Immucell Corp /De/ Q1 FY2024 Earnings Call

Good morning, and welcome to the ImmuCell Corporation's conference call to discuss the unaudited financial results for the first quarter ended March 31, 2024. Please note that this event is being recorded. I will now hand the call over to Joe Diaz of Lytham Partners. Please proceed.

Thank you, Nick. Good morning, and welcome to all. As Nick indicated, my name is Joe Diaz, and I'm with Lytham Partners, we're an 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, 2024. The listeners are reminded and cautioned that statements made by management during the course of this call include forward-looking statements, which include any statement that refers to future events or expected future results or predictions about 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 the safe harbor statement provided with the press release and the Form 10-K that the company filed last night, along with the company's other periodic filings with the SEC. Information discussed on today's call speaks only as of today, Wednesday, May 15, 2024. 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. Michael?

Thanks, Joe, and good morning, everyone. This is the story of the really good and a bit of the frustrating. With regards to the first quarter, I would like to speak about two financial disclosures that I think help demonstrate what we believe could be a critical turning point for our business. First, product sales were up 111% during the first quarter of 2024 compared to the first quarter of 2023. And sales were up 33% during the trailing 12-month period ended March 31, 2024, compared to the trailing 12-month period ended March 31, 2023. So again, 111% quarter-over-quarter, 33% trailing 12 over trailing 12. This improvement is largely the result of production output. By implementing and optimizing a multiyear investment to increase our production capacity, we achieved $7.2 million worth of production during the first quarter of 2024, which annualizes to $28.7 million or about 96% of our $30 million full capacity estimate. This level of production remains our aspirational goal, but we do not expect that it can be repeated or exceeded on a regular basis. The $7.3 million in sales recorded during the first quarter of 2024 represents an all-time quarterly sales record for us. The next highest quarter was $6 million recorded during the first quarter of 2022. Second, with those strong sales, we were able to turn earnings before interest, taxes, depreciation and amortization (EBITDA) from negative $1.6 million during the quarter ended March 31, 2023, to positive EBITDA of $377,000 during the quarter ended March 31, 2024. Our gross margin as a percentage of product sales improved from 9% during the quarter ended March 31, 2023, to 32% during the quarter ended March 31, 2024, but this is still well short of our 45% target. Cash is tight. In response, we have frozen certain capital expenditure investments for the time being, but we have no draw outstanding on our $1 million line of credit that is available to us until September of 2025. So that is the big picture. With regards to the other financial results, the press release provides the full unaudited P&L results and some unaudited summary balance sheet data. Further, our Form 10-Q provides all the unaudited financial details and management's discussion and analysis. I will now take our time on this call to review all that in detail. I would like to add that we have been driven by data as we remediate the contamination events that have plagued us recently. Improvements made throughout our production process are allowing us to come back into full production. We believe that the operational improvements implemented are allowing us to run more effectively at a 100% output level going forward. To be successful, we must avoid future significant contamination events and equipment breakdowns and operate with good production yield. So we will remain focused on the commercial opportunity we have with First Defense. But as is often the case in the regulatory approval process, we are frustrated by yet another regulatory delay in our effort to bring retain to market. The FDA recently issued a CMC technical section in complete letter in response to our third submission of vein. Pursuant to the incomplete letter, the FDA has provided some minor questions about our submission requiring a fourth submission of the CMC Technical Section, which is typically subject to a six-month review. However, the FDA has indicated that this resubmission potentially could be handled through a shortened review period because the items open are not complex. Most critical to the timeline, however, is that the FDA has also required that we not resubmit the CMC Technical Section until the inspectional observations at the facilities of our drug product contract manufacturer are resolved. Given the unique facts and circumstances, we are working with the FDA and our drug product contract manufacturer to obtain an expedited review. This is part of the process, and we are continuing to move forward. Regardless, 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 without FDA required milk discard or meat withhold claims. So lastly, I encourage you to review the press release and the quarterly report on Form 10-Q that we filed last night. Also, I am pleased to have you 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, see the Investors section of our website and click on corporate presentation or contact us for a copy. With that said, I'll be happy to take your questions. Let's have the operator open up the lines, please.

The first question comes from Frank Gasca, Private Investor.

First of all, Mike, sure relief having strong sales for the quarter. Keep it up.

Yes. I share that sentiment. Very exciting. Thank you.

My question deals with the shelf and the offering, could you clarify that in regards to at the market and how you go about designating or allowing a certain quantity at a time?

Yes, Frank, I think one of the big benefits of the ATM is its flexibility. So the answer to your question can change day-to-day, week-to-week, month-to-month. I think the biggest distinction between the ATM instrument versus the traditional offering is that the traditional offering would have gone out at a significant discount to market. And with this vehicle, we can just sort of watch the market and make adjustments as appropriate. The downside is that it takes a lot longer to raise some money because you're just sort of nibbling at the market. So we kind of looked at that real hard year-end and going into the first quarter and weighed the pros and cons and kind of decided this was a good opportunity to raise a little bit of money without the anticipated more significant discount. But I guess the short answer to your question is it's a management discretion, board discretion really on a day-to-day basis.

Okay. So some shares have, in fact, been authorized and sold?

Yes. So perhaps I should have included that in my comments, but it is in our disclosures. You can see that in both the financial footnotes. There's an equity section footnote, then there's a subsequent event footnote. And then in the very beginning of the MD&A, really the three places repeat the same information about $300,000 has been raised in gross proceeds.

Okay. I did see that. And as far as you do not disclose or do you when, in fact, you are selling or not selling?

