Earnings Call Transcript - ICCC Q1 2021

Operator, Operator

Good morning, everyone and welcome to the ImmuCell Corporation reports First Quarter of Fiscal Year 2021 Financial Results Conference Call. Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Joe Diaz with Lytham Partners. Sir, please go ahead.

Joe Diaz, IR Representative

Thank you, Jamie. Good morning and welcome to all. As Jamie indicated, my name is Joe Diaz, I am with Lytham Partners. We are the Investor Relations consulting firm for ImmuCell. Again, we thank all of you for joining us today to discuss the unaudited financial results for the first quarter of 2021. 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 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 that are not in the Safe Harbor statement provided in last night’s press release and the company’s quarterly report on Form 10-Q. 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?

Michael Brigham, President and CEO

Great. Thanks, Joe. I appreciate the opportunity to provide some updates on what is going on at ImmuCell. The press release and the quarterly report on Form 10-Q that we disclosed last night cover the key financial highlights and all the details. As you may know on April 7, we issued a press release covering our preliminary top line sales results. We have been making these optional announcements to give investors a very timely look at what I view as the most critical measure of our operations and financial performance, that being product sales early in the reporting period. Again, product sales are down 16% compared to the first quarter of 2020. I should note that sales during the first quarter of 2020 benefited from some ending inventory going into the quarter on hand as of December 31, 2019. While we produced product at about 100% of our current production capacity during the first quarter of 2021, it was not enough and strong demand created a backlog worth approximately $3.1 million as of March 31, 2021, which was increased from about $1.8 million as of December 31, 2020. Our investment to increase our annual production capacity from approximately $16.5 million to $23 million is on track to be complete by the end of June. With that, we do expect to make up for the first quarter drop in sales and report sales growth for the full year of 2021 over 2020. Our sales team has been working very diligently to manage the product shortfall with customers. I can now see the light at the end of this 18-month tunnel to where we can start selling with inventory on the shelves sometime during the third quarter. The drop in gross margin to 39% of sales during the first quarter ‘21 is also related to this capacity expansion. To demonstrate, I will review some informal pro forma finances with you. Had we been able to reduce costs by $287,000 during the first quarter, our gross margin percentage would have been 46% instead of the 39% we reported. We have identified costs aggregating at least that amount that I would consider upfront startup or one-time costs. These are costs that we had to incur to benefit from the future capacity expansion, but they were not necessary to meet the first quarter production output. In addition to the top line sales results, the production capacity expansion and the gross margin results just discussed, I would like to touch on three more topics: one, the use of proceeds from April’s equity raise; two, our cash flows; and three, the road to regulatory approval of Re-Tain. First, as you may know, we raised $4,250,000 in new equity at $8.25 per share last month. That was a straight common stock deal, no warrants, no converts, very low issuance costs. This funding together with some other available cash allows us to aggressively take on four new important growth investments aggregating about $5.4 million. We are investing to scale up and upgrade our vaccine production capacity, expand and improve our classroom collection capabilities and logistics, further increase our annual production capacity for First Defense from the new level of $23 million to about $30 million, and build inventory levels as we come out of backlog and prepare for peak selling season during the first quarter of 2022. Full details about these investments and other capital expenditure projects that we are working on can be found in our quarterly report, in the MD&A section under liquidity and capital resources, around Pages 25 to 26. I appreciate the confidence that these new investors have demonstrated in our business and I believe we are putting this money to very productive use to grow our business for the benefit of all stockholders. So secondly, our cash flows. Driven primarily by large product development expenses to bring Re-Tain to market, we continue to report a net loss. However, I think we should focus on our cash flows more than our GAAP net loss at this stage in our development. Page 4 of last night’s press release provides a look at the impact of certain non-cash expenses on our financial results. You can see that we continue to report positive EBITDA, which I believe is the most relevant to tracking our bottom line performance at this stage. But the most important measure is the statement of cash flows on Page 4 of our quarterly report. Third and lastly, the road to regulatory approval of Re-Tain. It has been a long and expensive road, but we are nearing completion of the work required to achieve FDA approval of this novel sub-clinical mastitis treatment for lactating dairy cows without a milk discard or meat withhold. During the first quarter, we submitted the last five technical sections required for FDA approval. This kind of submission is subject to a 6-month review by the FDA. That puts us at a huge fork in the road during the third quarter of this year. If the FDA has questions for us, we could be required to respond through another submission, which would be subject to an additional 6-month review. We do not anticipate that an additional submission would be required after that. Therefore, we are making plans for a mass market launch during the second quarter of 2022, while also being prepared to flex to an initial limited launch plan around the end of this year, in the event the approval comes through in response to our first submission. Re-Tain puts a second horse in the race for us as we strive to keep growing our total product sales. So in conclusion, I encourage you to review the press release and the quarterly report on Form 10-Q that we filed last night. Also please have a look at our corporate presentation slide deck and May update that was just posted to our website last night. I believe it provides a very good summary of our business strategy and objectives as well as our current financial results. You would see the Investors Section on our website and click on Corporate Presentation. With that said, I will be happy to take your questions. Let’s have the operator open up the lines. Thanks, Jamie.

