Immucell Corp (ICCC) Q1 2020 Earnings Call Transcript

Good morning and welcome to the ImmuCell Corporation's conference call to discuss the financial results for the first quarter of fiscal year 2020. Please be aware that this event is being recorded. I will now hand the call over to Joe Diaz from Lytham Partners. Please proceed.

Thank you, Brandon. Good morning and welcome to all of you. My name is Joe Diaz. As the operator indicated, I’m with Lytham Partners. We are the Investor Relations consultant firm for ImmuCell. Again I thank all of you for joining us today to discuss the unaudited financial results for the first quarter which ended March 31, 2020. I'd like to preface this discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements made by management during the course of this call include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the cautionary note regarding forward-looking statements or in other words, the safe harbor statements in the company's press release and Form 10-Q which was issued last night and can be obtained from the SEC or by visiting the Investor Section of the company's website at immucell.com. With that said, let me turn the call over to Michael Brigham, President and Chief Executive Officer of ImmuCell Corporation, after which we will open the call for your questions.

Thank you for joining today's call; I appreciate your time. Last night, we filed our Form 10-Q for the three months ended March 31, 2020, and issued a press release summarizing our key results. While I won’t go into all the details available in the Q and the press release, I want to highlight a few important points. Firstly, regarding the press release, we experienced an 11% growth in product sales, which marks a strong quarter for us, ending with an additional $1.4 million in demand on backlog, leading to approximately $14.2 million in annual revenue over the past 12 months. Secondly, you'll notice in the press release a link discussing our leasehold improvements project to enhance First Defense production capacity, and I’m pleased to report that this project is progressing well. If you check out the pictures on our website, you’ll see we are nearing completion, successfully converting a warehouse into assembling space, and we are on budget and schedule. Specifically, as we approach Phase I completion, we anticipate obtaining the certificate of occupancy soon, allowing us to start assembly in that building. Phase II entails setting up a third freeze dryer at our 56 Evergreen site, which is next on the agenda once we clear space for that equipment. Lastly, I’d like to address some non-GAAP measures mentioned in the press release. On Page 4, we report income before income taxes and certain non-cash expenses, amounting to about $600,000 in the first quarter. This is a slightly different figure from EBITDA, which was $770,000 in the first quarter of 2020 compared to $836,000 in the first quarter of 2019. Turning to the Q, one notable highlight is the subsequent event described in footnote number 20 about the Paycheck Protection Program; we have received $938,000 in funds through this federal program and anticipate that nearly all of it will be forgiven, pending certification by our bank under federal guidelines. While there has been some recent discussion about public companies receiving this money, we argue that we are a small public company, deserving of this financial support. A recent ruling indicated that PPP loans under $2 million will face less scrutiny, so we are optimistic as we navigate this situation and seek to maintain some financial flexibility amidst ongoing economic challenges. Moving on, I want to emphasize that we secured a favorable deal with Gorham Savings Bank for our bank refinancing, lowering our interest rates and replacing variable rates with a fixed rate of 3.5%. This change should enhance our cash flow for principal repayments. I also want to update you on our FDA submission for Retain. Regardless of the pandemic, the FDA is operational and responsive, and we’re proceeding with our submission for the manufacturing technical section, expected to be submitted in the fourth quarter, which will undergo a standard six-month review. We’ve taken steps to reduce risks associated with the submission, having already submitted the drug substance section. This next step involves adding the drug product, aseptically filled into a syringe by Norbrook, which is a leader in aseptic filling expertise. If the submission is complete, we expect a response after the six-month review; otherwise, additional questions could extend the process. On another note, the ongoing COVID-19 crisis is affecting the agricultural sector, leading to economic uncertainty for dairy and beef producers. Milk is being dumped due to decreased demand, and processing plant closures are disrupting beef supply chains. Farmers face challenges despite their efforts to enhance production and efficiency. Our goal is to maintain First Defense's competitive edge in the market, striving for market share even amidst a shrinking market. Furthermore, I want to highlight our preparedness against COVID-19 risks. Our supply chain remains stable, and we’ve put measures in place, such as cross-training employees and implementing remote work practices. Certainly, this unprecedented period brings economic and market risks, but I’m proud of our team's resilience in maintaining production. Lastly, we issued a press release this morning about the 2020 annual stockholders' meeting. Given current safety protocols, we have opted for a virtual meeting rather than an in-person gathering. Detailed instructions on accessing the virtual meeting on Wednesday, June 10 at 3 PM are included in the press release. I encourage you to review the Form 10-Q and the press release issued last night, as well as our updated corporate presentation slidedeck available on our website, which effectively summarizes our business strategy, objectives, and current financial results. Now, let’s open the lines for questions; I’m happy to take them.

