ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Wyatt, thanks, and good morning to everyone joining us today. The operator already mentioned this, but I'm Joe Diaz, and I work with Lytham Partners. Our firm handles investor relations consulting for ImmuCell. I appreciate each of you taking the time today to go over the unaudited financial results for the quarter that closed on September 30, 2024. A reminder and a caution for listeners: management will make forward-looking statements during this call, and that includes anything referring to future events, expected future results, or predictions regarding steps the company intends to take going forward. Such statements don't guarantee performance, and they carry risks and uncertainties that might cause actual results, outcomes, or events to differ materially from what we discuss today. More details about forward-looking statements and the risks and uncertainties that could affect future results, outcomes, or events can be found in the cautionary note on forward-looking statements or the safe harbor statement included with the press release and the Form 10-K the company filed last night, as well as in the company's other periodic filings with the SEC. Anything discussed on today's call reflects information only as of today, Thursday, November 14, 2024. The company has no obligation to update any information discussed on today's call. Also note that we may reference certain non-GAAP financial measures during today's call. To help you better understand its financial performance, the company provided 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 the call over to Michael Brigham, President and CEO of ImmuCell Corporation, and after that, we'll open the call for your questions. Michael?

Okay, thank you, Joe, and good morning to all of you. I feel a lot of enthusiasm, and there are several reasons why. To start with, I'm saying that because somebody pointed out that my tone doesn't always convey it. So please evaluate my — evaluate me based on what I say and what we disclose. I'm glad that a very tough stretch is mostly in the rearview mirror. The strongest proof of that is we haven't seen any additional contamination in our manufacturing operations from the first half of April of 2024 onward. There's a tremendous chance to boost 2024 sales above both 2023 and 2022; we can envision getting FDA approval for Re-Tain soon, after all these years of investment, and we're gathered here to learn how the market views our brand-new novel product. We're lucky to see robust customer demand for the First Defense product line, but the major investments in facilities, equipment and staffing needed to double our production capacity have proven difficult. Even with delays in installing some equipment, we finished those capacity-expanding investments near the close of 2022. Roughly when we started running at this higher output level, we started having production contamination incidents that grew more frequent throughout 2023 and persisted into April of 2024; we have looked into these incidents in depth. We're fine-tuning raw material mix to keep bile burden levels at acceptable levels while also getting the most out of yields. We also think a portion of the contamination came from equipment and processes that hadn't been properly optimized to operate at a greater production output. These new remediation steps put in place during April of 2024 in response to the latest contamination incidents seem to be working very well so far since, as I mentioned, we've operated without contamination from that point to now; we don't identify a single smoking gun as the root cause behind the contamination and yield losses; we believe the answer has more to do with optimizing and controlling critical process parameters along with multiple production inputs and process steps. The remediation steps for the contamination incidents called for several adjustments, all within our USDA-approved outline of production. Additionally, I want to verify that during these contamination incidents, every product sold to market had cleared final USDA release testing requirements. Looking back, I notice something that makes complete sense now after successfully running the same process for more than 30 years: rapid growth is difficult. We deal with a high bile burden source material, which is farm milk. We had to improve quality control at the source of this growth. That's what we're doing now. Comparable difficulties arose in our downstream processing as we drove our well-established process and equipment harder. We believe the operational improvements put in place are enabling us to run more effectively at a higher output level moving forward. To succeed, we need to prevent future significant contamination incidents and equipment breakdowns and operate with solid production yields. Now, let's look at the P&L results. Compared with the equivalent periods that closed on September 30, 2023, product sales rose 11%, 51%, and 46% across the 3-, 9-, and 12-month periods ending September 30, 2024. As a result, we brought our order backlog down to $6.8 million as of October 30. That's exciting, yet this top line win hasn't been accompanied by sufficient gross margin flowing through to the bottom line. As is true for most other businesses in this economy, we're up against difficult inflationary pressure on what