ImmuCell Corporation (ICCC) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the ImmuCell Corporation Reports First Quarter Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead.

Thank you, Brandon. Good morning and welcome to all of you. My name is Joe Diaz. As the operator indicated, I’m with Lytham Partners. We are the Investor Relations consultant firm for ImmuCell. Again I thank all of you for joining us today to discuss the unaudited financial results for the first quarter which ended March 31, 2020. I'd 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 or in other words, the safe harbor statements in the company's press release and Form 10-Q which was issued last night and can be obtained from the SEC or by visiting the Investor Section of the company's website at immucell.com. With that said, let me turn the call over to Michael Brigham, President and Chief Executive Officer of ImmuCell Corporation, after which we will open the call for your questions. Michael?

Okay, great. Thank you all for taking the time to join today's call, I do appreciate that. Just last night, we filed our Form 10-Q for the three-months period ended March 31, 2020 and issued a press release summarizing, some of the key results. So I'm not going to rehash a lot of the detail that you can pick up from the Q and the press release but I would like to highlight a few of what I see is a more important disclosures. So first, with regards to the press release I would say about three things. Product sales top line 11% growth, a good quarter for us, ending the quarter with an additional $1.4 million with the demand on backlog. And that that brought us to about $14.2 million annual revenue trailing 12 months $14.2 million. The other number two on the press release, you will see a link in there, we talk a little bit about the leasehold improvements the project to expand First Defense production capacity, so that project is going well. If you have a chance to click on those pictures or you can pick them up through our website, you can see we're at the late stage of that project basically turning a warehouse into assembly space really, really going well on budget, on time. I'll call out basically sort of Phase I and we’re approaching the certificate of occupancy, we see that coming here pretty quick. The move in and we get up and running with assembly in that building. Phase II is going to Iyo, the freeze dryer, the third freeze dryer up and running in the space here at 56 Evergreen, so that starts next, we need to move equipment out of 56 Evergreen in order to make room for that freeze dryer and then we'll move on to the expansion of our liquid processing. So third and final, just press release is a good place for me to talk about some non-GAAP measures. If you look at Page 4 there, we talk a little bit about what we call income before income taxes and certain non-cash expenses generating about $600,000 in the first quarter, it's a slightly different number than EBITDA, we reconcile it back to EBITDA, EBITDA was $770,000 first quarter 2020 versus $836,000 first quarter 2019. And then if I may turning over to the Q with a few highlights there, I think, I'd start with the subsequent event, it’s footnote number 20 is pointing out the PPP, the Paycheck Protection Program money we did receive $938,000 in funds under that federal program and we have noted that we expect all but around $100,000 of that to be forgiven. But it is subject to certification by our bank under federal guidelines and we've all seen a little bit of talk lately about public company should not be taking this money or receiving this money and obviously we're making the argument that we're not a big public company and we're a small public company and we do want it. There is some ruling that came out yesterday that suggested, I believe it was yesterday very recently suggested PPP loans under $2 million would not be subject to deep scrutiny or certainly under $2 million, and we're going to have to just work out this process to make sure there's not a public company arbitrary, one size fits all rule. So that's a little uncertain right now, but I think we should prevail and we certainly make that, that argument to give us a little bit of that $800,000 of financial flexibility going into later this year and potential pandemic related economic related challenges, so probably too much said on that one. But moving on, if I go into the MD&A Item 2 MD&A of the Q, I do want to highlight the bank refi is a really good deal with Gorham Savings Bank. We're able to lower our interest rates, we're able to take out our variable interest rates to a fixed rate of 3.5 and avoid some balloon payments coming our way and just a better cash flow for us on principal