ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, and good morning — glad you could all be here. The operator already mentioned this, but I'm Joe Diaz of Lytham Partners, the IR consulting group working with ImmuCell. I appreciate everyone taking the time to go over the combined financial results for the year that closed on December 31, 2022. Before we go further, I want to start with a note of caution about forward-looking statements. Those listening should keep in mind that anything management says on this call may include forward-looking statements — meaning any remark touching on events yet to come, results we expect down the road, or predictions regarding moves the company intends to make later on. Such statements don't promise any particular performance, and they come with risks and uncertainties that might make what actually happens — the real results, outcomes, or events — turn out quite differently from what we talk about here. If you want more detail on forward-looking statements and the risks and uncertainties that could shape future results, outcomes, or events, you can find it in the cautionary note on forward-looking statements, or the safe harbor statement, that came with the press release we issued last night, as well as in the company's other periodic filings with the SEC. Anything discussed on this call reflects information only as of today, February 22, 2023, and the company has no obligation to update it. One more note: we may reference certain non-GAAP financial measures during this call. To help you get a clearer picture of the company's financial performance, the definitions of those terms, plus reconciliations of those figures against the closest comparable GAAP financial measures, were included in last night's press release. With all that covered, I'll hand things over to Michael Brigham, ImmuCell Corporation's President and CEO, and once he's finished we'll take your questions. Michael?

All right, thank you, Joe, and good morning to everybody. According to what we released yesterday evening, there's been no revision to the product sales figures we initially announced on January 9. That release additionally includes complete unaudited profit and loss statements along with certain unaudited summarized balance sheet figures. Our expectation is to submit our comprehensive audited financial statements via Form 10-K on or around March 29, 2023. I won't devote much additional time during this call to going over the financial numbers. In my view, it's more valuable to use this opportunity to talk about how a significant product contamination issue within our manufacturing operations is affecting us; we're going to take a hit in 2023's first quarter. Yet we're working hard to resolve the matter and feel we're making the right moves to come out of this challenge in a stronger position, with the production capability available to generate in excess of $30 million worth of product annually moving forward; we laid out this situation thoroughly in yesterday evening's release, but I want to walk through the key points with you right now. During 2018, it grew evident that demand for Tri-Shield First Defense was exceeding what we could produce. Reacting to that rising demand, we launched a set of investments across 2019 aimed at lifting our production capability beyond $30 million each year. The required building expansions and additional machinery needed to boost production capability were completed by the close of 2022. The truly difficult part is that right at the moment this greater production capability is becoming operational, a contamination incident in production got picked up through routine in-process quality control checks near the conclusion of 2022's third quarter. We acted right away to deal with the contamination, and manufacturing proceeded smoothly throughout the remainder of 2022's fourth quarter. What complicates things further is that in the first quarter of 2023, our routine in-process quality control checks have identified another contamination incident. This is causing production output to slow down while we carry out the required measures to evaluate and fix the problems and guarantee that we — that whatever product reaches the market satisfies every quality requirement. We think that continuing to execute our capacity expansion initiatives and the remedial measures being implemented following these contamination incidents ought to enable us to run at an elevated production output level moving forward without additional major contaminations. The first quarter's slower production output has, in part, played a role in the order backlog more than doubling since 2022's close. We anticipate reporting lower sales for the first quarter of 2023 along with a substantially larger backlog as of March 31, 2023. Because of the earned gross margin loss being experienced in 2023's first quarter, we've decided to postpone for now the completion of the incremental plan investments and push our production capability even higher to beyond $40 million annually. The rising demand in sales for First Defense is something that excites us and challenges us at the same time. Meanwhile, we're getting all the data together that's needed for our third submission of the CMC Technical Section, and getting the FDA's approval on that is necessary before we can market Re-Tain. That submission is going to go through a 6-month review by the FDA. Our goal is to resubmit in the first quarter of 2023, assuming we finish several critical path items that depend on results coming from outside laboratories; so to wrap up and be very direct, one way to look at it is that we've pushed the company into backlog and contamination on the First Defense side while we haven't yet gotten FDA approval for Re-Tain. But another way to look at it is that we're getting close to $30 million in annual production capacity for First Defense, with a flex option that could take us past $40 million down the road, and at the same time, we were moving into the final stages of a very significant FDA product development initiative. I choose to take the latter view as I work on attracting, retaining and motivating our greatest assets, which are the employees who work so diligently to make all of this possible. Finally, I'd encourage you to look over the press release we filed last night; and please also take a look at our corporate presentation slide deck. In my view, it gives a very good summary of our business strategy and objectives, along with our current financial results. A February update was just posted to our website last night in the Investors section of our website, and you can click on Corporate Presentation or Contact Us for a copy; we expect to share more information about how the product contamination has impacted us, along with the updated status of our remediation efforts and our annual report on Form 10-K, on or about March 29, 2023. Having said that, I'll be glad to take your questions. Let's have the operator open up the lines.

Michael, I just had a few fast questions. I didn't notice a sizable charge-off on the operations statement because of the contamination — that is, a line item. Did you manage to rescue any of those batches, or were they completely lost?