we pay for labor and components. That affects virtually every item we purchase. Beyond that, the other driver of the gross margin decline is the production yield losses we've recorded in recent periods. That said, our gross margin as a share of product sales did rise from 23% to 26% across the comparable 3-month periods, from 21% to 27% across the comparable 9-month periods, and from 22% to 27% across the comparable 12-month periods, though that remains far below our 35% to 40% target. We do think that by remediating the contamination events and optimizing how the new equipment installed to raise production output operates, we can boost process yields starting in the fourth quarter of '24 and continuing into '25. Given these strong sales, we managed to lift earnings before interest, taxes, depreciation and amortization, or EBITDA, from negative $95,000 in the 3-month period ended September 30, 2023, to positive EBITDA of $119,000 in the 3-month period ended September 30, 2024. And we did cut negative EBITDA of $2.3 million in the 9-month period ended September 30, 2023, to negative $221,000 in the 9-month period ended September 30, 2024. We've concluded that some stockholder dilution is needed to strengthen our cash position. Toward that goal, our at-the-market offering has added substantially to our capital needs during 2024. It has assisted us in bettering our cash position from only $979,000 as of December 31, '23, to roughly $3.8 million as of September 30, 2024, as we stabilized our production systems at a higher output level. At the same time, we're cutting product development expenses while we wait for FDA approval of Re-Tain. Following an investment of about 25 years and approximately $50 million in developing this technology, we're committed to seeing this product through to regulatory approval and the start of our previously disclosed limited distribution control launch strategy. Simultaneously, we were also at the very early stages of looking into potential strategic partnerships that might offset a portion of our product development expenses and support a mass-market launch of Re-Tain. So our attention is going to stay on the commercial potential that First Defense gives us, while we continue working through what looks like the last phases of the regulatory review needed to get Re-Tain on the market. Back in May, the FDA sent us a CMC Technical Section and a complete letter, following our third CMC Technical Section submission for Re-Tain. Through that incomplete letter, the agency raised a handful of minor questions regarding our filing that call for a resubmission, and that kind of filing normally gets a 6-month review. That said, the FDA has suggested this resubmission might qualify for a shorter review window, since the remaining issues aren't complicated. What matters most for timing, though, is that the FDA also told us we cannot resubmit the CMC Technical Section until the inspectional observations at our drug product contract manufacturer's facilities have been resolved. Because the facts and circumstances here are unusual, we are collaborating with the FDA and with our drug product contract manufacturer to secure an expedited review. This is simply part of the process, and we keep moving ahead. Even so, we stay ready and enthusiastic about transforming how subclinical mastitis gets treated in the dairy market of today, offering a novel substitute for traditional antibiotics that carries no FDA-required label restrictions for milk discard or meat withhold; that's the big picture. As for the remaining financial results, the press release contains the unaudited P&L figures along with some unaudited summary balance sheet data. In addition, our Form 10-Q lays out all the unaudited financial specifics and management's discussion and analysis. I won't spend your time during this call walking through all of that in detail. But finally, I'd urge you to look over our corporate presentation slide deck. I think it offers a strong overview of our business and objectives, plus our current financial results. A November update went up on our website just last night. Check the Investors section of our website and click on Corporate Presentation, or reach out to us for a copy. With that, I'd be glad to take your questions. Operator, please open up the lines.

Michael, Joe Diaz here. I wanted to ask something before the queue begins to fill up. About self — First Defense, that business has been performing well. What would you say is behind that?

This product does its job. What matters most, honestly, is how well it performs. The demand we're seeing from customers for it is simply tremendous. When it comes to rival approaches, we're holding our own very strongly—mainly against vaccines. Those would be vaccines administered to the mother in an attempt to boost her antibody output, which I'd describe as only partly effective, or ones delivered through the feed to the newborn. We also go head-to-head quite successfully with the vaccine injected straight into the newborn calf, whose immune system is naive and, I'd add, has a fairly restricted capacity to mount a response to that shot. So the sales force has done a fantastic job with a product that has a solid reputation for efficacy, delivering that value to customers so those newborn calves stay healthy. Anyway, thank you, Joe. That was a good question.

