ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, Brendan. Good morning, everyone, and welcome aboard. I'm Joe Diaz. Like the operator said, I represent Lytham Partners, the Investor Relations consulting firm working with ImmuCell. Once more, I appreciate each of you taking the time today to go over the unaudited financial results covering the first quarter, which closed on March 31, 2020. Before we get into it, I want to add a note of caution about forward-looking statements. Those listening should keep in mind that remarks from management on this call contain forward-looking statements that carry risks and uncertainties, and those could make actual results vary materially from what we talk about today. You can find more details about such risks and uncertainties in the cautionary note on forward-looking statements — that is, the safe harbor statement — included in the company's press release and its Form 10-Q, both released last night, and available from the SEC or through the Investors section of the company's website at immucell.com. Having said that, I'll hand things over to Michael Brigham, President and Chief Executive Officer of ImmuCell Corporation, and afterward we'll take your questions. Michael?

Alright, thanks, everyone, for making time to be on today's call. I really appreciate it. Yesterday evening, we submitted our Form 10-Q covering the 3-month period that closed on March 31, 2020, and put out a press release that sums up several key results. So rather than going back over a lot of the specifics you can already find in the Q and the press release, I'd like to point out a few items I consider to be among the more significant disclosures. First, regarding the press release, I'd mention roughly 3 things: product sales, top line, 11% growth, a solid quarter for us, finishing the quarter with an extra $1.4 million worth of demand on backlog. That brought our trailing twelve-month revenue to $14.2 million — $14.2 million on an annual basis. Regarding the second point in the press release, there's a link included for you. We touched on the leasehold improvements and the initiative to boost First Defense production capacity; things are moving along nicely with that. Should you have a moment to click on those images or bring them up through our site, you'll notice that we're in the later stages of the effort, basically turning a warehouse into assembly space. It's going really, really well — staying on budget and on schedule. I'd call this essentially Phase I, and we're getting close to the certificate of occupancy. We anticipate that happening soon, along with the move in. After that, assembly work will begin in that facility. The second phase centers on lyophilization—specifically the freeze dryer, which will be the third such unit running at our 56 Evergreen location. That step is next in line. Before we can install that freeze dryer, equipment currently at 56 Evergreen needs to be moved elsewhere so there's sufficient space, and once that's done, we'll move forward with growing our liquid processing capacity. Turning to my third and final point: this press release seems like an appropriate place for me to touch on certain non-GAAP figures. Page 4 contains a short discussion of what we refer to as income before income taxes and certain noncash expenses, which came to about $600,000 during the first quarter. That number differs somewhat from EBITDA, and we provide a reconciliation bridging it back to EBITDA. For the first quarter of 2020, EBITDA was $770,000, compared with $836,000 in the first quarter of 2019. Now, if you'll allow me, I'd like to turn to the Q and go over a few highlights. I'd probably start with footnote #20, the subsequent event footnote. I just want to note the Paycheck Protection Program money. Under that federal program, we got $938,000, and we've said we anticipate that all but roughly $100,000 of it will be forgiven. Even so, it's still subject to certification by our bank in line with federal guidelines. And lately there's been some debate over whether public companies should be taking or receiving these funds. Obviously, our position is that we don't fit either category — neither a large public company nor a small one. And yes, we do want it. A ruling came down yesterday, I think it was yesterday, very recently, indicating that PPP loans below $2 million wouldn't face deep scrutiny. We're definitely below $2 million. And — we'll simply have to figure out this process so there isn't some arbitrary, one-size-fits-all rule aimed at public companies. So right now that's a bit up in the air, but I believe we should come out ahead. We're certainly going to present that argument, which would let us capture a portion of that financial breathing room—about $800,000—as we move toward the back half of this year and whatever pandemic- or economy-driven difficulties may arise. That's likely more discussion than it deserves, so let me shift over to the MD&A, Item 2 of the Q. I want to highlight the bank refinancing, which was an excellent arrangement with Gorham Savings Bank. We managed to lower our interest rates. We can turn our variable interest rates into a fixed 3.5% rate, and we can avoid certain balloon payments that are coming due, plus we get improved cash flow on principal repayments; so there's a great deal of detail about product sales that follows. I put the top line in the press release in bold. And let's see. I just wanted to mention a sort of update regarding Re-Tain and the FDA process. So we're moving forward with that without pause. Whether or not COVID exists, the FDA remains open. They respond. Norbrook remains open. They respond. So we expect our submission — the next critical submission, the manufacturing technical section — to go in during the fourth quarter. A standard statutory review means it gets a six-month review. It comes to us in the fourth quarter of 2020. Six months after that, a response arrives. Naturally, our hope is that it will be a complete response — we believe we cut a great deal of risk so that the first-time complete designation could be achieved. Two ways we cut risk: first, we've already turned in the drug substance portion of this technical section — in other words, the production of the active. So what this really does is add drug product to finish the submission, with the drug substance that we produce here in Portland being aseptically filled into a syringe by Norbrook. That's the final piece of the submission. Partnering with Norbrook—a top-tier specialist in aseptic filling—also brings down some of the risk. Still, we won't really know until we see. So if everything is complete six months following submission, there's roughly a 60-day administrative review, and then we'd anticipate approval. Should it come back incomplete, we'd need to respond to their questions and file again, which means another six months. A couple of final thoughts from me. COVID touches all of us in every possible way. Around Page 37, we introduced a handful of new risk factors. The first one has to do with the economic downturn. On that point, I want to read one aloud: milk is largely being discarded at farms, mainly due to dairy demand disappearing as restaurants shut and school lunch programs stopped, along with other harmful effects from the COVID-19 pandemic. Beef producers also face uncertainty, since the supply chain has been disrupted by processing plant closures and lower throughput stemming from the COVID-19 pandemic; for farmers, this is a highly abnormal set of circumstances. They put in so much effort to boost output, quality and efficiency so they could feed a population that keeps growing. There are additional disclosures here regarding milk price; and quite recently, in January and February, we basically were forecasting a banner year for milk price, and now it has fallen back to low levels. So we have got some — our customers have got some difficulties. Our task is to keep First Defense in a superior technology position within its market; so should the overall market contract somewhat, we can hold steady or expand because we capture a greater portion of that share through competition; and the second risk factor I meant to call out was the following one, near Page 37, addressing COVID specifically; it is likely what all of you would anticipate.

