ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, Grant. Good morning, everyone joining today's call. As the operator mentioned, I'm Joe Diaz, and I work with Lytham Partners, the Investor Relations consulting firm serving ImmuCell. I appreciate all of you being here today as we go over the unaudited financial results for the third quarter, which closed on September 30, 2020. Before we begin, I want to add a caution about forward-looking statements. Those listening should keep in mind that remarks made by management throughout this call contain forward-looking statements, and such statements carry risks and uncertainties that might lead actual results to differ materially from what we discuss today. More details about those risks and uncertainties can be found under the cautionary note on forward-looking statements, or the safe harbor statement, in the company's press release and its Form 10-Q, which you can get from the SEC or by going to the Investors section of the company's website at immucell.com. Having said that, I'll hand the call over to Michael Brigham, President and CEO of ImmuCell Corporation, and afterward we'll open the call for your questions. Michael?

Thanks, Joe. I'm grateful for the chance to share some updates about what's happening at ImmuCell. I appreciate everyone taking time to be on today's call. Only last night, we submitted our Form 10-Q covering the 3-month and 9-month periods that closed on September 30, 2020, and put out a press release that summarized several key results. I won't go back over much of the detail you can find in the Q and the press release, but I do want to call attention to a few items I consider to be among the more significant disclosures. To begin, as you probably are aware, on October 6, we released a press release that covered only our preliminary top line sales results. Our reason for doing so is to give investors a very prompt look at what I regard as the single most important measure of our operations and financial performance early in the reporting period. Those preliminary figures remain unchanged. Product sales rose 25% in the third quarter. That comes after a 9% gain in the second quarter of 2020 and an 11% gain in the first quarter of 2020. Product sales rose 15% across the 9-month period that ended September 30, 2020. And they rose 17% across the trailing 12-month period that ended September 30, 2020. Each of the increases I just mentioned is measured against the corresponding period one year prior. This growth is genuinely exciting for us, and it has come alongside steady market share gain. Our sales team has concentrated on disrupting the traditional scour vaccine market by swapping out very old vaccine technology for our preformed antibodies. Our production team is putting in hard work to keep pace with that demand. We carried a backlog of orders valued at roughly $945,000 as of June 30. We brought that down to approximately $130,000 as of September 30. With market demand for First Defense continuing to grow stronger, satisfying that demand is a good problem or challenge for us to face. The plan for raising our production capacity first to $23 million per year, and afterward to roughly $30 million per year, is covered at length as PROJECT C in the 10-Q within the Liquidity and Capital Resources section of the MD&A. The heavy lifting on this project — the renovations to our new formulation fill and packaging facility at 175 Industrial Way — is finished, and it is fully cGMP compliant, with good material, equipment and people flows plus nice cleanable surfaces and rooms. We are now carrying out the work to raise our liquid processing capacity by 100% and our freeze drying capacity by 50%. This work is being carefully coordinated so disruption to our ongoing operations and product supply stays minimal; we expect to fully realize the benefits of this expanded production capacity starting in the second quarter of 2021. Let's move to gross margin. A thorough breakdown of gross margin is available in the 10-Q, within the Results of Operations portion of the MD&A. During the third quarter, gross margin came in at 46%, which represents a 3-point gain compared with the second quarter. We're putting in significant effort across multiple areas to try to better this key metric. Two primary factors drive the rise in cost of goods sold: the mix of product sales, which is shifting toward gel tubes and biology. To start, manufacturing gel tubes costs more than making the older capsule format, the gel paste format delivers a greater gross margin per dollar than the capsule does, and we're moving a large volume of those tubes. Next, because we're collecting more colostrum to back higher production, we must work with new cows that haven't yet received our proprietary vaccines. Biological yield ought to rise once those cows go through our program a second time, which spreads our fixed and relatively fixed costs across greater production. Higher volumes should lift margins ahead. Turning to some welcome news: I'm delighted to share that we got very positive word from the federal government. Our Paycheck Protection Program loan, totaling nearly $938,000, has been completely forgiven. That income will be recorded in the fourth quarter; we've disclosed it in subsequent events footnote #20 and in the press release as well. As everyone is aware, the COVID-19 pandemic keeps causing unmatched disruption to the world economy and to people's lives globally, and it tests our employees and our ImmuCell operations in numerous ways; we haven't lost meaningful production time because of the pandemic, yet nothing is the same. Our committed production crew has stayed adaptable and inventive, advancing First Defense production and facility expansions. Government funding has let us proceed with our expansion plans without major interruption and run the business without furloughs or layoffs. In fact, we've been adding staff. This funding has helped us maintain production at such a demanding pace as safely as we can amid this unprecedented period. Now on to product development expenses, still our biggest operating expense line item. I believe examining the effect of noncash expenses matters here. Within this line item, depreciation, amortization and stock-based compensation made up roughly 38% of product development expenses across the 9-month period that ended September 30, 2020. The bulk of depreciation charges stem from the Nisin Drug Substance facility we built and the related production equipment for Re-Tain. I'd like to spend a moment on Re-Tain. It's been a lengthy and costly journey, but we're close to finishing the work needed to secure FDA approval for this novel subclinical mastitis treatment for lactating dairy cows. In the 10-Q, within the MD&A's Results of Operations section, we've laid out our most refined thinking along with the particular specifics regarding the ultimate route toward bringing Re-Tain to market. Everything hinges on securing approval for the manufacturing technical section, otherwise called the chemistry, manufacturing and controls, or CMC Technical Section. Of the 5 technical sections needed for product approval, this one is the last. Our plan is to remain on schedule for an initial submission covering the drug substance and drug products, the CMC Technical Section, prior to year-end. A submission of this type gets a 6-month FDA review. That places us at a major junction in the road around the close of the second quarter of 2021. Should the FDA pose questions to us, we might need to answer via a further submission, and that would get another 6 month review. We don't expect that yet another submission beyond that would be necessary. As a result, we're preparing for market launch in the first quarter 2022, while simultaneously working up a flex launch plan that could — that we might put into action earlier should approval arrive at some point in the third quarter of 2021. As we move ahead with the upcoming submissions, the route to market will become clearer. Finally, at this point in our development, my attention centers more on cash flows than on our GAAP net loss. An examination of how all noncash expenses affect our financial statements appears on Page 4 of last night's press release. When it comes to grasping our cash flows, this metric matters, yet the statement of cash flows in the 10-Q stands as the key measure. So to wrap up, I urge you to go through the Form 10-Q along with the press release we filed last night. In addition, please take a look at our corporate presentation slide deck. A November update was posted just last night to our website. In my view, it offers quite a solid summary of our business strategy and our objectives, plus our current financial results; so simply visit the Investors section of our website and click on Corporate Presentation. Having said that, I'd be glad to field your questions. Let's ask the operator to open up the lines. Thank you, Grant.