repayments. So a lot of detail on product sales follows that I highlighted, the top line in the press release and see, I wanted to highlight just sort of update on retain and the FDA process. So we're moving straight ahead with that COVID or no COVID, the FDA is open, they are responsive, Norbrook is open. They’re responsive. So we see our submission the next critical submission at the manufacturing technical section going in fourth quarter that will be subject to a six-month review. It's a standard statutory review, so we get it in fourth quarter 2020, six months later, we get a response obviously, we're hoping that will be a complete. We think we reduced a lot of risk in order to get that first time complete to the two ways we reduced risk is one, we have already submitted the drug substance section of this technical section. In other words the making the active, so this is really adding drug product to complete the submission that being the drug substance we make here in Portland, having it aseptically filled into a syringe by Norbrook. So it's that final submission there and we're working with Norbrook who is a world-class aseptic filling expert reduces some risk as well, but we'll see we just want to know and so if it's complete six months after submission, there is about 60 day admin review and we would expect approval, if it's incomplete we'd have to answer their questions and resubmit for another six months. My last couple of points, COVID is with us all in every way, in many ways, we've put a couple of new risk factors in around Page 37. First talking about the economic downturn and I'd like to just read one on that note, so milk is being dumped on farms, largely because of the loss of demand for dairy products from closed restaurants and school lunch programs and other negative impacts of the COVID-19 pandemic, there is also economic uncertainty for beef producers as the supply chain is interrupted due to closures of processing plants and reduced throughput caused by the COVID-19 pandemic. This is very unusual situation for farmers, they've worked so hard to improve production, quality and efficiency in order to feed a growing population. So there are other disclosures in here about milk price and it's -- just as recent in January and February, we were projecting basically a banner year on milk price and it's now back down to low levels. So we've got some -- our customers have got some challenges. Our job is to maintain First Defense a superior technology position in its market. So if the total market does shrink a little bit, we’re able to maintain or grow because we take more of that market share competitively. And then the second risk factor, I was going to highlight was the next one around Page 37 just talking specifically about COVID. It's what you all might expect, our exposure to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on manufacturers and a lot of these affected countries and the ongoing cross training of our employees, the implementation of remote work practices for us wherever feasible and early compliance with recommended hygiene and social distancing practices. But we're going to just continue to live through this unprecedented period of economic and market risk, so far so good. I'm really proud of the team and the way we've been able to keep supply and keep producing and to me it's day-by-day and week by week as we go forward here into the second, third and fourth quarter and manage this pandemic risk. So that's a bit informal not really scripted as you may have noticed, but did spend a lot of time writing the Q and writing the press release, so I'll just refer to those sources and picked out what I saw was important. I also want to highlight one more thing. So lastly we did just issue a press release this morning regarding the 2020 annual meeting of stockholders and given all the safety precautions we have implemented around our facilities during the COVID-19 pandemic, we have decided it is best not to open our doors for an in-person visit at this time for the safety of our employees and for your safety as well. So today's press release provides instructions on how you can access our virtual meeting on Wednesday June 10 at 3 PM. Please review those details and let us know if you have any questions. So in conclusion, I again encourage you to review the Q the Form 10-Q and the press release that we filed last night also please take a look at our updated corporate presentation slide deck, our May update 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. If you would see the Investors section of our website and click on corporate presentation. So with that said, let's have the operator open up the lines for your questions, I will be happy to take your questions.

