ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, Anthony. Morning, everyone, and welcome. Like Anthony mentioned, I'm Joe Diaz from Lytham Partners, the investor relations consulting group serving ImmuCell. I appreciate each of you taking part today as we go over the unaudited financial results covering the quarter that closed on June 30, 2024. A reminder and caution for those listening: anything management says during this call amounts to forward-looking statements, and that covers any remarks pointing to future events, anticipated future results, or predictions regarding steps the company intends to take down the road. Such statements aren't promises of performance, and they carry risks and uncertainties that might lead actual results, outcomes, or events to wind up materially different from what we discuss today. You can find further details about forward-looking statements and the risks and uncertainties that might affect future results, outcomes, or events in the cautionary note on forward-looking statements included with the press release, plus the Form 10-Q the company submitted last night, together with its other periodic filings with the SEC. What we share on this call is accurate only as of today, Wednesday, August 14, 2024. The company assumes no duty to update anything discussed on this call. Be aware that we may reference certain non-GAAP financial measures today. To help you better grasp its financial performance, the company put definitions of those terms, along with reconciliations of those figures to the most comparable GAAP financial measures, in last night's press release. Having said that, I'll hand things over to Michael Brigham, ImmuCell Corporation's President and CEO, and afterward we'll open the line for your questions. Michael?

Appreciate that, Joe, and good morning to all of you. Rather than use up your time today walking through every financial figure on this call, you can find those numbers and results at a summary level in the press release we issued last night, and with far greater detail in the Form 10-Q we filed last night as well. I'd like to highlight that we achieved quite robust top line sales growth across the 3-, 6- and 12-month periods that ended June 30, 2024, when measured against the equivalent periods that ended June 30, 2023. What these results show is that the work on expanding production capacity — something we've been putting money into since 2022 — is now largely finished. For the 6-month period that ended June 30, '24, finished goods production came in at roughly $12.7 million. Annualized, that output level works out to about $25.4 million, which is approximately 85% of the $30 million we estimate as our annual full capacity target. That top line success, however, hasn't been matched by sufficient gross margin reaching the bottom line. Our gross margin as a percentage of product sales did rise, going from 19% in the 6-month period that ended June 30, 2023, up to 28% in the 6-month period that ended June 30, 2024, yet that remains far below the 40% target we've set. Once we started operating at this elevated output level, we ran into some notable product contamination events spanning late '22 through early 2024. We've looked into these events thoroughly. A portion of our issues stemmed from an unusually high bioburden in the raw material we source, which is colostrum, as we quickly signed up additional source farms and more cows to satisfy the demand we anticipated. That front-end issue, we believe, is now mostly resolved, though it will need continued monitoring as we move forward; we also believe that equipment and processes that hadn't been adequately optimized for running at the higher production output caused part of the contamination. Fixing the contamination events called for several adjustments, every one of them within the outline of production approved by our USDA; the cost of scrap inventory is laid out in detail in our 10-Q filing, but scrap alone isn't what pulled down our gross margin — the lower sales in earlier periods, when we slowed production to address the contaminations, played a role too. That missed sales data appears in our 10-Q filing as well and is the main reason we haven't yet worked through the order backlog, which stood at $7.9 million as of August 6. New remediation steps put in place during April of 2024 in response to the most recent contamination events look very successful so far, since we've operated without contamination from then through the present; to be clear, I want to confirm that during all of these contamination events, every product sold to market had passed final USDA release testing requirements. As is the case for most other companies in this economy, we're up against difficult inflationary pressures on labor costs and components. This affects nearly all of our purchasing; beyond that, the other factor behind the decline in gross margin is the production yield losses we've experienced over this period. We've shared certain specific targets we're pursuing to enhance process yields in the quarters ahead. Looking back, I see something that makes a lot of sense now. Having run the same process successfully for more than 30 years, abrupt growth is difficult. Our source material has a high bioburden — that's farm milk. At the origin of this growth, we had to gain better quality control. That's now in place, and comparable difficulties arose in our processing as we drove our long-established process and equipment harder. Adding more heat to lower bioburden is a natural response to contamination, yet that heat destroys antibodies as well. We're fine-tuning that balance so we keep bioburden at acceptable levels while getting the most yield possible. We think the operational enhancements we've put in place are enabling us to operate more effectively at the elevated output level moving forward. For us to succeed, future major contamination events and equipment failures must be avoided, and we must run with solid production yields. Thanks to those strong sales, we managed to improve earnings before interest, taxes, depreciation and amortization, or EBITDA, from negative $2.2 million in the 6-month period ended June 30, 2023, to negative EBITDA of $340,000 in the 6-month period ended June 30, 2024. Without question, cash is tight. In response, we keep exercising prudence with our expense controls wherever we can, and we have frozen nonessential capital expenditure investments for now; however, we have nothing drawn on our $1 million line of credit, which remains available to us until September 2025. So that's the big picture. As for the remaining financial results, the press release offers the unaudited P&L results along with some audited summary balance sheet data. In addition, our Form 10-Q contains all the unaudited financial details plus management's discussion and analysis. As I noted, I'll now use your time on this call to go through all of that in detail. We'll stay focused on the commercial opportunity with First Defense as we work through what we view as the last steps of the regulatory process and our push to bring Re-Tain to market; in May, the FDA issued a CMC technical section in complete letter responding to our third submission of the CMC technical section for Re-Tain. According to the incomplete letter, the FDA has raised some minor questions regarding our submission that call for a force submission, which normally gets a 6-month review. That said, the FDA has signaled that this resubmission might potentially be handled via a shortened review period since the open items aren't complex. What matters most to the time line, though, is that the FDA has additionally required that we hold off on resubmitting the CMC technical section until inspectional observations at our drug product contract manufacturer's facilities are resolved. Back at the start of July, our contract manufacturer turned in its replies to the inspectional observations. Because the facts and circumstances here are unique, we're collaborating with the FDA and our drug product contract manufacturer to secure an expedited review. That's simply how this process goes, and we keep pressing ahead. Even so, we stay ready and thrilled about transforming how subclinical mass site gets treated in the dairy market of today, offering a novel substitute for traditional antibiotics that carries no FDA-required milk discard or meat withhold label restrictions. Finally, I'd urge you to look over our corporate presentation slide deck. In my view, it offers a strong summary of our business strategy and objectives, plus our current financial results. An August update went up on our website just last night, so check the Investors section there and click Corporate Presentation, or reach out to us for a copy; and with that, I'm glad to take your questions. Operator, please open up the lines.

