ImmuCell Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 5 speakers on the call.

Operator

Good morning, and welcome to the ImmuCell Corporation Reports Second Quarter Ended June 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 Lintham Partners.

Operator

Please go ahead.

Speaker 1

Thank you, Anthony. Good morning and welcome. As Anthony indicated, my name is Joe Diaz 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 June 30, 2024.

Speaker 1

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 provided with the press release and the Form 10 Q 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, August 14, 2024. The company undertakes no obligation to update any information discussed on today's call.

Speaker 1

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?

Speaker 2

Thanks, Joe, and good morning, everyone. I'm not going to take your time to review all the financial details during this call today. Those numbers and results are available to you at the summary level in last night's press release and in much more detail in the Form 10 Q that we also filed last night. I would like to point out that we had very strong top line sales growth during the 3, 6 12 month periods ended June 30, 2024 in comparison to the same periods ended June 30, 2023. These results demonstrate that we have largely completed the production capacity expansion work that we have been investing in since 2022.

Speaker 2

During the 6 month period ended June 30, 2024, finished goods production was approximately 12 point $7,000,000 This level of output was annualized to approximately $25,400,000 or approximately 85 percent of our estimated $30,000,000 annual full capacity target. This top line success has not been matched with adequate gross margin to the bottom line. Our gross margin as a percentage of product sales did improve from 19% during the 6 month period ended June 30, 2023 to 28% during the 6 month period ended June 30, 2024, but this is still well short of our 40% target. As we began to operate at this higher output level, we incurred some significant product contamination events from late 'twenty two to early 2024. We have investigated these events thoroughly.

Speaker 2

Some of our problems were caused by an unusually high bioburden in our source raw material, which is colostrum, as we rapidly contracted with more source farms for more cows to meet anticipated demand. We believe that this front end problem has now been largely fixed, while it will require ongoing monitoring going forward. We also believe that some of the contamination was caused by equipment and processes that were not adequately optimized to run at the higher level of production output. The remediation of the contamination events required several adjustments all within our USDA approved outline of production. We disclosed the cost of scrap inventory in detail in our 10 Q filing, but it's not just the scrap that reduced our gross margin, it is also the lower sales in the prior periods when we slow production to remediate the contaminations.

Speaker 2

This missed sales data is also disclosed in our 10 Q filing and is the key reason we have not yet cleared the backlog of orders, which was set at $7,900,000 as of August 6. New remediation steps implemented during April of 2024 in response to the most recent contamination events appear to be very successful so far because we have run without contamination since then and to the present. For clarity, I'd like to confirm that throughout these contamination events, all product that was sold to market had passed final USDA release testing requirements. Like most other companies in this economy, we are facing challenging inflationary pressures on the cost of labor and components. This impacts just about everything we buy.

Speaker 2

In addition, the other cause of the gross margin deterioration is the production yield losses that we have incurred during this period. We have disclosed some specific targets that we are working on to improve process yield in the coming quarters. When I look back, I see this I see something that is now very understandable. After successfully running the same process for over 30 years, sudden growth is hard. We work with a high bio burden source material that being farm milk.

Speaker 2

We needed to better control quality at the source of this growth. We have done that now. Similar challenges were incurred in our processing as we pushed our well established process and equipment harder. A natural reaction to contamination is to introduce more heat to reduce bioburden, but this heat also kills antibodies. We are optimizing that mix to maintain acceptable bioburden levels while also maximizing yield.

Speaker 2

We believe that the operational improvements implemented are allowing us to run more effectively at the higher output level going forward. To be successful, we must avoid future significant contamination events and equipment breakdowns and operate with good production yields. With those strong sales, we were able to improve earnings before interest, taxes, depreciation and amortization or EBITDA from negative $2,200,000 during the 6 month period ended June 30, 2023 to negative EBITDA of $340,000 during the 6 month period ended June 30, 2024. No doubt cash is tight. In response, we continue to be prudent with our expense controls where possible and we have frozen non essential capital expenditure investments for the time being.

Speaker 2

But we have no draw outstanding on our $1,000,000 line of credit that is available to us until September of 2025. So that's the big picture. With regards to the other financial results, the press release provides the unaudited P and L results and some audited summary balance sheet data. Further, our Form 10 Q provides all the unaudited financial details and management's discussion and analysis. As I mentioned, I'll now take your time on this call to review all that in detail.

Speaker 2

We will remain focused on the commercial opportunity we have with First Defense as we work through what we see as the final steps of the regulatory process and our efforts to bring RETAIN to market. In May, the FDA issued a CMC technical section incomplete letter in response to our 3rd submission of the CMC technical section for retain. Pursuant to the incomplete letter, the FDA has provided some minor questions about our submission requiring a 4th submission, which is typically subject to a 6 month review. However, the FDA has indicated that this resubmission potentially could be handled through a shortened review period because the open items 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 inspectional observations at the facilities of our drug product contract manufacturer are resolved.

Speaker 2

Our contract manufacturer submitted its responses to the inspectional observations in early July. 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 an FDA required milk discard or meat withhold label restrictions. Lastly, I encourage you to review our corporate presentation slide deck.

Speaker 2

I believe it provides a very good summary of our business strategy and objectives as well as our current financial results. An August 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, I will be happy to take your questions. Let's have the operator open up the lines.

Operator

We will now begin the question and answer session. Our first question will come from Tom Fox, a Private Investor. You may now go

Speaker 3

ahead. Good morning. Thank you for taking my question. I actually have a couple of questions. My first one is is on first offense.

