary supplement.
So basically you’re not going to be profitable this year and you’re going to have negative cash flow?
That’s probably a fair statement, but in the process I expect that we will build significant value in the Company. I’d be more than happy to lose a few million dollars and build the brand that’s worth $10 million and then in the couple of years it's worth $30 million or $50 million and lose a few million a year while doing so.
So let me ask you about the Legend. The Legend that competes with something like Cialis and all that is that true but it doesn’t have to have FDA approval because it's a dietary supplement?
So first of all, that Legend is Legendz I don’t short change the Z, that’s critical to the category. Just having a little fun with you. Second of all, I am not allowed to compare it to prescription products. But clearly you take Viagra or Cialis it works the first time you take it and with Legendz XL it works the first time that you take it. I can’t make comparisons because we didn’t go through tenure year FDA new drug application process.
This is a dietary supplement. We have to be very careful FDA scrutinizes very closely what you say about dietary supplement, so I am not going to compare the prescription product, I’d rather compare it to other dietary supplement product. I can tell you that I believe we have the best product on the market in terms of how it works, relative to other dietary supplement product and we do have a very strong claim stating that within 16 minutes it promotes blood flow.
Well, that’s what you told me when you used it. Anyway --.
And Bill how did that work out for you?
Anyway, the question is, so you have some info-commercials, I think that’s a great way to pull a brand through the marketing. But how long you’ve done on them? I mean, you’ve had two or three tests, what kind of revenue have it generated? Can you speak about that? I mean in other words, you air these commercials, they get a percentage. Can you talk about what kind of results you’re seeing on the two or three commercials?
So I mean listen this is really preliminary and the reason I don’t want to talk to numbers is because; number one, it is still preliminary; and two, just to give you an example, in our first test we might advertise on 20 different networks. 10 of them do relatively well, 10 of them don’t do anything. In the future, we wouldn’t do anything on the 10 obviously that aren’t generating any revenues. So, to even talk about revenues relative to the spend, it’s honestly just not relevant right now. It will be relevant six months from now, it’s not relevant now.
Okay. But you’re seeing positive -- you are seeing sales?
Yes, of course it’s generating sales. We’re generating -- the beauty is, we actually build a really nice infrastructure for Legendz and for selling products online, you go to our website and purchase our products, a lot goes into that website, a lot goes into advertising on TV, between developing all the infrastructure of the call center and the fulfillment center. And all the nuances that go into the Web site and enormous amount of work and research goes into the website just in terms of not only what you see, but the order in which you see it that all matters, same thing with TV spot. So I can tell you we’re making nice progress, we’re not there yet, we’re not at breakeven yet. But I’m hopeful later this year, we will be.
Okay. So Ted I saw you bought a lot of stock, I saw the [indiscernible] bought a lot of stack. So tell me what, can you give me an off-hand value what do you think the Cold-EEZE brands worth today?
I actually thought that I answered that question pretty well. I’m not going to get into specifics. But I’ve mentioned some of the factors that go into the value of the brand. One is whether -- the most important is probably gross profit margins, distribution, longevity and whether it’s growing or shrinking. You put that all together, it is a valuable brand. And by valuable what I mean is, all those factors determine, what the multiple of revenues or what the multiple --.
Yes. So what is the range, in other words, if you’re doing 22 million and it meets those criteria would you say it’s three times --?
I won’t talk about Cold-EEZE, I’ll tell you based on my limited experience of other deals that I’ve looked at, if you have a small shrinking brand, it’s probably worth about [indiscernible] and by the way, the acquirers typically look at contribution margin, they don’t look at revenues, but contribution margin comes from revenues and we have high gross profit margins. So it’s okay for me to speaking in terms of revenues.
But such a small and shrinking brand, maybe you get between half and one-times revenue. If its stable brand, it depends on the size of the brand, it depends on the gross profit margins. It can go for anywhere from one to four times revenues.
The Cold-EEZE brand is certainly worth more than one times revenue. And to put that in perspective, our stock right now probably values our brands at about one times revenues. But we also own two properties, we own a state-of-the-art manufacturing facility, which I really didn’t even touch on. We have one of the best manufacturing facilities in the country for manufacturing lozenges and hard candy. So we have a valuable manufacturing facility, we own two properties.
So there is a lot of value there and it’s clear that our stock is undervalued. What the brand would actually go for, also depends on whether there is a major pharmaceutical company that’s looking to put more of emphasis on cough cold and/or whether there is a company out there maybe a foreign company that’s looking for distribution in the U.S. and wants to use Cold-EEZE as a platform for other products that they may have. There is a lot of variables in there. But I can tell you that at least in terms of the key factors that an acquirer would look for, there all pretty positive for Cold-EEZE.
