Immucell Corp /De/ Q1 FY2023 Earnings Call

Good morning, and welcome to ImmuCell Corporation Reports First Quarter 2023 Unaudited Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

Thank you, Chad. Good morning and welcome to everyone. As Chad indicated, my name is Joe Diaz. I’m with Lytham Partners. We are the Investor Relations consulting firm for ImmuCell. I thank all of you for joining us today to discuss the unaudited financial results for the quarter ended March 31, 2023. I would 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, which include any statement that refers to the future events or expected future events or predictions about the steps the company plans to take in the future. These statements are not guarantees of performance and are subject to risks and uncertainties that could cause actual results, outcomes or events to differ materially from those discussed today. Additional information regarding forward-looking statements and the risks and uncertainties that could impact future results, outcomes or events is available under the cautionary note regarding forward-looking statements, or better known as the Safe Harbor statement provided with last night's press release, along with the company's other periodic filings with the Securities and Exchange Commission. Information discussed on today's call speaks only as of today, Friday, May 12, 2023. The company undertakes no obligation to update any information discussed on today's call. Please note that references to certain non-GAAP financial measures may be made during today's call. The company included definitions of these terms as well as reconciliations of these figures to the most comparable GAAP financial measures in last night's press release in order to better assist you in understanding its financial performance. With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation, after which we will open the call for your questions.

Thanks, Joe, and good morning, everyone. Let me get right to the tough news. We have persevered through what I see as the most difficult quarter in the history of the company. I would like to spend most of this call describing what happened and how we are fixing it. But first, regarding the financial results, last night's press release reports no change to our product sales results that were first reported on April 5. The press release also provides the full unaudited P&L results, and some audited summary balance sheet data, as well as our non-GAAP earnings before income tax, depreciation and amortization or EBITDA. Also, we filed our Form 10-Q for the quarter ended March 31, 2023 last night, I won't take our time here to review those financial results in detail. So let's review the hard stuff. In response to increasing demand for the first events product line, we began a series of investments during 2019 to increase our production capacity to approximately $30 million per year. The good news is that all the necessary facility expansions and new equipment needed to increase our production capacity were in place by the end of 2022. The very hard thing is just as this increased production capacity was coming online, a product contamination event was detected by standard in-process quality control testing around the end of the third quarter of 2022. We took immediate steps to address this contamination and production ran without issue during the balance of the fourth quarter of 2022. However, during the first quarter of 2023, our standard in-process quality control testing detected another contamination event. In response to the second contamination event, we made the strategic decision to significantly reduce production output in order to assess and remediate the problem. The production slowdown resulted in a significant decrease in sales during the first quarter and contributed to an increase in the order backlog from about $2.5 million as of December 31, 2022 to approximately $8 million as of May 3, 2023. Due to the loss in earned gross margin that was incurred during the first quarter of 2023, we made the decision to defer for the time being the completion of certain capital expenditure investments. We are being driven by data as we resolve this temporary production problem. I would like to explain what I mean by that a bit. All production batches are tested by our quality control team at the beginning, middle and end of the production process. From February 1, 2023 through May 3, 2023, the incoming test has met specifications 88% of the time, while the mid-process and end-process tests are both consistently meeting specifications. We continue to make progress at improving the beginning stage of the production process, improvement throughout the process from the depth of the contamination problem in January, it's allowing us to come back into full production. We believe that the operational improvements we've implemented throughout the production process as part of this remediation will help us run more effectively at a higher output level going forward. As we recover and resume full production, we aim to produce more product quarter-after-quarter than we did during the first quarter of 2023. When this contamination event is fully behind us, our goal is to be able to produce at least $6 million worth of product per quarter, which would analyze to about 80% of our $30 million full production capacity. We are not losing sight of the criticality of stabilizing supply, regaining lost business and reestablishing our growth objectives. We are at the same time preparing all the data required to make our third submission of the CMC technical section for FDA review before the end of this second quarter of 2023, subject to completion of several critical path items that require results from external laboratories. This submission will be subject to a 6-month review by the FDA. We remain poised and excited to revolutionize the way that subclinical mastitis is treated in today's dairy market with a novel alternative to traditional antibiotics. So with that, lastly, I do encourage you to review the press release on the quarterly report that we filed last night. Also, please have a look at our corporate presentation slide deck. I believe it provides a very good summary of our business strategy and objectives as well as our current financial results; a May update was just posted to our website last night. To see the investor section of our website, click on corporate presentation or contact us for a copy. With that said, I'd be happy to take your question. Let's have the operator open up the lines.

You're welcome. At this time, I'll turn the question over to Joe Diaz with Lytham Partners who will pose a question.

Thank you, Chad. Michael, have you determined the cause or the source of the contamination issue?

It's important that we don't attribute this to a single event or location. We're essentially rebooting the production process from the beginning to the end, from farm to finished goods. The shared data indicates that we are in very good shape during the mid-process and at the end process, with 100% meeting specifications, though we still need to focus on the initial stage. Our goal is to improve that figure from 88% to a higher percentage. I can't say it needs to reach 100%, but we will increase it from where it is now. So, to summarize, we are concentrating on the entire process, from start to finish, but we still have some work to do on the front end.

Right. So it sounds like you can get closer to 100%. I mean, is it possible to actually eradicate this issue with new procedures?

I don't think so. I mean, we want to get as close to 100% as possible. There's definitely room for more improvement, but we have to be cognizant that we're dealing with the dirty raw material. It does come from a barn and our specs are set up to allow and to anticipate that. So it's not septic; it's certainly not sterile, but it needs to be held below the standards that specification level and what happened in this contamination is some of these batches popped up above that level. So we need to just move it down, so there's a margin between where we operate and where that line is on pass and fail.

Thank you. Since we do not seem to have any other questions, I would like to thank everyone for participating in today's call. We look forward to discussing the results of the second quarter of 2023 on or about August 11. Have a great day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.