Yeah, good question, Charles. A bit complicated; so in the third quarter, as I said, 2 events. That third quarter event, naturally, shows up in the 2022 results, and we'll lay that out in the K along with the cost of goods discussion in the MD&A. So — and we're still assessing this first quarter since you're correct. Not all of it is a write-off. I think the near-term effect is timing. So it does slow things, the momentum drags on production. Certain portions of that product can be successfully reworked, and certain portions will turn into a write-off. And all of that is under close evaluation. That's what I meant. I think we'll have improved data to judge that and report it in a couple of weeks here with the — 3 or 4 weeks with the 10-K. But you're correct, it's 2 things. Part of it can be salvaged, reworked. Part of it will be a P&L write-off.

Alright, and regarding that deferred investment, my assumption would be that it's tied to wanting to protect capital. Is that right?

Yes; that project was mostly financed through sales, through gross margin.

In terms of profit, yes.

Regarding profit — we've chosen to move carefully. With sales at roughly $20 million and capacity currently near $30 million, there's no immediate need. The goal was to position ourselves ahead. As you've observed, these investments require a considerable amount of time, spanning several years. So our aim is to move ahead and reach that $40 million mark, but I believe it makes sense from a cash flow standpoint and for safe production to hold off there, stabilize, return to operating at the $30 million level, and then put that — I still plan to reinstate that program, but it's not — the commencement date isn't particularly pressing.

All right. Also, regarding the backlogs, do you have any sense of the rate at which they're dropping off? Are we losing quite a bit of that backlog to competing products, or did most of those backlogs eventually materialize?

Charles, that's yet another excellent question. Every single day, our sales force puts enormous effort into addressing exactly that. I brought up how the backlog doubled. A portion of that — in fact, a great deal of it — occurred even prior to the downturn tied to contamination; demand, therefore, is genuinely robust, and orders keep coming in very strong, yet we're well aware that those calves get born and many of these customers are going to seek out a different product; so some we will lose, and the difficulty lies in restoring supply, winning those customers back, and simply selling on our efficacy. From where I sit, they'll switch to something less effective; that's precisely why our orders remain so robust. First Defense is what they're after; so get supply in, and with the remainder of the year ahead, the sales team faces an enormous task of locating those who moved to an alternative and bringing them back.

Alright, I'm aware that your product is excellent. So — assuming your sales force is solid, they'll recover that business for you. I've got a different question. When the time comes to secure the capital you've pushed off, which approaches would you consider for bringing in that money? Would it be borrowing? Or would it involve issuing additional shares? And supposing you do issue more shares, does that water down existing holdings? Could you touch on that briefly? And clearly, based on what you mentioned, that would happen down the road.

Yes. Let me backtrack for a moment. Thanks for trusting that our product works. You mentioned having a strong sales force — I'd add that ours is in a special spot to win those accounts back, recover the revenue, and return those customers to us. They put in enormous effort and endured a long, painful stretch because of the backlog. Once they've got stock available, watching them sell is going to feel great. On your financing point: absolutely, gross margin comes first for me. Nothing steadies this company better. We've already issued a great deal of equity. We have taken on a considerable amount of borrowing. That said, given circumstances such as these, we intend to stay watchful and remain open to all three approaches, asking ourselves which route best offsets the shortfall from Q1 — and the size of that shortfall is still under review. So in my view, keeping every possibility available is simply the sensible thing to do.

Yeah, that question came too soon. My apologies for that. Whenever Re-Tain launches — ideally during 2024 or possibly near the end of 2023, we don't know — so speculating about it isn't worthwhile. Will Re-Tain be produced at the very same facility or lab? I'm not familiar with how you refer to it, but the same location as First Defense? And if that's the case, should we be concerned about contamination problems carrying over from 1 product to the next?

Charles, that was yet another excellent question.

Sorry — I know these aren't simple things to answer, but...

No, no, no — you've got it right; these are good questions, and I'm glad you asked. Let me start with the schedule so there's no confusion. Once this gets filed, it faces another 6-month review; then at the very end comes what you could describe as a 2 months administrative review. So from the point of submission, I count it as 8 months. That said, you're right that filing is the piece within our hands. The review itself, along with the approval, belongs to the FDA. So that news — whether it comes back complete or incomplete — will reach us 8 months after submission. On the production side, that's a reasonable thing to flag, though the two are entirely separate sites. You step out our back door and it's only a brief walk. Air handling and process segregation there follow a different set of rules. It falls under FDA oversight rather than USDA. Part of what we're doing in this remediation involves applying certain takeaways from the Re-Tain site, though not every one of them transfers to the USDA site. Still, it's a distinct site with distinct inspection requirements, and there's zero shared product or equipment between them, and barely any shared personnel. It's still the same company, but things look somewhat different in the unit we refer to as 33 Caddie Lane, which handles Re-Tain.

Yes. I really appreciate it, because today I picked up something new regarding how USDA differs from the FDA — that simply hadn't crossed my mind; so thank you for widening that perspective for me.