The danger this poses to us is lessened somewhat because we don't rely all that much on producers located in many of those impacted nations, plus we keep cross-training our staff, we've put remote working in place wherever it can be done, and we acted early to follow the hygiene and social distancing guidance. Even so, we'll simply keep enduring this period of economic and market risk unlike anything we've seen. Things are holding up fine up to now. The team makes me very proud, and so does how they've maintained supply and kept manufacturing going. For me, it's one day at a time and one week at a time as we move ahead into Q2, Q3 and Q4 and handle this pandemic risk; that's a little casual, not truly scripted, as you can probably tell, but we devoted a great deal of effort to writing the Q and writing the press release; so I simply looked at those materials and selected what struck me as significant. There's one further item I'd like to emphasize. And finally, we put out a press release only this morning about the 2020 Annual Meeting of Stockholders. Because of every safety measure we've put in place at our facilities throughout the COVID-19 pandemic, we've concluded the best course is to keep our doors closed to an in-person visit right now, for the sake of our employees and for your sake too. So the press release today explains how to get into our virtual meeting, which happens Wednesday, June 10, at 3:00 p.m. Kindly go over those specifics and tell us if anything is unclear. To wrap up, I once more urge you to go over the Q, the Form 10-Q and the press release we also filed last night. Have a look, too, at our refreshed corporate presentation slide deck. A May update went up on our website just last night. My view is that it offers a strong overview of our business strategy and objectives together with our present financial results. You'll find it under the Investors section on our website, where you click on corporate presentation. That said, let's ask the operator to open the lines so you can ask questions. I'd be glad to answer them.

I trust everyone is keeping safe and healthy, and that we'll make it through this situation somehow. First off, I want to ask about the $1.4 million in backlog tied to First Defense. We weren't able to make that. Why does that backlog exist? And how — is it necessary for the new facility to be operational before that backlog can come down? Or could you shed some light on that for me?

Sure. Well, one way to look at it is that our sales team did a fantastic job. The opening quarter mostly came before COVID-19's effects were felt. Our salespeople were out in force, and demand was robust — as I mentioned, it appeared it would stay robust through the remainder of the year. So demand was excellent, and our sales team performed very well. Then, on the manufacturing side, yes, this expansion is necessary. We're doing everything we possibly can within this facility. That opening quarter came in at $4.9 million. Annualize that figure and you're looking at nearly $20 million in output. Naturally, I'm not claiming we'd reach that level. The first quarter is our peak season. I'm simply pointing out that's a substantial amount of product to ship, and it still wasn't sufficient. So we've discovered our capacity sits at roughly $18 million, and we need this expansion to reach $27 million. We'll simply keep at it and let that backlog grow, though in the end the expansion is what's required to bring that backlog down and keep it down.