Speaker 3

As I understand it, you guys get your main ingredient for the drug from the mother cow's milk after she gives birth, because the milk that she spits out after giving birth. What I'm wondering is if there's a potential bottleneck here because you're getting it from an animal, not a machine and you're getting it at a certain point in their life. On top of that, I mean, what is your relationship with these farms? Do you think that you'll be able to contract out more farms if First Defense keeps growing? Thank you.

Speaker 3

If you could just talk on all that.

Speaker 2

Yes. Tom, sure. Thanks. It's a good question. So yes, you've got it right.

Speaker 2

That's the early milk right after she freshens, it's called colostrum, it's really rich with antibodies. We hyper immunize those donor cows so that it's very specific antibodies to our target being E. Coli, corona, rotavirus. But we've been very successful at growing the quantity of milk we bring in. There's actually a disclosure.

Speaker 2

If you don't find it, sidebar with me on the page number with me right at the moment. But I did detail a little bit about the growth of that work in process inventory. So we are in really good shape on the quantity of the raw material, the colostrum, the milk that we buy. And I did discuss the challenges in growing those farms and those cows and those contracts. We did run through this contamination problem we needed to sort of assimilate our growth and training, quality standards, all that.

Speaker 2

I think we're in a much better position now on the quality and so good shape on the quantity and improved shape on the quality. So I don't see that as a limit to our production growth.

Speaker 3

Okay. That answers my question. Do have another question, just kind of a quick one.

Operator

Sure.

Speaker 3

I understand that your Chief Scientist retired recently. Do you guys have any plans to replace him?

Speaker 2

Yes. You're referring to Doctor. Joe Crabbe. I'm very pleased to maintain an open consulting relationship with him, but true, he did retire from full time work. He's the developer of First Defense going back to the early days of the first USDA approval.

Speaker 2

He is the initial developer of retain. He did pass both of those projects on. First Defense is into a production team now and the retain is being run by Betsy Williams. She's our VP of Manufacturing Operations. So there is good transitions there and we really do not have a large active new program.

Speaker 2

So our investment in product development outside of retrain is very limited and is managed by Doctor. John Zinkraff. He is our Director of Product Development. So no, not to replace at the VP level or at the full time level, But that team, that production team, Betsy's work and John Zinkra's work really cover the science for us quite well.

Operator

Our next question will come from George Melas with MKH Management.

Speaker 4

Good morning. Just trying to drill down a little bit more on the gross margin. And thank you for the some of the clarity that you provide in the Qs. It's interesting to read. Just trying to understand, it seems like the Q1 was really impacted by some of the previous contamination event of 2023.

Speaker 4

The Q2 was less affected by contamination and maybe more by yield issues. In a nutshell. Is that right or is that just too simplifying?

Speaker 2

Yes. That's a good not too simple. That's generally true. I mean, we did that I really think it is the harder the smaller the period, the harder the analysis. So I do prefer 6 over 3, but we do report quarterly and we do I want to you're reading those numbers right.

Speaker 2

There was a bigger hit in 2Q than 1Q. Yes, so I mean, a kind of a combination of both. I don't know exactly how to separate contamination impact from yield impact, but I know for sure contamination has got to go down and yields got to go up and that's what we were trying to speak to as far as progress and detail on status on both sides. Is that fair?

Speaker 4

Okay. There is I don't know what page it is, but you talk about in the Q, you talk about some yield improvements that you have already sort of achieved. One of them is by sort of reducing heat and the other one was introducing some new filter equipment with sort of improvement of 17% and 5% respectively. Is that 17 points of margin or is that 17% over what you have achieved previously?

Speaker 2

Yes. No, more of the latter. So you are in the Page 35 area. I don't know if Tom is still with us, but the work in process question he asked is right above that where we're talking about the inventory. And then yes, what's interesting about the 17%, I mean, what's important about the 17% is, we can identify, we know what that target is, but that's one that we have not had the technical fix to yet.

Speaker 2

But it is something that would give us that much more at that filtration step of each week, plus or minus an estimation range that filtration step can be improved. And then that product still needs to be finished all the way through the rest of the it's sort of the early cheesing, post cheesing filtration. That product still needs to be finished through the production cycle, formulated and filled. So it's not I wasn't trying to suggest dropping 17 points to the bottom line, but 17% improvement on that liquid process step.

Speaker 4

So it means that if right now you have sort of an output there of 100, that output would move to 117, is that what you

Speaker 2

Yes. And then go incur the additional costs, labor and materials to finish it. But yes, then each week we'd be in that ballpark of like basically doing the same work and getting those extra 17 doses.

Speaker 4

Okay. And then maybe looking at very hard to look at the crystal ball and it's probably a little opaque and murky, but you still have a goal of 40% gross margin including depreciation. And do you feel like you have the tool, the steps, the knowledge, the processes to get there because you still have that goal? I mean, is there sort of a plan to get there that you can understand?

Speaker 2

I called out those 2 specific yield items because we do understand them well. 1, I feel like we just now we have implemented the 5 percenter we've implemented and just need to see it be achieved and repeated. The 17 is still in the development stage with the manufacturer to find that solution. But I mean, these people sell equipment that's supposed to work well. We need to adapt it to our process and make it work 17% better.

Speaker 2

So that one, I need to hedge a little bit on because it hasn't happened yet. But I think both I pick those 2. I mean, there's a laundry list, George. There's a lot of little things, but I picked those 2 because they're significant and because they're identifiable. And yes, I think we can achieve both of those.

Operator

It appears there are no further questions. There appears to be no further questions. This concludes our question and answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks.

Speaker 1

Thank you, Anthony, and thanks all of you for participating in today's call. We look forward to talking with you again to review the results of the Q3, which will end on September 30, 2024 and we'll do that during the week of November 11, 2024. Have a great day. Thanks again.

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ImmuCell Q2 2024
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