[Operator Instructions] Our first question comes from Sam Rebotsky with SCR Asset Management. Please go ahead.

Hope everybody is staying safe and well and we'll sort of get through all this. My first question relates to the $1.4 million backlog, relative to the First Defense, we couldn't produce this, what is the rationale for the backlog and how do we need the new facility to be up and running to sort of reduce the backlog or give me some color on that?

Yes, I mean one answer is great work by the sales team. I mean the first quarter was largely in front of the impacts of the COVID pandemic, sales team was fully charged in the field and the market was strong and looking as I said, looking to be strong for the rest of the year. So great demand, great work with our sales team. And then, but to production yes, we need this expansion, we're pushing every button in this building as we can, that first quarter was $4.9 million. If you annualize that out, we're getting close to $20 million worth of production of course, I'm not suggesting we would be there, first quarter is our high season. I'm just saying that's a lot of product to push out the door and it wasn't enough. So we’ve come to find our capacity is around $18 million and needing this expansion to get up to $27 million. So we’re going to just keep going and - fill that backlog, but it will ultimately take the expansion to get us to the point where that backlog goes away and stays away.

Did we eliminate the backlog as of now or when do we expect to eliminate the backlog?

As soon as possible, but not yet so it's a moving target, because we got new orders coming in just as soon as we're filling old orders at the same time. But yes, we're working through that in the second quarter, but I don't know if it will be a 100% clear on June 30, but we're making progress.

Well that's wonderful. Now as far as the submission to the FDA, we expect by 2021 and the response in six months. If we get a complete, do we have to do something else or what do we have to do as far as the Re-Tain and the Mast Out?

Right yes I mean, so I think really, the answer is no, nothing else. I mentioned a 60 day administrative review so we don't just go right to market, but there is one more step in the process but basically five technical sections, four complete we need this fifth one complete. The manufacturing one, plus the 60-day admin review and go-to-market we’ll prefer market sales.

So, and the submission is basically that the plant is functioning properly and you're producing the quantity that you’re going to sell in the plant. That's what the submission is?

It's a little different than that Sam. So the first phase submission was strictly more what you described drug substance with Nisin, the active ingredient we make in Caddie - at the Caddie Lane facility. So we're responding to the questions that they raised when they issued incomplete on that and it was - they didn’t complete because we had questions and it was incomplete because we hadn't submitted drug product. So the real new focus of the pending submission is to answer those questions and then submit all the drug product that being the drug substance aseptic, we filled in the syringe. So that is a new material that they have not seen yet and that's where we partner with Norbrook to hopefully get them something that they are - is acceptable.

Okay. Now and as far as treatment of Coronavirus in cows have we had any further discussions or results whether this is utilizable - both for any other animals or anything else?

Yes, it's a very fair question, Sam. I didn't highlight it on my talking points there. But on Page 26 we did put a pretty definitive answer, and it's no and it is what we expected. The human Coronavirus is different than the animal Coronavirus. We've had a test in a lab and those results were confirmed. It's just its not the cross-protection is not there. So we're not going to be able to provide a viable solution to this pandemic, but yes, that's a new disclosure.

Okay. And one final do we need to raise any more funds are we suitable through the end of the year, the way we are?

Yes, suitable I guess yes sure. As I do want to make sure we achieve forgiveness on that PPP loan that's critical to our financing going forward. But yes, no plans are go to market this year. I mean I just don't know how deep the crater is going to be how deep the economic collapse is going to be. So it's hard to say definitively, but I don't see that we have stress tested it, we can handle a drop in sales with the PPP covering us. So, yes no, my expectation is not to raise money.

Okay. I want to congratulate you and ImmuCell on the performance on the sales and on the growth of new products. Keep up the good work, Michael. Thank you.

[Operator Instructions] Our next question comes from Paul Nouri with Noble Equity. Please go ahead.

It looks like the gross margin was around 45% or so this quarter given your product makeup now is this what we should think about as normal gross margin for you guys or once you get the expansion complete, should we expect a higher gross margin?

Yes, that was a little surprising to me, it's definitely the 46 is lower than we want, our goal is 50. I don't worry about the depreciation component, which is in there, at least our cash margins obviously a little bit better than 46. But this, our growth is being fueled by the Tri-Shield business, the gel tube business and the gel tube product and process is more expensive. So we have got - a real repeatable and solid 50% plus margin on the capsule. But that business was maturing and didn't have a growth the explosive growth we're seeing out is Tri-Shield. So we may suffer a little bit on the percentage, but we feel it’s worth because we're going to grow on the total dollar received the total dollar gross margin. And yes, we just think that's going to get better over time. We're going to get better yield out of our cows. We're going to get better throughput out of the expanded capacity more throughput over fixed costs. So I don't think we're going to go back to the old bolus days of well over 50%, but I think we can get back to that 50% and those were the drivers yields out of our cows are expanding herd of source cows and more throughput over fixed costs.

Okay. And I guess that given that you're still working through your backlog. I guess the virus has not negatively affected demand for the product here?