Has the backlog been cleared at this point? If not, when should we anticipate it being cleared?

We're aiming to get it done as quickly as we can, though it hasn't happened so far. It keeps shifting since fresh orders keep arriving while we're simultaneously completing older ones. That said, yes, we're addressing it during the second quarter, though whether it will be entirely resolved by June 30 is uncertain — still, we're moving forward.

That's great to hear. Regarding what we're submitting to the FDA, we're looking at 2021, and then a 6-month response period — if it comes back complete, is there anything additional required of us? What else would we need to handle for Re-Tain and Mast Out?

Correct, yes. So honestly, I'd say no — there's nothing more. As I noted, there's that 60-day administrative review. We don't move straight into the market; there remains one additional stage in that process. But essentially, out of 5 technical sections, 4 are done. We still have to finish one, the manufacturing section, and then following the 60-day admin review and go-to-market, we'll have approval to sell in the market.

So, essentially, the filing says the facility is operating as it should, and you're making the amount you plan to sell from that site. Is that the gist of it?

Not exactly, Sam. The initial phase filing was really closer to what you just outlined — the drug substance, the Nisin, the active ingredient that we produce in Caddie, at the Caddie Lane facility. Right now we're answering the questions they brought up when they sent an incomplete on that one. It came back incomplete both because they had questions and because we hadn't filed drug products yet. So the true new emphasis of the filing now pending is to address those questions and then file the entire drug product — meaning the drug substance aseptically filled into the syringe. That's fresh material they haven't laid eyes on so far. And that's the area where we work with Norbrook, hoping to deliver something they find acceptable.

All right. And regarding how coronavirus is treated in cows, have any additional conversations taken place, or have results come in about whether that could be used for other animals or for anything else?

Yes. That's a completely reasonable thing to ask, Sam. I didn't call attention to it in the points I prepared to discuss. However, on Page 26, a fairly clear response was included, and that response is no. What we anticipated, I believe, is that the coronavirus affecting humans differs from the one affecting animals. Testing in a laboratory was necessary, and those findings came back confirmed; it simply isn't — cross-protection isn't present. As a result, we won't be in a position to offer a workable answer to this pandemic, and that's all; that information is in there.

All right. Then lastly, is there a need for us to bring in additional capital? Given where things stand, can we make it to December 31 without more money?

Yeah, yeah. Able to get by, I suppose, yeah, absolutely. I really want to be certain that PPP loan gets forgiven. For our financing moving forward, that matters a great deal, but yeah, we have no intention of going to market during this year. What I can't tell you is how big this hole will end up being, or how severe the downturn will turn out to be. So saying anything with certainty is tough, yet I don't anticipate that. We have run the test already. If sales fall, we can absorb it since the PPP is there to carry us. So yeah — no, raising capital isn't something I expect we'll do.

All right, congrats to you and ImmuCell for how things have gone — the sales, the expansion of the new offerings. Michael, keep it going.

Wonderful. Appreciate it, Sam.

This quarter's gross margin seems to have landed at roughly 45%. With the product mix you have today, should we treat that as a typical gross margin going forward? Or after the expansion is finished, ought we to anticipate a bigger gross margin?

Yeah. That caught me a bit off guard. To be sure, 46% is not as high as we'd like. We're aiming for 50%. The depreciation piece that sits in there doesn't bother me, since cash margin is clearly somewhat above 46%. But here's the thing — the Tri-Shield business and the gel tube business are what's driving our growth; and the gel tube product, along with its process, costs more. So on the capsule we enjoy a genuinely repeatable, solid margin above 50%. Yet that business was maturing and lacked growth — the explosive growth that Tri-Shield is delivering. So the percentage may take a bit of a hit, but in our view it's worthwhile, since we'll grow on the total dollar and collect the total dollar gross margin. And yeah, we simply believe things will improve as time goes on; we'll achieve better yield from our cows; we'll achieve better throughput from the expanded capacity, meaning more throughput spread across fixed costs. So I doubt we'll return to the old bolus days of comfortably above 50%, but I believe we can return to that 50%. And the drivers are these: yields from our cows, our growing herd of source cows, and more throughput over fixed costs.

All right. Given you're still catching up on orders, I take it the virus hasn't hurt demand for the product here?