Building on that point, what's your view on how the backlog will play out across the coming three to four quarters?

Look, Joe, here's how I'd put it: if demand from customers weren't as robust as it is, that backlog would already have shrunk considerably further than it has. That's why I keep saying the backlog is an issue, though it's a favorable sort of issue — particularly when you stack it against the opposite scenario, where you're sitting on inventory that's facing expiration problems. To answer you more directly, though, only time will tell, since incoming order volume clearly plays a big role. Still, at this fresh production level — the output we've now achieved — we're chipping away at it daily. We're talking months here, definitely not a full year. That said, we're entering peak season, which makes clearing the backlog a bit tougher at the moment, given that this opening quarter — roughly December through March and April — brings our strongest demand. So we'll stay at it, and each quarter you'll be able to watch us bring that number down to 0.

All right. Thank you. I will get out of the queue. Wyatt?

My question concerns gross margin, and I appreciate all the information you included in the Q to help us grasp it. If I look back to May '21 and early '22, when your revenue was at comparable levels, across 2 quarters, December '21 and March '22, revenue came in at $5.4 million and $6.0 million, which matches precisely what you recorded in the past few quarters. Cost of goods sold was much lower back then. I believe it was probably $2.9 million, whereas now it averages $4.3 million over the last few quarters. So the difference works out to roughly $1.4 million in additional costs. And I think we discussed inflation somewhat. We discussed yield problems. But can you help us better understand what's driving the rise in cost of goods sold? And are you running more batches through the process at lower yields? Still, on cost of goods sold, you likely have quite good granularity on each element of that cost; so perhaps shed some light on that for us, if you would.

Yes. Definitely a significant question, George. I think you nearly posed it and partly responded to it yourself, but I'll say it again; and thank you, I do rely on the Q to try and dig into some of this detail because I think — I know it matters. I know you and others want to know. I know we want to know and we're worried. It's essential. We devoted the better part of basically '23 so intensely focused on contamination. That was simply such a vital event. It would be lovely to tell you, "Oh, we resolved the contamination, and we're right back to our prior gross margin." Well, I can't. But I do think you spoke on the — mentioned the main factors or variables. Yes, I think if my memory serves, you were comparing sort of '23-'24 to '21-'22, yes, that is — those are 2 separate periods for many reasons; but again, the first one in contamination, those costs simply get written off as we go. When we were losing those batches, that was — there was, I suppose, pricey write-offs of scrapped inventory that definitely weren't in our gross margin budget. But you also mentioned yield, and I think that's correct. Emerging from this contamination period, it would be lovely if we could simply say we leapt right into the higher output level and have the same yields, but we don't. So there's plenty of work we're doing on yield. It's a very tricky biological process. Small things make a big difference. I feel like we are tackling many factors that are going to favorably affect the yield going forward; but that's the key — I think that's the #1 key goal or initiative going forward is — yes, you said yes, you're right, more and more cheese batches. That's likely a solid yardstick for gauging what we produce. Using more and more cheese batches while getting less and less yield won't be sustainable, though we are addressing it. So I suppose — I'm not sure, I wouldn't put them in order. I'd simply say contamination matters enormously, and yield matters enormously. And I think I'd add a third one that I consider quite pertinent, and I did include that disclosure in the Q, and I think in the previous Q too. It's product line format mix — when I spoke with a bit of pride about effectiveness and expansion and customer demand and customer backing for the product, our initial bivalent format delivered in a bolus remains on the market, and certain customers are fond of it. Yet much of our expansion stems from the trivalent, the more recent format, the Tri-Shield. And making that product is just costlier. Think back — we return to cheese batches. Basically one cheese batch is needed to produce a bivalent bolus capsule product; producing every dose of Tri-Shield requires 2 cheese batches to incorporate that third antibody into the tube. So I'm sort of speaking off the top of my head here after devoting considerable time to this matter daily and definitely while getting the Q ready, but contamination, yield and product mix are the obstacles we must resolve to bring that gross margin back up to that 35% to that 40% level?