Well, the board communicates to the banker through me and sets thresholds of both volume and price. And I think through our quarterly reports, we would report the results of that interaction and that activity.

The next question comes from Michael Potter with Monarch Capital Group.

So certainly a mixed quarter on the news front. Congratulations operationally. Obviously, I'm kind of scratching my head on regards to retain. Can you walk us through the inspectional observation? What is the process here and the timeline to get to the process?

Yes. It is currently active and the outcome is uncertain. There will be significant back and forth that we won't be involved in, as it is a direct conversation between the FDA and Norbrook. However, Norbrook keeps us updated, so we will receive status reports, although their response timing is up to them. It's important to note that they are a large company with other products, and they are motivated to ensure this goes well. Ultimately, once they are ready, it will be the FDA's responsibility to determine the speed of their review and the outcomes of that review. It is frustrating not to have a clearer answer right now, but we simply don’t have that information at this time. It's still very new.

Okay. And when will we be notified by the FDA that they were not moving forward with the approval?

Yes. It was exactly as expected, at the 180-point, and we had disclosed this on May 10.

This is May 10. So this is all fresh. So we're just getting our arms around the go-forward process at this point.

Exactly, that's what I meant by the good and the frustrating. The good is the sales, but the frustrating part is that we thought we were at the end stage, late in the game, and we didn't get the complete outcome. There will be a lot of communication in the coming weeks regarding how quickly and effectively Norbrook can respond and how swiftly the FDA can concur.

The next question comes from Maynard Fernandez with McDill Columbus.

ICC has now achieved 95% of maximum production volume, but still has not turned to profit for the quarter. How can ICC turn a profit, if not with 95% of production volume? That's the first question. The second question is when do you project to produce a profit?

Yes, that's a fair question, Maynard. The best answer I have is to look at the statement of cash flows and focus on the depreciation. While it's not a bottom line profit, it is cash flow positive when you consider EBITDA, which is not a GAAP measure. The depreciation expenses are included in our GAAP reports, but the EBITDA figure is in our press release. I think that's the first step in transitioning from a product development, retain-driven loss to cash flow and then to profit and loss, but I didn't provide a timeline for that. We are looking at 2024 to see how strong we can keep sales and how quickly we can reduce some expenses as this retain project, which significantly drives our product development costs, moves from development to commercial. There are many events in 2024 that will relate to that question.

The next question comes from Sean Kirkwood with SRK Capital.

So I have a few questions about margins. From the 10-Q, it sounds like maybe it was yield that is causing margins to be lower than the 45% target. Can you just kind of speak a little bit more detail about what is affecting those margins?

Yes, yield is an important factor and it tends to fluctuate due to natural biological processes. We strive to manage it closely, but variations do occur. Milk is our primary raw material, sourced from cows. I don’t want to veer off topic, but our marketing stance promotes not vaccinating your cows and instead using First Defense to avoid the expected variability associated with vaccines. Our customers experience this commercial variability, and we see the same challenges in our production planning. Additionally, contamination issues are costly and have negatively impacted our margins. Thus, achieving better yields and minimizing contamination will surely enhance our margins, which is our goal. We must acknowledge that producing this product is challenging and costly. I reviewed some figures recently; prior to launching Tri-Shield, we operated as a $10 million company. Tri-Shield has significantly boosted our sales, driven by strong customer demand, but it is also more expensive to produce. Therefore, while the margin pressure comes as no surprise given these factors, I still prefer being a multi-format company with Tri-Shield than being a smaller entity offering a more affordable product.

Okay. So I mean it looks like contamination was only about 1% of the margin in the quarter, if I read that correctly. But how do you improve margins from here to your target of 45%?

Yes, we are going to take all necessary actions. There are strategies we can implement to influence yield and manage the process, which should reduce contamination challenges. Additionally, increasing volume will help us leverage fixed costs, leading to better outcomes. It's undoubtedly a priority, and while it is a management goal to achieve that percentage, I must also consider the financial aspect. We operate with dollars, not just percentages, and we need to generate more gross margin dollars to cover expenses and return to profitability. It's all about total revenue, even if it means accepting a slightly lower margin. I believe that is a better approach than being a company with a fixed revenue of $10 million.

Okay. So like these margins are historically much lower than, say, what you even did in your highest quarter in 2022? Do you see any improvement moving forward? What should we expect going forward in Q2 and the remainder of the year? Is this a new normal of 33% margin?

Well, yes, the improvement, the first step, as I mentioned, both in the call and the filings is moving off that disaster. So now the huge focus is how quickly and how close can we move from 32% to 45%. We do always talk about the gross margin gap percentage. But the other thing I do look at is, again, cash, and depreciation is a component of our cost of goods. I'd be happy with a near 45% margin; that could be 45% when we remove the non-cash depreciation. So we're looking at that measure, the cash flow measure and all those buttons to increase that yield. So it is a future-looking thing. It will be subject to performance and future disclosures, how quickly and how close can we move from 32%, 33% to 45%, at least 45% before depreciation.

Right. I mean is there any improvement as of today from the first quarter or we're still looking at 32%?

Yes. The same thing may not satisfy you, Sean, but it is the truth. We really the costing, the production process is so complex. We get a view as with our auditors quarterly. There's really not a weekly or monthly way to accurately measure that, metric expect and anticipate certain trends. But I mean this is a six-month production process. So the best answer to that is quarterly to quarterly and interim views are not disclosed because they're just not accurate.

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

Thanks, Nick, and thank all of you for joining on today's call. We look forward to talking with you again to review the results of the second quarter, which ends on June 30, 2024, and that will be some time during the week of August 12. So thank you for your time. Have a great day.

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