Operator, Operator

Our first question today comes from Sam Rebotsky from SER Asset Management. Please go ahead with your question.

Sam Rebotsky, Analyst

Good morning, Michael. Tell me how many employees do you have now? And how many do you expect to have in June and what’s the current status?

Michael Brigham, President and CEO

Yes, so the Q disclose is right around 54 FTEs. We have got about 6 part-timers. So 53, 54 currently, that’s going to go right up to 60 and above up to around 70 when we are fully loaded and launching Re-Tain into next year. So, I see 54 going to 60 quickly and 70 over the next year.

Sam Rebotsky, Analyst

Okay. And as far as June 30, are we comfortable with that date for being ready to start manufacturing, or what do we need to do?

Michael Brigham, President and CEO

Well, we are at the end of the process. So, we are getting more and more comfortable as each objective is achieved and completed. But it’s not done until the USDA approves it. So the final part of this, I think I referred to that in the gross margin discussion, there are some of these costs already incurred. So, the new building over 175,000, where we do our finished packaging, formulation, and filling of product, now that’s already up and running. And it’s a question of just finishing up the work here at 56 Evergreen, and that is installing tanks. Tanks are ordered. Tanks are fabricated. Tanks are being installed. So, I feel pretty good about that timeline. It’s a beautiful space. All the facility renovations are done, just poured the floor, the epoxy coating on the floor this week; it’s a gorgeous space. So, it’s awaiting USDA approval, and I feel good about June 30.

Sam Rebotsky, Analyst

Okay. And now as far as the Re-Tain, we have submitted that to the FDA. Have we gotten any indication of how the FDA is operating under COVID? And is it six months or what is the timeframe?

Michael Brigham, President and CEO

Yes, the timeframe, pre-COVID, and as far as we know in COVID is six months. So, we have seen no indication that that would be changed. So, we do still expect that the submission going from Q1 to Q3 will undergo a critical six-month review. The FDA just in the last few days published some information on remote inspections. So, that’s obviously relevant to us. We are expecting an inspection of our facility, and it looks like that may be remote. I have got a whole Zoom setup, and that’s what they have told the industry to be prepared for. So, we are Zoom-ready.

Sam Rebotsky, Analyst

Alright. With the backlog, hopefully, when do we look at reducing it? It’s June 30, and you will hopefully have everything up and running. How do we look at the backlog? Is it continuing to increase? And what do we do relative to reducing it?

Michael Brigham, President and CEO

Yes. Well, $3.1 million is a huge number. So, the backlog goes up and down. We do see some orders being canceled from time to time. Some distributors just don’t want open POS on their books for an extended period. Others place more orders looking to get in the queue. What we are doing here in the second quarter is taking advantage of as much capacity as we can push in the second quarter in advance of the full completion of the project and then going into the third quarter just running straight out. Our goal is to catch up somewhere around the third quarter, getting back to a point where sales can run smoothly, knowing that inventory is available to ship when the order is placed. We want to get this backlog stress out and behind us.

Sam Rebotsky, Analyst

That sounds very good. Good luck, Michael.

Michael Brigham, President and CEO

Thanks, Sam. I appreciate it. Good to hear from you.

Operator, Operator

Our goal is to catch up around the third quarter, ensuring that sales can proceed smoothly with available inventory ready to ship when orders are placed. We aim to eliminate the backlog stress. Thank you, Sam. I appreciate it. It's good to hear from you.

Sam Rebotsky, Analyst

Okay, well, the queue starts filling up. Michael, I did have a question about the facility, the capacity and the timing of it coming online as well as the FDA approval process of the actual facility. Can you give us a little color on a couple of those things?

