Earnings Call Transcript - ICCC Q3 2024

Operator, Operator

Good morning and welcome to ImmuCell Corporation Reports Third Quarter September 30, 2024, Unaudited Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference call over to Joe Diaz of Lytham Partners. Please go ahead.

Joe Diaz, Investor Relations

Thank you, Wyatt, and good morning and welcome to everybody on today's call. As the conference call operator indicated, my name is Joe Diaz with Lytham Partners. We're 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 September 30, 2024. Listeners are reminded and cautioned that statements made by management during the course of this call include forward-looking statements, which include any statements that refer to future events or expected future results 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 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, Thursday, November 14, 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 Brigham, President & CEO

Thanks, Joe, and good morning, everyone. I’m excited for a few reasons. First, I’m excited to have a challenging period largely behind us, evidenced by the absence of contamination in our production since early April 2024. We have a great chance to increase our 2024 sales compared to 2023 and 2022. We are optimistic about achieving FDA approval for Re-Tain soon after years of investment, and we are eager to hear market feedback on our new product. Customer demand for First Defense is strong, but the substantial investments required to double our production capacity have been difficult. Despite delays in installing some equipment, we completed these capacity-expanding investments by the end of 2022. Following the ramp-up in production, we experienced a rise in contamination events that continued into April 2024. We have thoroughly investigated these issues and are optimizing our raw material mix to maintain acceptable levels while maximizing yields. Some contamination was due to equipment and processes not adequately optimized for the increased production levels. The remediation steps taken in April 2024 appear to be effective, as we have not faced contamination since then. We do not attribute contamination and yield losses to a single cause; rather, we see the solution in optimizing critical process parameters and various production inputs. The adjustments necessary for remediation were made within our USDA-approved production framework, and it’s worth noting that all products sold during these contamination events met final USDA release testing requirements. Reflecting on our growth, it’s clear that sudden expansion is challenging, especially with high-burden source material like farm milk. We are addressing quality control at the source of this growth. Similar challenges were encountered in our downstream processing as we increased our output. We believe the operational improvements implemented will allow us to operate more effectively moving forward. For success, we must prevent significant future contamination events and equipment failures while maintaining good production yields. Regarding our financials, product sales rose by 11%, 51%, and 46% in the three, nine, and twelve months ending September 30, 2024, respectively, compared to the prior year. This helped decrease our order backlog to $6.8 million as of October 30. While this top-line success is encouraging, we are facing inflationary pressures on labor and components, affecting our gross margin. Additionally, production yield losses have contributed to gross margin deterioration. Despite this, our gross margin as a percentage of product sales improved to 26% from 23% over the past three months, from 21% to 27% over the past nine months, and from 22% to 27% over the past twelve months, though we are still below our target of 35% to 40%. We believe that by addressing contamination events and optimizing new equipment, we can enhance process yields starting in the fourth quarter of 2024 and into 2025. With strong sales, we improved our EBITDA from a negative $95,000 for the three months ending September 30, 2023, to a positive $119,000 for the same period in 2024 and reduced negative EBITDA from $2.3 million to negative $221,000 for the nine-month periods. We’ve determined some stockholder dilution is necessary to strengthen our cash position, and our at-the-market offering significantly contributed to our capital needs in 2024, increasing our cash from $979,000 as of December 31, 2023, to around $3.8 million as of September 30, 2024. As we stabilize our production systems, we are also reducing product development expenses while awaiting FDA approval for Re-Tain. After investing approximately $50 million over 25 years for this technology, we remain committed to its regulatory approval and the launch strategy. We are exploring strategic partnerships to help manage product development expenses and support a broader launch of Re-Tain. We remain focused on the commercial opportunity with First Defense as we navigate the final stages of regulatory approval for Re-Tain. In May, the FDA issued a CMC Technical Section Incomplete Letter regarding our third submission for Re-Tain, requesting minor clarifications that necessitate a fourth submission, which typically undergoes a six-month review. However, the FDA may handle this expedited review due to the simplicity of the issues raised. The FDA has also stipulated that we cannot resubmit until inspectional observations at our contract manufacturer’s facilities are resolved. We are actively working with both the FDA and our manufacturer for an expedited review. We are excited to change how subclinical mastitis is treated in the dairy industry with a novel alternative to traditional antibiotics that does not require milk discard or meat withholding. For additional financial details, please refer to our press release, which includes unaudited P&L results, and our Form 10-Q for comprehensive financial information and management analysis. I encourage you to review our corporate presentation available on our website. Now, I’m happy to take your questions. Let’s have the operator open up the lines.

Operator, Operator

I encourage you to take a look at our corporate presentation slide deck, which offers a solid overview of our business, objectives, and current financial results. A November update was recently posted on our website. Please visit the Investors section and click on Corporate Presentation, or reach out to us for a copy. Now, I'm ready to take your questions, so let's open the lines for the operator.

Joe Diaz, Investor Relations

Michael, this is Joe Diaz. I did have a question while the queue start filling up. With regards to First Defense, the business has been strong. What do you attribute that to?