Our first question comes from Sam Rebotsky with SCR Asset Management. Please go ahead.

Hope everybody is staying safe and well and we'll sort of get through all this. My first question relates to the $1.4 million backlog, relative to the First Defense, we couldn't produce this; what is the rationale for the backlog and how do we need the new facility to be up and running to sort of reduce the backlog or give me some color on that?

Yes, I mean one answer is great work by the sales team. I mean the first quarter was largely in front of the impacts of the COVID pandemic; sales team was fully charged in the field and the market was strong and looking as I said, looking to be strong for the rest of the year. So great demand, great work with our sales team. And then, but to production yes, we need this expansion; we're pushing every button in this building as we can, that first quarter was $4.9 million. If you annualize that out, we're getting close to $20 million worth of production; of course, I'm not suggesting we would be there; first quarter is our high season. I'm just saying that's a lot of product to push out the door and it wasn't enough. So we’ve come to find our capacity is around $18 million and needing this expansion to get up to $27 million. So we’re going to just keep going and fill that backlog, but it will ultimately take the expansion to get us to the point where that backlog goes away and stays away.

Did we eliminate the backlog as of now or when do we expect to eliminate the backlog?

As soon as possible, but not yet so it's a moving target because we got new orders coming in just as soon as we're filling old orders at the same time. But yes, we're working through that in the second quarter, but I don't know if it will be 100% clear on June 30, but we're making progress.

Well that's wonderful. Now as far as the submission to the FDA, we expect by 2021 and the response in six months. If we get a complete, do we have to do something else or what do we have to do as far as the Re-Tain and the Mast Out?

Right yes I mean, so I think really, the answer is no; nothing else. I mentioned a 60-day administrative review so we don't just go right to market, but there is one more step in the process but basically five technical sections; four complete, we need this fifth one complete. The manufacturing one plus the 60-day admin review and go-to-market we’ll prefer market sales.

So, and the submission is basically that the plant is functioning properly and you're producing the quantity that you’re going to sell in the plant? That's what the submission is?

It's a little different than that Sam. So the first phase submission was strictly more what you described drug substance with Nisin, the active ingredient we make in Caddie - at the Caddie Lane facility. So we're responding to the questions that they raised when they issued incomplete on that, and it was - they didn’t complete because we had questions; and it was incomplete because we hadn't submitted drug product. So the real new focus of the pending submission is to answer those questions and then submit all the drug product that being the drug substance aseptic, we filled in the syringe. So that is a new material that they have not seen yet and that's where we partner with Norbrook to hopefully get them something that they are - is acceptable.

Okay. Now and as far as the treatment of Coronavirus in cows have we had any further discussions or results whether this is utilizable - both for any other animals or anything else?

Yes, it's a very fair question, Sam. I didn't highlight it on my talking points there. But on Page 26, we did put a pretty definitive answer and it's no and it is what we expected. The human Coronavirus is different than the animal Coronavirus. We've had a test in a lab and those results were confirmed. It's just it's not the cross-protection that is not there. So we're not going to be able to provide a viable solution to this pandemic, but yes, that's a new disclosure.

Okay. And one final do we need to raise any more funds, are we suitable through the end of the year, the way we are?

Yes, suitable I guess yes sure. As I do want to make sure we achieve forgiveness on that PPP loan; that's critical to our financing going forward. But yes, no plans are to go to market this year. I mean I just don't know how deep the crater is going to be, how deep the economic collapse is going to be. So it's hard to say definitively, but I don't see that we have stress-tested it; we can handle a drop in sales with the PPP covering us. So, yes, my expectation is not to raise money.

Okay. I want to congratulate you and ImmuCell on the performance on the sales and on the growth of new products. Keep up the good work, Michael. Thank you.

Our next question comes from Paul Nouri with Noble Equity. Please go ahead.

It looks like the gross margin was around 45% or so this quarter; given your product makeup now is this what we should think about as normal gross margin for you guys or once you get the expansion complete, should we expect a higher gross margin?