Did you have somebody try to take a run at this one-time?
Yes. That was a few years ago, but I’m not interested in selling to a private equity firm at well below the --.
Yes. Whether that [indiscernible]. Alright, well keep up the good work.
Your next question comes from the line of Dino [indiscernible].
Question about synergy, Cold-EEZE has an incredible market presence. Are you going to be using that Cold-EEZE leverage to help sell the TK Supplement products or they’re going to be totally separate entities?
As possible down the road, the real benefit of Cold-EEZE is that it provides us with the infrastructure and the relationships with the retailers, as oppose to the Cold-EEZE name. It’s a mixed bag, for every pro there is a con, with regards to using the Cold-EEZE brand name and associating that with Legendz and research we’ve done in the past, that was a mix bag at best. I really don’t want to mix the two together unless research clearly indicates that we should.
But because we’re in the Cold-EEZE business, we have 40,000 stores around the country that will open up their doors to us and meet with us and be receptive to doing business with us. So there is indirect very positive leverage to the Cold-EEZE brand.
If we didn’t have the Cold-EEZE brand and were starting from scratch and just had a company that was looking to develop Legendz, we would have an incredibly difficult time getting into these same-stores. And entrepreneur face this problem all the time, they create these products that they’re passionate about and they just can’t get distribution and I see it happen all the time.
No doubt about that. I’m excited about tour TK Supplement venture. What other -- you’ve mentioned prostate health and testosterone booster as two potential new products. What about the general overall vitamin market itself? Do you have any intentions of entering into that with TK?
Our next step actually, we've got a lot of feedback that women want products similar to what's out there for men and I'll leave it Dr. Cuddihy, how soon he can develop those products for women. But I think we're on the right track there and then I actually think that's next place to go. But if we’re successful with Legendz, really sky is limit because we would then have a new platform in a multibillion category and we can literally go wherever we see pockets of opportunity, which is one of the reasons why I wanted to try and extend beyond the cough cold category because again that's a tough seasonal category.
For the work that we've done at our company and restructuring and building it over the last several years, if we put those efforts into a different category, we would be multiples of the size that we are right now and frankly I know that we -- while we may have made some mistakes along the way early on, we're doing all the right things now and I promise we're in a tough category with the cough cold category and as I mentioned, when you have the incidence of respiratory illness down 20% and 25% in some weeks, year-over-year, probably difficult to sale product no matter how good a job you do.
Why do you think that incidence of upper respiratory infections was down so much this year? Was it weather or is there --.
You can say its global warming, you can say it weather, you can say it just cyclical, we have good seasons and bad seasons, it just wasn't a great season. Interestingly right at the end of March, it started to pick up year-over-year relative to a year ago, so I happen to think more, it’s just one of those flukes or anomalies where we had a bad season, I'm confident that we're going to have the better season this coming year, there is no reason why we wouldn’t at least be flat if not up in terms of the incidence of upper respiratory illness, which would be great backdrop for us increasing shelf space and coming out with new product, so I expect Cold-EEZE to have a good year this year.
Great, thank you.
Your next question comes from the line of Charles Hooper [ph].
Ted, could you give us an idea of the market size for Robitussin and Mucinex brands as well as libido product?
I can tell you, each of the liquids, and it tends to whether you include Mucinex in there, I mean we're talking about many, many hundreds of millions of dollars, if not more, it's a big category, they make a lot of money. And the thought there is if a brand name called Alka-Seltzer which was for an upset stomach, if they can a big splash in the cough cold market, why can't Cold-EEZE, it should be a no brainer.
And so there was tremendous potential for our Cold-EEZE liquids, there are lot of consumers out there, only approximately 6% or 7% of consumers purchase homeopathic products, but in the non-homeopathic liquids those percentages, it's a multiple, a significant percentage of consumers purchase the liquid. So we're going after significantly, dramatically more consumers and it just a matter of getting the retailer to play ball with us. Food typically has more shelf space for products like these, because they love the profit margins, because food has such low profit margins. So the cough cold products which have better profit margins for them, they're willing to give the sales space, so they opened up their doors to us first. We have to prove ourselves in food and then hopefully the others will open up their door.