I have two things I'd like to ask. The first concerns First Defense. From what I gather, the key ingredient for that drug comes from milk taken from the mother cow once she's calved — the milk she expels right after giving birth. So my question is whether that could become a constraint, since the source is an animal rather than a machine, and you only get it at one specific moment in her life. Beyond that, how do you work with these farms? If First Defense continues expanding, do you believe you could sign up additional farms? If you could just address all of that.

Absolutely, Tom, happy to. That's a fair question. So you've described it accurately. What we're talking about is the early milk produced right after she freshens, known as colostrum, which is extremely concentrated in antibodies; those donor cows are hyperimmunized by us, which makes the antibodies highly targeted toward what we're after — E.coli, corona, rotavirus. That said, our success in scaling up the volume of milk we purchase has been strong. There's a disclosure — if you can't locate it, sit down with me on it, I don't have the page number handy right now. But I did go into some detail regarding how that work in process inventory has grown; so when it comes to the amount of raw material — the colostrum, the milk we buy — we're sitting in really good shape. And I did cover the difficulties involved in expanding those farms, those cows, and those contracts, we went through that contamination issue, which required us to kind of level out our growth alongside training, quality standards, all of it. My sense is we're now much stronger on quality; so quantity looks good and quality looks better. Therefore I don't view that as a cap on how much we can produce.

Alright, that takes care of my question. I've got one more, and it's fairly brief. So — from what I gather, your Chief Scientist stepped down not long ago; are there any intentions to bring someone in for that role?

Correct. Dr. Joe Crabb is who you mean. Keeping an open consulting arrangement with him makes me quite happy, though that part is accurate. He has indeed left full-time employment. Back in the earliest period of the very first USDA approval, he was the one who developed First Defense, and he is the original creator of Re-Tain. Both of those projects were handed off by him. First Defense now belongs to the production team, while Re-Tain is overseen by Betsy Williams, our VP of Manufacturing Operations. So the handovers went smoothly there. Also, we genuinely lack a sizable active new program. Consequently, our spending on product development apart from Re-Tain is quite constrained and falls under Dr. John Zinckgraf's management. He serves as our Director of Product Development; so the answer is no, we won't be filling it at the VP level or in a full-time capacity; however, that group, the production team, Betsy's efforts, and John Zinckgraf's efforts truly handle the science for us rather effectively.

I'd like to dig a bit deeper into gross margin. Also, thanks for some of the clarity you gave in the queues — that made for interesting reading. I'm just trying to get a handle on it: it appears Q1 took a real hit from that contamination event back in '23. Then Q2 was hit less by contamination and perhaps more by yield problems, in short — is that accurate? Or am I oversimplifying?

Yeah, that's a decent — not too simple. Broadly speaking, that's correct. What I mean is, we did — honestly, I think it's tough — the shorter the window, the tougher it is to analyze. So my preference is 6 rather than 3, though we do report on a quarterly basis, and we do — I'd like that — your reading of those figures is correct, the hit in 2Q was larger than in 1Q. Right. So, I mean, it's sort of a mix of the two. I can't say precisely how to disentangle contamination's effect from yield's effect, but one thing I know for certain: contamination has to come down and yields have to rise, and that's what we were attempting to address regarding progress and detail on where things stand on both fronts. Is that fair?