Yes, that was a little surprising to me, it's definitely the 46 is lower than we want; our goal is 50. I don't worry about the depreciation component, which is in there; at least our cash margins obviously a little bit better than 46. But this, our growth is being fueled by the Tri-Shield business, the gel tube business and the gel tube product and process is more expensive. So we have got a real repeatable and solid 50% plus margin on the capsule. But that business was maturing and didn't have a growth; the explosive growth we're seeing out is Tri-Shield. So we may suffer a little bit on the percentage, but we feel it’s worth because we're going to grow on the total dollar received the total dollar gross margin. And yes, we just think that's going to get better over time; we're going to get better yield out of our cows. We're going to get better throughput out of the expanded capacity more throughput over fixed costs. So I don't think we're going to go back to the old bolus days of well over 50%, but I think we can get back to that 50% and those were the drivers yields out of our cows are expanding herd of source cows and more throughput over fixed costs.

Okay. And I guess that given that you're still working through your backlog, I guess the virus has not negatively affected demand for the product here?

Not extremely negative. So we're seeing the signs and we're seeing the stress that our customers are under, so that's definitely not positive growth. We’re offsetting it with the value proposition and this market is resilient; we are selling a product that helps them save money, and we've had comments like one interested comment; I need to get that Tri-Shield, I don't have labor to treat the cows. So there is opportunity for us like that even in this low milk price environment. But also in the second and third quarter results, I answer to that question, which is we are going to play it out.

And on the last call, I think you brought up casually that you had sent in your animal Coronavirus vaccine or product to the health authorities. Just to see if there is anything they could do with it? Are there any developments with that or no?

Yes, that was on, I think that was Sam's question I was referring to a short paragraph on Page 26 just above the gross margin analysis where we did work hard to get that our antibodies tested. It took a little longer than we would have liked, but we did ultimately get them tested and the answer was what we expected; no, there is not that cross protective opportunity for our antibodies; the data was not there. So kind of confirm, but we did believe that this animal bovine Coronavirus is different than the COVID-19 human virus and there is not cross-protection.

Okay. And then last question, the sales, marketing and admin expenses as well as the product development expenses should we expect any significant increase in these lines in the next few quarters or should they remain about where they are now?

Yes, no, I think in this environment, but honestly even without the pandemic those figures we're not looking - we're controlling those expenses. If we can reduce then we will right now we're not making drastic cutbacks real - harsh and extreme cutbacks. So, but at the same time no increase plans just we’re kind of can go level through this next two, three quarters.

Our next question comes from Brad McCurtain with Maine Securities. Please go ahead.

Great to see sales moving ahead here in this environment through the end of the quarter. Anyway, can you give us a little color on how they have looked here for April and so far into May?

No, I mean, I just don't do that. I mean that would be a violation of Reg FD. We're going to announce these results as soon as we have them. And we just have not been in the projection business. I don't have an analyst that works on that with me, and we just don't do monthly sales reporting. So that's my short answer is no. I think that probably doesn't surprise you, but in general, we're going full steam ahead. Whether we - the first level of business is to fill the orders we already have and orders have not dropped to zero. So we're bringing in new orders as we go, but how the second quarter plays out here on May 14 halfway through the quarter. Yes, I don't want to make; I don't have a good way to make that projection.

Sorry Michael, I didn't mean for the quarter, just how things are looking so far here in April; a lot of businesses has seen your business fall off quite a bit here and we read a lot about what's going on in the dairy industry. So I was just trying to see if things are essentially consistent with what they've been here in the past or if you're really seeing something a little bit different from what a lot of companies are seeing?

Right, yes you're asking that was speaking to really not making monthly public sales disclosures. But yes we make quarterly so it's something I want to see how it not just the first half of the quarter - put the whole three months together and put out there. But the point I was trying to make is customers are resilient. Our product I think has a place to play, even in a down market and the sales team is aggressive and creative in trying to make that happen. But it's too early to know what ultimately is going to happen here.

Sure. Just kind of moving from there, a little bit over to the paycheck protection program loan, cash at the end of the first quarter, net working capital in the first quarter looked pretty similar to what it was at the end of the year and was there really a need for this? I mean we do have access to capital; you've obviously sold a lot of stock over the past few years? You just refinanced with the bank, was there a need for this or did you take it because it was out there?

All right, I think when you do contingency planning for a pandemic of this size and the economic potential harm that's your way, you look for every opportunity you have to mitigate downside. And that's what this program was designed for and we kept our - we met the primary objective of the program, which is to keep people employed and cover payroll. That was based on a run rate of payroll in 2019. The actual - we adjusted to - we're about halfway through this 8-week measuring period and it's allowed us to not miss a payroll dollars to keep this business going and it's a security for what may happen here going forward. But I think that was the purpose of the plan; is that to get payroll dollars out into the market, keep businesses moving forward and we fit that description quite well. We've done the best we can to do that and I’m happy to be a relatively small participant in this mega dollar program.

