ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, Chad. Good morning to each of you, and welcome. As Chad mentioned, I'm Joe Diaz, and I work with Lytham Partners. Our firm serves as the investor relations consultant to ImmuCell. I appreciate everyone taking part today as we go over the unaudited financial results covering the third quarter, a period that closed on September 30, 2022. Before we get into the discussion, I want to begin by offering a caution about forward-looking statements. Those listening should be aware that when management speaks on this call, those remarks include forward-looking statements, and such statements carry risks and uncertainties that might make actual results differ materially from what gets discussed today. You can find further details about those risks and uncertainties under the cautionary note about forward-looking statements, more commonly called a safe harbor statement, which was included with the press release issued last night and with the company's quarterly report on Form 10-Q covering both the 3-month and the 9-month periods that ended September 30, 2022, as well as in the company's other periodic filings with the SEC. Having said that, I'll now hand things over to Michael Brigham, the President and CEO of ImmuCell Corporation, and once he's finished, we'll open the call up for your questions. Michael?

Alright, thank you Joe, and good morning to all of you. So you now have a recap of the third quarter along with year-to-date financial results from the press release issued last night, and specifics can be found in the Form 10-Q covering the quarter that closed September 30, 2022, which we also submitted last night. That Form 10-Q reached the SEC roughly 5 business days behind schedule so that we would have time to restate our first and second quarter filings. Those restatements were needed in order to capture a noncash accrual for deferred compensation expense made up of paid time-off that was earned but not used in the first quarter of 2022; this adjustment raised both our administrative expenses and accrued expenses by about $222,000, again with no effect on cash or on product sales. As many of you are aware, on October 5 we put out a press release with our preliminary top line sales figures. We have been providing these optional updates to give investors an extremely prompt view of product sales, which in my view represents the most essential gauge of our operations and financial performance early in the reporting period, and there are no changes to that earlier disclosure. Once more, sales declined roughly $350,000 across the 3-month period that ended September 30, 2022 versus the prior year, yet sales climbed 24%, or $935,000, above sales for the second quarter of 2022. Turning to longer time frames, sales rose 6%, or $858,000, and 15%, or $2.56 million, across the 9-month and 12-month periods that ended September 30, 2022, respectively, versus the equivalent period a year earlier. We are traveling a somewhat bumpy road as we move out of a lengthy stretch of limited product supply into our developing new state of expanded and still expanding production capacity. Before we rolled out the newest extension of the First Defense product line in late 2017 and saw it become popular with our customers, specifically Tri-Shield First Defense, annual production capacity of roughly $16.5 million was sufficient to promptly cover sales with no order backlog. I want to point out that the capacity estimates I have referenced on this call shift depending on biological and process yields, product format mix, selling price and other factors. Starting in 2018, our world improved dramatically with the arrival of Tri-Shield. We have poured millions of dollars in capital expenditures into raising our production capacity; this type of major investment in real estate, manpower and equipment does require time no matter how much urgency and energy our team brings to it. This shift from backlog to buffer stock grew even more complicated in the second quarter because of a material disruption in the supply of the plastic syringes needed for our gel product formats. That supply disruption challenge has now been resolved. Lately, we encountered some contamination events in our production process near the close of the third quarter of 2022. This led to a write-off of about $412,000, and it has pushed us back into a backlog situation. We think we've tackled those issues as we move forward. Two essential machines required for boosting our output capability are scheduled to be up and running before this year finishes. The investments we're wrapping up by December should lift our yearly production capability up to the target we've stated of $35 million per year when running at full capacity as we head into 2023; that's what's necessary for us to raise our manufacturing capability and clear the order backlog entering 2023. A fresh investment labeled PROJECT H in our SEC filings is an investment in building changes plus equipment to push our yearly First Defense output capability higher, from that $35 million mark to roughly $47 million in the latter half of 2024, along with choices for additional growth. PROJECT H additionally delivers better powder milling facilities plus greatly needed extra cold storage and warehouse room; unlike earlier capacity growth investments that simply couldn't be finished fast enough, the schedule for this investment makes far more sense for everyone involved, including our staff, contractors and equipment manufacturers. The output volumes I just referenced demand operating machinery and personnel at close to 100% of capability; we've been pushing hard near that threshold across the past couple of years so we could fulfill the order backlog. That exposes us to product contamination risks and compels us to postpone preventive upkeep on equipment while facing more disruptive emergency repairs. One goal behind PROJECT H is establishing a more sustainable production timetable. To illustrate, by operating at 80% of maximum capability, PROJECT H might boost our yearly output volume from roughly $27.7 million by the close of this year to roughly $37.3 million in the latter half of 2024. EBITDA, an important non-GAAP financial metric for us because of the substantial noncash depreciation we hold, fell to roughly $1.3 million across the 9-month period ending September 30, '22, down from nearly $2 million across the 9-month period ending September 30, 2021. This non-GAAP financial metric ought to be viewed alongside our statement of cash flows, which is presented according to GAAP. Now let's examine our balance sheet. Cash dropped to $8.8 million on September 30, 2022, from $10.2 million on December 31, '21. Net working capital fell by only $12,000, reaching $3.7 million on September 30, 2022, versus December 31, 2021. Stockholders' equity declined to slightly below $32 million on September 30, 2022, from $32.6 million on December 31, '21. All of this unfolded while we kept working on and financing the development necessary to secure FDA approval for Re-Tain. Our product development aim is showing that our polypeptide antimicrobial, Nisin A, can serve a useful function in treating subclinical mastitis within today's dairy sector, providing a viable substitute for conventional antibiotics. Since every intramammary mastitis medication currently sold requires milk to be thrown away and meat to be held back while treatment is given and for some time afterward, farmers commonly leave sick cows untreated as long as those animals are still producing milk that can be sold. By taking away that financial drawback, Re-Tain delivers an animal welfare gain, letting subclinical mastitis cases be treated without facing milk dumping or meat withholding penalties. Beyond better welfare for animals, Re-Tain boosts food safety and sustainability through its use of Nisin, an ingredient not employed in human medicine. That matters, since excessive use of standard antibiotics — including among animals raised for food — is thought to drive antibiotic resistance in people, a public health issue that continues today. As such, we are assembling all the data needed for our third submission seeking approval of the CMC technical section, which is necessary before Re-Tain can be marketed. That filing would face a 6-month FDA review. Our plan remains to submit it at some point in the first quarter of 2023, though we do not yet know precisely when in that quarter it will happen. We stay ready and eager to transform how subclinical mastitis gets treated. This disease inflicts roughly $2 billion in economic damage on the U.S. dairy sector annually; to wrap up, I urge you to look over the press release along with the quarterly report on Form 10-Q we filed last night. In addition, take a moment to view our corporate presentation slide deck. In my view, it offers a strong overview of our business strategy and objectives, plus our latest financial results. A November update went up on our website just last night. Visit the Investors section of our site and click Corporate Presentation, or reach out to us for a copy. Having said that, I'm glad to answer your questions. Please let Chad open the lines.