Michael, congratulations. Seeing the filing go to the FDA prior to this December has me excited. Presumably, we've run tests on this an awful lot of occasions. Does anything require us to file sooner than the 31st of December? Alternatively, in what way should we think about when the submission happens?

Yes. Something does require it, yet it won't be sent until it's ready. What I mean is, the earlier, the better, though some work remains. Stability accounts for a great deal of that; thus much of this is simply the passing of time. You've got to file with a particular level of stability for this product. Still, I believe what Betsy Williams, who serves as our VP of Manufacturing Operations, has accomplished alongside the team in arranging this — the entire science team, Joe Crabb, John Zinckgraf, and others, numerous others — all of them are driving this as forcefully as they can. And yes, I believe our stance was simply to keep that course and get it in during this year, but get it in properly.

And — all right. That has been a while in the making, and it's thrilling to learn about it. And regarding the funds from the federal government, that's positive as well, and it will strengthen the balance sheet too. Was that basically standard paperwork? Or did you need to devote any time to walking through the steps you took? Or what was that like?

Yes, Sam. I wouldn't say — I suppose maybe it was standard paperwork, but I don't — my sense is we definitely had to put in a great deal of time describing things. What I'm attempting to convey, I guess, is that although our submission was fairly uncomplicated, I never assume anything is guaranteed. Securing that forgiveness mattered enormously to us. Even though I felt sure we'd receive it, nothing is final until it's final; and our submission was less complex than a lot of others. And perhaps that explains why we're kind of near the head of the forgiveness queue, while other businesses haven't been forgiven yet, since ours was entirely payroll. So we never even needed to address rent, mortgage interest, overheads, supplies, and various other eligible expenses. We simply stated, look, with this Paycheck Protection Program, all of it is payroll. I believe that probably worked in our favor. I believe that probably made it easier for the submission to be processed.

All right. Regarding Tri-Shield and First Defense, can we grow sales this quarter compared with the September quarter? The backlog is essentially done, so can we sell more given the demand?

Yeah. That product keeps enjoying strong demand. We're genuinely pleased with how it's performing. The industry is seeing some solid — fairly solid economic indicators, such as milk price being quite strong at the moment. That benefits our customer. When our customer does well, we do well. In the end, we'd announce those numbers early, exactly as we did this quarter. So around January 5, 6, 7, somewhere in that window, we'll pull together a top line figure in a preliminary press release, clearly, well before the year-end audit and the complete P&L, but I'd like to keep up that practice. I believe that's my best way to address your question as promptly as possible.

Well, that's great. And at this point, are we ready to expand shipping and sales of First Defense and Tri-Shield into foreign markets? And when do you figure that might take place?

Yes. Thanks for your interest on that front. You've certainly kept our attention fixed on that objective, though we've proceeded somewhat cautiously. What I mean is, I'd like to put some space between us and this backlog prior to launching new markets; so Bobbi Brockmann, who serves as our VP of Sales and Marketing, has done excellent work qualifying particular new markets — new markets abroad. But those are going to remain on hold somewhat. They're going to be delayed somewhat until later in '21 and on into '22. I want to be certain North America is fully covered, completely clear of backlog with a bit of buffer stock, before we generate that additional demand via new international markets past Japan and South Korea, which is where we stand now.

Alright, well done, and here's hoping COVID continues to improve, that we make things better across the board, and everyone ought to enjoy — if not in 2021, then in 2022 — a joyful Thanksgiving and happy holidays.

I suppose that's one way to see it, Sam, though I believe you've got a point. This year I'm not going anywhere. I'll be at home. Keep yourself safe. Let's all come through this as one.