We have the possibility that at least one major retailer is seriously interested in our liquids for the upcoming season, if they take it on, it will build momentum. Alka-Seltzer, I promises you, I don't know how many years it took, but it took years not months for them to get into cough cold business and I can only tell you that everything is going in the right direction, if we get one of the major retailers in drug or mass to accept our product, it will eventually motivate and pressure the other retailers to carry it as well.
So we're on the right track, it's a very big category and if successful, it could dramatically increase the amount of revenues for the Cold-EEZE brand and also dramatically increase the value of the Cold-EEZE brand, just one more reason why I’d really like to see that play out, as opposed to selling the brand for some impatient shareholders.
Okay, thank you very much.
Thank you, Charles. I appreciate the questions. I see that there are no more questions out there, I really appreciate the questions and I appreciate everybody giving me an hour to talk about our company. Operator, you want to ask one last time, if anyone has any other questions.
Okay, great. I think we can end the call at this time. We have one more question. Go ahead.
You have a question from line of Pat Peterson [ph].
Sorry to be late on the question, but I just wanted to ask to see if I did understand, did you say that you were thinking about introducing additional dietary supplement, something in the vitamins and mineral lines later on?
I think the answer is that the dietary supplement category is a multi-billion dollar category, everybody that’s not in it is jealous of the brands that are in it. This is our first entry into the category. If it's successful we can introduce virtually any product. I am really proud of our R&D efforts, I don’t think there is a better formulator on the planet that Ralph and any product that we want to formulate there is no question in my mind, he can formulate it. We have manufacturers around the country that are regularly dying to know how Ralph formulates what he formulates. We keep our products very closely guarded secrets.
So we manufacture part of the product at one location at one company and we’ll manufacture another part at another manufacturer. So the manufacturer don’t even know what he’s doing. So, I think to answer your question, if there is an opportunity, whether it's in vitamins or elsewhere in the category, there is no question that if Legendz is successful, we will be able to leverage that and go wherever we like while our hands are somewhat tied in and we’re somewhat constrained with regards to cough cold category. There are no such constraints in the dietary supplement category. So with TK Supplements this could go from a little start up that we’re financing from as Bill aptly mentioned our negative cash flow, obviously we’re being very-very careful in terms of spending money.
We’re doing this on a shoestring budget. I could certainly ramp up Legendz more quickly if I was willing to spend $5 million or $10 million to do so, anybody else would we’re trying to be more careful. So this is the long winded way of saying it’s certainly possible, but it's premature to give you any kind of definitive answer.
It sounds like good doing it exactly the right way, and I am really excited about the possibility. Thanks for taking my questions.
Thanks Pat, I am excited too, I think we’re all excited to the Company. Thank you all for participating today. I really appreciate it. Looks like Mr. Hooper has one more question. Chuck, please feel free.
Operator, we have one more question.
Yes. We have a question from the line of Charles Hooper.
Have you decided on a price for your libido product?
That’s a great question. That’s one of the key variables that we’re testing. To give you an idea one thing the way we tested introducing the product on TV is by providing a free sample and then signing up for continuity program. Continuity programs means that when you get the free sample you have to provide your credit card and then we’ll auto ship the product until you cancel it. We vary the price anywhere $89.95 to $79.95, $69.95, we’re testing $59.95, and that’s for a 30 capsule package.
Separate from that, we’ve also tested rather than doing a free sample with a continuity plan because a lot of people don’t want continuity program, we’ve tested a Bo-Go, that’s a buy-one-get-one free and we have tested that with a 10 counts at $39.95 where you buy one for $39.95 you get a second package for free includes, free shipping. That is highly profitable to us.
But if you don’t generate enough orders, it doesn’t pay for the TV time. We may in the future cut $29.95 instead of $39.95, so there are number of variables, pricing isn’t set. The beauty of direct response TV is that the consumers tell you what that’s the most that they’re willing to pay while still selling a lot of product. So, there is some real advantages to going direct response TV. They tell you what they’re looking for. They tell you what they respond to. They tell you the offers that they respond to. They tell you what calls to action they respond to. They tell you what claims they respond to. So pricing is just one of probably 20 variables and we’re just in the early stages of optimizing those variables.
You’re welcome. Thank you so much. All right, thank you all. I think we’re going to end the Q&A now. We’re passed an hour and that was without us reading the press releases and the quotes. I enjoyed the call. I hope that we have informed you and that this is somewhat of a level playing field. That you all realize that there is a lot of value in our Company. There is a lot of upside potential. I can’t guarantee the upside, but we’re certainly going to give it our best shot as efficiently as possible.
Enjoy the rest of your day and thanks again for joining us.
This concludes today’s call. You may now disconnect.
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