Michael Brigham, President & CEO

The product works. I mean efficacy rules. I mean we just have great customer demand for this product. We're competing very effectively against alternative technologies, primarily vaccines, vaccines that are either given to the mother to try and, I'll say, somewhat unsuccessfully improve her production of antibodies in the feed, or those given to the newborn. We compete extremely effectively against the vaccine that is given directly to the newborn calf with its naive immune system and limited ability to respond to that vaccine. So just great work by a sales team with a product that is pretty well known for its efficacy and providing that value to the customer to keep those newborns healthy. But thanks, Joe. Good question.

Joe Diaz, Investor Relations

Leveraging off of that, how do you see the backlog working out here over the next three to four quarters?

Michael Brigham, President & CEO

I would say that if the demand from customers weren't so strong, the backlog would have decreased significantly by now. While backlog can be an issue, it's a favorable one compared to having unsold products that may face expiry concerns. As for your question, we will need to see how it unfolds, as it largely depends on the volume of incoming orders. With our new production capacity, we're making progress every day. It's a matter of months, definitely not a year. We're entering our peak season now, which makes it a bit more challenging to address the backlog since December through March and April is our busiest time. We'll keep working on it, and you'll notice our progress in each quarterly report as we work toward reducing it to zero.

Joe Diaz, Investor Relations

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

Operator, Operator

Our next question comes from George Melas with MKH Management.

George Melas, Analyst

My question about the gross margin and I appreciate all the detail you put in the Q to try to help us understand it. If I go back to certainly late '21, early '22, when you had similar revenue levels, in two quarters, December '21, March '22, revenue was $5.4 million and $6 million, which is exactly what you had in the last few quarters. The cost of goods sold was significantly lower. I think probably it was $2.9 million and now it's on average, the last few quarters is $4.3 million. So the delta is like $1.4 million of added costs. And I think we talked a little bit about inflation. We talked about yield issues. But is there a way you can help us understand a little bit better the increasing the cost of goods sold? And do you have more batches going through the process with lower yields? But I guess on the cost of goods sold, you probably can have pretty good granularity about every aspect of that cost. So maybe help us understand that, if you could.

Michael Brigham, President & CEO

Yes, that's a significant question, and I appreciate you bringing it up. We have focused intensely on contamination throughout 2023, as it has been a critical issue for us. While it would be great to say we've resolved the contamination and returned to our previous gross margin, that's not the case. You mentioned comparing 2023-2024 to 2021-2022, which are indeed different periods for various reasons. Primarily, during the contamination phase, we incurred significant costs due to batch losses, which added to our write-offs and affected our budgeted gross margin. You also mentioned yield, and that's an important point. After dealing with the contamination, we can't simply return to higher output levels with the same yield. We're actively working on improving yield, which is a complex biological process where minor factors can significantly affect outcomes. Our focus moving forward will be improving yield while also increasing cheese batch production. However, producing more cheese batches without improving yield will not be sustainable, so that's a priority for us. I would identify contamination and yield as major challenges. Additionally, the mix of our product lines plays a role. While our original bivalent format remains popular, much of our growth is coming from the newer, more expensive Tri-Shield format. Each dose of Tri-Shield requires more production time and resources compared to the bivalent product. In summary, to improve our gross margin, we must address contamination, yield, and product mix challenges.

George Melas, Analyst

So that means that essentially if you compare to a period of time roughly two years ago or two, three years ago, when you had similar revenue levels, now you have more batches. So that is one of the factors in the high cost?

Michael Brigham, President & CEO

Yes, we have more batches, which helps to increase overall output and more batches per dose to achieve the Tri-Shield, 2:1. This is definitely a contributing factor. I believe we previously had around a 50% margin when our bolus or capsule business generated about $10 million in sales. Although it's the same company, the business dynamics have changed significantly as we've scaled that to over $20 million by incorporating the Tri-Shield. This shift presents a new perspective for our staff, equipment, and facilities. As I mentioned in the quarterly update, I don't anticipate returning to a 50% margin since it's a different business now, but we are increasing both sales and gross margin dollars, even with a lower target range of 35% to 40%.

George Melas, Analyst

Yes. Quick question on the P&L. Some of the costs were down, especially product development but you explained that. Sales and marketing was down a little bit as well. Is there a way to explain that?

Michael Brigham, President & CEO

It's a significant request. We're asking the sales team to achieve two objectives: increase sales and cut costs. It's about finding balance. The team has maintained consistent headcount, so neither an increase nor a decrease is happening. We've managed our programs to ensure that we can spend appropriately where necessary. During tight cash flow periods, we evaluate all options to reduce expenses. Absolutely, it's straightforward. Our VP of Sales, Bobbi Brockmann, has effectively managed and controlled certain selling expenses while ensuring that nothing essential for growth is being cut. The sales team has demonstrated good expense management. Additionally, product development has transitioned significantly. We have produced all the inventory required for this control launch, meaning there is no need for further production, allowing us to cut costs. However, we have deliberately chosen not to eliminate costs entirely because we need to be prepared for an FDA inspection at a facility we refer to as aggressively idle. It is ready to resume service, not completely inactive, but not currently producing inventory, which helps us save money.