Right, well I think the plan was for businesses that we're planning on laying off their employees to be able to keep them on it. But I won't debate it, but if you feel you met the obligation, it just as there is a lot of backlash against public companies as you know. And you may be smaller, but it just strikes me that the working capital, the cash level here, the sales up in the first quarter; it seems like a stretch to make the case there. But other question I had for you syringes, there seems to be a lot of talk right now if we're able to find some sort of vaccine that one of the issues is finding in syringes for the vaccine for the pandemic. Do you see that obviously there was nothing in the Q speaking to that, but do you see that as a potential issue or are you pretty firm with the supplier?

Yes, I have seen no issue with the supplier. This is a huge company Hubert De Backer, providing these sort of different syringes. They're not human injectables; they are intramammary infusion pieces of plastic. No indication that there's any problem there. In fact, just to make this submission, later this year we've needing to access syringes for the studies. So we've been successful and yes I don't see any indication of a problem with Hubert De Backer.

Okay, excellent. And then just a final is just a question, would you consider moving these to WebEx presentations going forward? And I have not seen the presentation that you put out there. But I'd like to, but it would be great if you could walk us through during these meetings the presentation that you put out. So I'm guessing the Annual Meeting will be a WebEx or equivalent, correct?

Yes, it's an either or option or both for the Annual Meeting and you'll see that in this morning's press release. But yes, it's going to be that. The WebEx but as I speak live here, actually, the way this WebEx I believe is going to be set up is just another access to come in. So we're leaning on the website for the slide deck. And the slide deck that we put up last night is the same slide deck we’re going to use on June 10. So people may have a chance to look at it in advance, but I definitely want to walk through it. Some of these services that you see from bigger companies are up to $10,000 and I just couldn't see spending that kind of money. So we have got a much more cost effective approach; it will be the audio connection and the slides on the website. Again, they are now and we'll talk through them but yes, which I’m learning, everyone's learning in the new virtual world. So this will be a first for us on the Annual Meeting. Brad, back to the small company and the PPP; it does support payroll. I don't - I’m not aware of rehiring criteria; I think its supporting payroll. So the fact that we had the money and then didn't need to furlough or layoff I think is relevant and is meeting our criteria. That's ultimately going to be the calculation; 75% of our forgivable piece will be payroll. And then the argument I'm going to be making is to the small size you pointed out that we did raise money, and that's really part of my argument. We scratched and we worked hard with Craig-Hallum to raise the money we did raise to fund the two programs that we are funding and the ability to go back to market right now for stock like ours, of finding serve stock or the market cap where ours. I don't think it’s there. I think that the public company outcry is towards the big guys that have ready access to raising money and we're a little different than that broad categorization of all public companies anyway. We'll play that one out and we’ll see how we prevail.

Our next question comes from Frank Castle with Andover. Please go ahead.

Thank you very much. Good morning. Would you just describe the plant and where you are - I was on the website. I saw the pictures, etc., this morning. I took a tour of the plant quite - when it opened I guess. And I'm wondering what the goal is and are you meeting your goal and is everything going well here; are those pictures really relevant or are they pretty historical? Thanks very much.

Well yes good Frank, I think we're confusing two different plants so let me describe.

Okay.

The headquarters is 56 Evergreen, that's where we make First Defense today; all USD operations. I think the facility you toured because we really haven't had tours over at the First Defense facility. I think the facility you remembered touring was the Re-Tain facility at 33 Caddie Lane.

You bet.

Yes okay; that's the $21 million investment that's complete, that's where we're running and producing drugs cut since to complete that FDA application. So no new construction over there that's complete; that's been complete. What you're seeing as construction photos that are relevant is what I've been trying to show is the third facility, is 175 Industrial. So Caddie is out of our back door. Industrial is out of our front door. Industrial was lease property; we essentially leased a 14,300 square foot warehouse and built in these assembly rooms where we're going to finish the product. So that's the $3.5 million investment; that's the certificate of occupancy I'm looking for in the next weeks. That's the move in, the next stage there to get all of the assembly of First Defense out of 56 into 175 so that we can move the new freeze dryer into the vacated space at 56. So 56 becomes the liquid processing plant and 175 becomes final assembly and fill.

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks.

Thank you, Brandon. Again we appreciate all of you being on today's call and we will look forward to talking with you again at the conclusion of the current quarter sometime in early to mid-August. Please stay safe and we'll look forward to talking with you again soon. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.