Not extremely negative. So we're seeing the signs and we're seeing the stress that our customers under so that's definitely not positive growth. We’re offsetting it with the value proposition and this market is resilient we are selling a product that helps them save money and we've had comments like a one interested comment I need to get that Tri-Shield I don't have labor to treat the cows. So there is opportunity for us like that even in this low milk price environment. But also - in the second and third quarter results I answer to that question, which is we going to play it out.

And on the last call, I think you brought up casually that you had sent in your animal Coronavirus vaccine or product to the health authorities. Just to see if there is anything they could they do with it? Are there any developments with that or no?

Yes, that was on, I think that was Sam's question I was referring to a short paragraph on Page 26 just above the gross margin analysis where we did work hard to get that our antibodies tested. It took a little longer than we would have liked, but we did ultimately get them tested and the answer was what we expected. No, there is not that cross protective opportunity for our antibodies the data was not there. So kind of confirm but we did believe that this animal bovine Coronavirus is different than the COVID-19 human virus and there is not cross-protection.

Okay. And then last question, the sales, marketing and admin expenses as well as the product development expenses should we expect any significant increase in these lines in the next few quarters or should they remain about where they are now?

Yes no, I think in this environment, but honestly even without the pandemic those figures we're not looking - we're controlling those expenses. If we can reduce then we will right now we're not making drastic cutbacks real - harsh and extreme cutback. So, but at the same time no increase plans just we’re kind of can go level through this next two, three quarters.

[Operator Instructions] Our next question comes from Brad McCurtain with Maine Securities. Please go ahead.

Great to see sales moving ahead here in this environment through the end of the quarter. Anyway, can you give us a little color on how they have look here for April and so far into May?

No I mean, I just don't do that. I mean that would be I’ll be violation of Reg FD. We're going to announce these results as soon as we have them. And we just have not been in the projection business. I don't have an analyst that works on that with me, and we just don't do monthly sales reporting. So that's my short answer is no. I think that probably doesn't surprise you, but in general, we're going full steam ahead. Whether we - the first level of business is to fill the orders we already have and orders have not dropped to zero. So we're bringing in new orders as we go, but how the second quarter plays out here on May 14 halfway through the quarter. Yes, I don't want to make, I don't have a good way to make that projection.

Sorry Michael, I didn't mean for the quarter, just how things are looking so far here in April, a lot of businesses has seen your business fall off quite a bit here and we read a lot about what's going on in the dairy industry. So I was just trying to see if things are essentially consistent with what they've been here in the past or if you're really seeing something a little bit different from what a lot of companies are seeing?

Right, yes you're asking that was speaking to really not making monthly public sales disclosures. But yes we make quarterly so it's something I want to see how it not just the first half of the quarter - put the whole three months together and put out there, but the point I was trying to make as customers resilient. Our product I think has a place to play, even in a down market and the sales team is aggressive and creative I'm trying to make that happen. But it's too early too early to know what ultimately is going to happen here.

Sure. Just kind of moving from there, a little bit over to the paycheck protection program loan, cash at the end of the first quarter, net working capital in the first quarter looked pretty similar to what it was at the end of the year and was there really a need for this. I mean we do have access to capital you've obviously sold a lot of stock over the past few years? You just refinanced with the bank was there need for this or did you take it because it was out there?

All right, I think when you do contingency planning for pandemic of this size and the economic potential harm that's your way you look for every opportunity you have to mitigate downside. And that's what this - program was designed for and we kept our - we met the primary objective of the program, which is the keep people employed cover payroll. That was based on a run rate of payroll in 2019. The actual - we adjusted to - we're about halfway through this 8-week measuring period and it's allowed us to not miss a payroll dollars to keep this business going and it's a security for what may happen here going forward. But I think that was the purpose of the plan is that get payroll dollars out into the market, keep businesses moving forward and - we fit that description quite well. We've done the best we can to do that and I’m happy to be - a relatively small participant in this mega dollar program.

Right, well - I think the plan was for businesses that we're planning on laying-off their employees to be able to keep them on it. But I won't debate, but if - you feel you met the obligation, it just as there is a lot of backlash against public companies as you know. And you may be smaller, but it just strikes me that the working capital, the cash level here the sales up in the first quarter it seems like a stretch to make the case there. But other question I had for you syringes, there seems to be a lot of talk right now if we're able to find some sort of vaccine that one of the issues is finding in a syringes for the vaccine for the pandemic. Do you see that obviously there was nothing in the Q speaking to that, but do you see that as a potential issue or are you pretty firm with the supplier?