George Melas, Analyst

Okay. Great. You mentioned the increase in debt, which I appreciate, but you also referred to the potential for a spray product that could actually help reduce that. I believe this product is lower cost and somewhat different, and it could help manage the work in progress. Could you elaborate on that a bit more?

Michael Brigham, President & CEO

Yes. It's a really interesting upside for us. We haven't realized it yet. It's in development. We have processed some material. We like the look of it, the initial batches. And going into '25, we're going to get that to market and see if that is a less expensive but different format way to use up some of that inventory that you're talking about. I mean the inventory of hyper-immunized raw colostrum, frozen raw colostrum. So it simply is different. We spend a lot of time and thereby money to get a lot of antibodies into a capsule or two. This is a pretty different approach with the same overall objective of our antibodies being very effective at preventing newborn calf disease. So rather than focus on concentration, this is going to be more of a bulk product. It would be more for a different customer, a large calf ranch, say, that's mixing bags of feed rather than a capsule of First Defense or two of First Defense. So I'm kind of excited about it, but it's unproven. But we're trying to be creative and just find new customers and new sources of revenue.

George Melas, Analyst

I see. So it’s a spray that you spray on the feed rather than give it separately to the calves?

Michael Brigham, President & CEO

Well, no, George, the spray refers to the production process. You start with liquid colostrum, which is processed through cheese and filtration to create a concentrate with antibodies in a small dose, and then we freeze-dry it. This new format would skip those steps, utilizing raw colostrum and spray drying it. The result is a powder that will be mixed with milk to feed calves. So the spray pertains to a key production step. The application would resemble a capsule, but it would require more capsules since we haven't concentrated it down to the 4-gram level used in the current First Defense capsule. It would serve as a bulk feed powder.

George Melas, Analyst

Got it. Okay. Interesting. And then on Re-Tain, any possible update on your contract manufacturer and then getting through that inspection process?

Michael Brigham, President & CEO

Yes. The best update is that I don't have an update. What I mean by that is it hasn't been delayed and it hasn't been accelerated. We are confident that they are working diligently to resolve these issues, and they have made progress submissions along the way. However, the final outcome is still scheduled for December, and that has remained consistent; it hasn't moved forward or been pushed back. The key issue is how the FDA will respond to that submission. As soon as that submission is cleared, we can proceed with what I referred to as the non-complex response on our side regarding the manufacturing Technical Section.

Operator, Operator

And the next question comes from Jane Lindenman as a private investor.

Unidentified Analyst, Analyst

Michael, it's Bruce. Congratulations on getting all that stuff behind you.

Michael Brigham, President & CEO

A little bit of progress. Thank you.

Unidentified Analyst, Analyst

We are interested in knowing how many shares were sold and whether you will continue the ATM.

Michael Brigham, President & CEO

Yes, that's fair. For specific details, I would direct you to the Q. There's a subsequent event note that includes a detailed description of the shares issued. However, I wish I had my notes right in front of me.

Unidentified Analyst, Analyst

I'm just looking for an approximate number.

Michael Brigham, President & CEO

Yes. I think we went from about 1.1 million. We went from 7.7 million to 8.8 million shares outstanding.

Unidentified Analyst, Analyst

Okay. Do you think you're done for now?

Michael Brigham, President & CEO

With this ATM, the specific disclosure is historical and quarterly regarding past activities, while allowing some flexibility for future decisions based on Board discretion. Given the cash levels I mentioned, we can shift from a super-high concern level to a position where we can manage effectively. Ultimately, the future depends on our capital requirements, how we allocate our spending, and price fluctuations. At a higher price, it’s possible to generate funds and undertake significant initiatives with less dilution. While I'm hesitant to provide specifics about the future, the current quarter's details are clear.

Unidentified Analyst, Analyst

I was just curious because it seemed like you raised your cash balance to a decent level, making it different to sell stock at 3.5 or 4 compared to higher levels.

Michael Brigham, President & CEO

Exactly. That's true. And you can see that just if you compare the nine month numbers to the subsequent event, it very significantly sort of lowered the big volume was back in the third quarter.

Unidentified Analyst, Analyst

All right. Well, good luck. We're looking forward to the launch.

Michael Brigham, President & CEO

Great. Appreciate you, Bruce and Jane, for your patient following.

Unidentified Analyst, Analyst

Long over 20 years.

Michael Brigham, President & CEO

Is it 20? My goodness. Isn't that amazing? Time flies. Wow, thanks for reminding me of that. Holy cow.

Unidentified Analyst, Analyst

Okay. Thank you, Michael.

Michael Brigham, President & CEO

Be well. Thank you, Bruce.

Operator, Operator

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

Joe Diaz, Investor Relations

Thank you, Wyatt, and thanks to all of you participating in today's call. We look forward to talking with you again to review the results for the year ending December 31, 2024, during the week of February 24, 2025. Thank you and have a great day.

Operator, Operator

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