Michael Brigham, President and CEO

Yes. I mentioned it, Sam. I do feel really good about June 30. Everything is falling into place. We really have, as long as this 18-month project has been since we started at the beginning of 2020, it has stayed to our timeline and dollar budget. So yes, the second duplication of our cheese line, in other words, increasing our liquid processing is really the last step here. And those tanks are going in as we speak. There’s a little flex here, but we think it’s a two- or three-week process. We are really tight with the USDA. They know what’s coming. We just need to allow about two to three weeks for them to do their review and ensure everything checks out. So on the First Defense side, I feel good; it’s right in front of us. As for Re-Tain, again, that is a 2021 objective to complete the regulatory review, and 2022 is when we launch. It’s just a question of what happens here with this first submission if they don't have questions, we move on to the administrative review, which is the final stage, including labeling and all that freedom of information labeling and such. If they have questions and we know what they want to see, we respond to them and submit again for that review, which is another six months. I mean, both of these objectives, which are so critical for our business, are right in front of us: getting out of backlog and getting approval, then launching Re-Tain. The next 12 months are going to be, I think, very exciting.

Sam Rebotsky, Analyst

Thank you, Michael.

Operator, Operator

And our next question comes from Jenifer Taylor from MAC Funds. Please go ahead with your question.

Jenifer Taylor, Analyst

Hi, good morning. It looks like and sounds like you are making really good progress. And bear with me, I am not completely current on sort of what the last characterization has been in terms of funding going out over the next year or two. I would imagine the recent funding was viewed as a bridge to get you through what is hopefully a near-term FDA approval. But could you provide a few words to characterize publicly what you have said on how far this funding would get you and what you would look to do strategically longer term?

Michael Brigham, President and CEO

Yes, thanks, Jenifer. Very fair. I would also refer you to the Q where I answer that question in a lot of detail, because it’s an important question and I want to provide the answer exactly where we are spending that money. So, project by project, the $5.4 million is really exciting investment. The First Defense capacity was already budgeted and cash-funded. What’s new is advancing the pre-marketing launch expenses for Re-Tain and enhancing First Defense to a higher level. So, this new money just allows us to be a bit more aggressive, moving a little quicker on bringing First Defense to its next level and then completing and pre-launch marketing on Re-Tain. I don’t know if that helps. Does that provide a full answer, Jenifer?

Jenifer Taylor, Analyst

You know what? Forgive me for not having read the Q yet. I just was wondering with that raise whether or not if this would extend your runway. I realize you have to build inventory, you are driving the top line. I just didn’t know if you had indicated whether or not, beyond being EBITDA positive, you would need to raise additional capital for a more formal launch.

Michael Brigham, President and CEO

Yes, no, I mean, that’s a lot of detail in a filing that just went out last night. I didn’t mean to assume you have read it; it might be too much detail for me to cover on this call. So, it’s there for backup when you have a rainy day or insomnia in the middle of the night. But I really understand your question; what we are looking at is, the next big thing we would need to do, the next major use of capital for me, would be related to Re-Tain post-approval. So Re-Tain launches with a $10 million capacity. I would love to be in a situation where we could see that $10 million is not going to be enough. That’s sort of a new era and a new challenge in front of us. To be specific, we do not need more capital to bring our capacity on First Defense to $30 million, and we do not need more capital to both launch and initiate sales of Re-Tain.

Jenifer Taylor, Analyst

Perfect, perfect. That’s great. Thank you.

Michael Brigham, President and CEO

Great.

Operator, Operator

Our next question is a follow-up from Sam Rebotsky from SER Asset Management. Please go ahead with your follow-up.

Sam Rebotsky, Analyst

Yes, Michael, you answered my follow-up. The question really is whether we need any more funding after this and evidently, you do, good luck. You have enough capital?

Michael Brigham, President and CEO

Right. This last raise was very well supported by the family and some other key investors. I don’t know if I can consider it optional, but it did allow us to launch some really important growth investments. However, I separate that from the Re-Tain production capacity above $10 million; those are different topics, different times, and different needs.

Sam Rebotsky, Analyst

Sounds good.

Michael Brigham, President and CEO

Good, Sam. Thanks.

Operator, Operator

And ladies and gentlemen, with that, we will conclude today’s question-and-answer session. I’d like to turn the floor back over to Joe Diaz for any closing remarks.

Michael Brigham, President and CEO

Hey, Joe, are you on mute? No worries.

Joe Diaz, IR Representative

I think I am on mute.

Michael Brigham, President and CEO

Okay. Wrap us up.

Joe Diaz, IR Representative

Thank you for participating in today’s call. We look forward to talking with you again to review the results for the second quarter of 2021, not on mute around the second week of August of 2021. Have a great weekend. Stay safe and well. Thank you again. Have a great day.

Operator, Operator

Ladies and gentlemen, with that, we will conclude today’s conference call. Thank you for attending today’s presentation. You may now disconnect your lines.