Yes I have seen no issue with the supplier. This is a huge company Hubert De Backer, providing these sort of different syringes. They're not human injectables they are intramammary infusion pieces of plastic. No indication that there's any problem there. In fact just to make this submission, later this year we've needing to access syringes for the studies. So we've been successful and yes I don't see any indication of a problem with Hubert De Backer.

Okay, excellent. And then just a final is just a question, would you consider moving these to WebEx presentations going forward? And I have not seen the presentation that you put out there. But I'd like to but it would be great if you could walk us through during these meetings the presentation that you put out. So I'm guessing the Annual Meeting will be a WebEx or equivalent, correct?

Yes, it's an either or option or both. For the Annual Meeting and you'll see that in this morning's press release, but yes it's going to be that. The WebEx but as I speak live here actually, the way this WebEx I believe is going to be set up is just another access to come in. So we're leaning on the website for the slide deck. And the slide deck that we put up last night is the same slide deck we’re going to use on June 10. So people may have a chance to look at it in advance, but I definitely want to walk through it. Some of these services that you see from bigger companies are - up to $10,000 and I just couldn't see spending that kind of money. So we have got a much more cost effective approach will be the audio connection and the slides on the website. Again, they are now and we'll talk through them but yes, which I’m learning everyone's learning - in the new virtual world. So this will be a first for us on the Annual Meeting. Brad, back to the small company and the PPP it does support payroll. I don't - I’m not aware of rehiring criteria, I think its supporting payroll. So the fact that we had the money and then didn't need to furlough or layoff I think is relevant and is meeting our criteria and that's ultimately going to be the calculation 75% of our forgivable piece will be payroll. And then the argument I'm going to be making is to the small size you pointed out that we did raise money, and that's really part of my argument. We scratched and we worked hard with Craig-Hallum to raise the money we did raise to fund the two programs that we are funding and the ability to go back to market right now for stock like ours, of finding serve stock or the market cap where ours. I don't think it’s there. I think that the public company outcry is towards the big guys that have ready access to raising money and we're a little different than that broad categorization of all public companies anyway. We'll play that one out and we’ll see how we prevail.

[Operator Instructions] Our next question comes from [Frank Castle with Andover]. Please go ahead.

Thank you very much. Good morning. Would you just describe the plant and where you are - I was on the website. I saw the pictures et cetera this morning. I took a tour of the plant quite - when it opened I guess. And I'm wondering what the goal is and are you meeting your goal and is everything going well here is it, are those picture really relevant or are they pretty historical? Thanks very much.

Well yes good Frank, I think we're confusing two different plants so let me describe.

Okay.

The headquarters is 56 Evergreen, that's where we make First Defense today all USD operations. I think the facility you toured because we really haven't had tours over at the First Defense facility. I think the facility you remembered touring was the Re-Tain facility at 33 Caddie Lane.

You bet.

Yes okay, that's the $21 million investment that's complete, that's where we're running and producing drugs cuts since to complete that FDA application. So no new construction over there that's complete that's been complete. What you're seeing as construction photos that are relevant is what I've been trying to show is the third facility, is 175 Industrial. So Caddie is out of our back door. Industrial is out of our front door. Industrial was lease property, we essentially leased to 14,300 square foot warehouse and built in these assembly rooms where we're going to finish the product. So that's the $3.5 million investment, that's the certificate of occupancy I'm looking for in the next weeks. That's the move in the next stage there to get all of the assembly of First Defense out of 56 into 175. So that we can move the new freeze dryer into the vacated space at 56. So 56 becomes liquid processing plant and 175 becomes final assembly and fill.

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

Thank you, Brandon. Again we appreciate all of you being on today's call and we will look forward to talking with you again at the conclusion of the current quarter sometime in early to mid-August. Please stay safe and we'll look forward to talking with you again soon. Have a great day.

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