Michael, I might have missed this, but regarding those product problems you had during Q3 — are they fixed now? Could you walk us through what took place? Did people make mistakes? Or was something else at play? And if it's still not resolved, when do you think the company will mostly have it in the rearview mirror?

Yeah, thank you. Fair question, Jim. On the word "solved" — whenever you operate a biological manufacturing process, contamination is always a possibility, in my view. So I'd be reluctant to call it permanently solved, since it can recur. What I can say is that we're quite confident because no contamination has appeared since those Q3 incidents. So I believe certain fixes we've introduced are doing their job, and things have gone smoothly from that point on. Those incidents happened fairly close to one another, and if you're hunting for one clear culprit, I don't have it. I do have a list, and we've simply rolled out many procedures that ought to help — and have helped thus far — in preventing any additional contamination. As I said during my remarks, my honest view is that this mostly came from overworking people, overworking equipment, and overworking the process itself. That's exactly what we steer clear of when we stop running equipment at 100% and instead bring it down to a larger capacity while operating at 80%, doing everything properly with preventive maintenance, cleanings, and simply firming up the process along with the controls. So, things look good up to now. An incredibly painful episode, but it's behind us at this point.

And maybe in the Q, what is the size of your current backlog relative to year ago or however you measure it?

Yes. Probably the best answer is — well, we did put it in the Q, is our best projection of what we think it will be around year-end. And we think it may be around $900,000 at year-end; but again, with this new capacity coming on here in the fourth quarter, we just walk into the busy peak season first quarter with — as our VP of Sales likes to say, it's not a firehose, it's a fire brigade; and we just crank at that higher level to turn that around pretty quickly; but yes, short answer, we're — it's subject to sales and new product releases and actual figures, but we're thinking it's going to be up to around $900,000 at year-end.

And last, can you bring us up to date regarding the capital expenditures you have scheduled for this year as well as 2023?

Sure. There is, no, quite a bit of information about that in the Q. I laid out PROJECT H to — A through H. However, we're finishing every one of the projects currently underway, and then H is the fresh item that is going to carry us to that subsequent level by — for the conclusion of '24. Thus I would point you — and, David, simply assist me with the page here.