So does that mean that possibly, if you look at a stretch of about 2 years back, or 2, 3 years back, when revenue was at comparable levels, today there are more batches — so that's one of the contributors to the elevated cost?

Yes, more batches, but on top of that — the total number of batches rises to boost output, yet there are also more batches for each dose to obtain the Tri-Shield, 2:1; so that's certainly a factor. Yes, I believe — yes. And I think — I mean, we even saw some 50% margin in the old days, when we had a bolus or capsule business worth roughly $10 million in sales. That's — it's the same company, but it's a different business from when we began doubling that up to $20 million-plus with the Tri-Shield added in. It looks very different. It looks very different for the staff, for the equipment, for the facilities. And we have to make it work — as I mentioned in the Q, I don't anticipate returning to 50%. It's a different business, but we're increasing the sales and increasing the gross margin dollar even at that lower 35%, 40% level — target?

Yeah, yeah. A fast one about the P&L. A few of the expenses came down, particularly product development, though you gave the reasoning for that. Sales and marketing dipped somewhat too. Could you shed some light on why?

That's a tough request. Our sales organization is being asked to handle 2 things: boost revenue and cut costs; so there's a trade-off. Still, where head count goes, the team hasn't changed, so it's flat. We've run programs we'd prefer to put money behind and financed the ones we must. Since during that cash squeeze, during that contamination stretch, every lever gets examined to bring cost down. So yeah, there's nothing more to it. We — certain selling expenses have been handled really well by our VP of Sales, Bobbi Brockmann, who has overseen, reined in, and lowered them while simultaneously avoiding any cuts to what's essential for driving that growth. So solid expense discipline from the sales group; and yeah, product development looks quite different at this point. Every bit of inventory we want — we require for this control launch has already been made. We just don't have a need to make additional inventory, which lets us lower costs, yet we couldn't have opted to remove those costs since we intend to remain prepared for an FDA inspection at a facility we describe as aggressive idle. So it's poised to be put into — returned to operation. It isn't mothballed, yet it isn't actively turning out inventory, and that's purely to conserve some cash.

All right. Wonderful. Then a follow-up — you also mentioned, and I really do appreciate this, the rise in the debt; but after that there's a section where you bring up the chance of a spray product that could bring that down — I believe it costs less, it's a somewhat different product, and it would serve as a method to soak up the WIP. Could you expand on that a bit further?

Sure. For us it's a genuinely intriguing upside. We haven't brought it to fruition yet. It's still being developed. We've run some material through; the early batches look good to us. And as we move into '25, we're going to bring that to market and find out whether that's a cheaper yet differently formatted way to consume some of that WIP you're referring to. I'm talking about the inventory of hyper-immunized raw colostrum, frozen raw colostrum. So it's just different; we invest a great deal of time, and therefore cash, to pack plenty of antibodies into a capsule or 2; this takes a fairly distinct route toward the same broad goal of our antibodies being highly effective at stopping newborn calf disease. So instead of emphasizing concentration, this will lean toward being a bulk product; it would target a separate customer, a big calf ranch, for instance, that's blending bags of feed instead of a capsule of First Defense or two of First Defense. So I'm somewhat enthusiastic about it, but it isn't proven. Still, we're aiming to be inventive and simply uncover new customers and new revenue streams.

I get it, then — it's a product applied as a spray onto the feed, instead of being administered to the...

Actually no, George, what's being sprayed is part of how it gets made. So you start with liquid colostrum. You can either put it through the cheese and filtration steps to get the concentrate, those antibodies, down to a small dose, and after that we lyophilize it. That means freeze-drying. This new — possibly new — format would leave out all of those processing steps, and instead take the raw colostrum and spray-dry it. Which gives you a powder meant to be mixed into a batch of milk for feeding calves. So the spraying is one of the main production steps. When it's used, it would resemble a capsule, except far more capsules are needed since we haven't concentrated it down to that 4-gram level like the current First Defense capsule; this would be — a bulk feed powder.