ImmuCell Corporation (NASDAQ:ICCC) Q2 2022 Earnings Conference Call August 12, 2022 9:00 AM ET
Company Participants
Joe Diaz – Investor Relations
Michael Brigham – President and Chief Executive Officer
Conference Call Participants
George Melas – MKH Management
Operator
Good morning. This is Anthony from Chorus Call and I will be assisting with our conference call this morning. To get things started, let me ask Joe Diaz to open up the call.
Joe Diaz
Good morning and welcome to all. As the operator indicated, this is Joe Diaz. I am 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 second quarter ended June 30, 2022.
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 better known as the Safe Harbor statement provided with last night’s press release and with our quarterly report on Form 10-Q for the 3-month period ended June 30, 2022, along with the company’s other periodic filings with the SEC.
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
Thanks, Joe and good morning everyone. You do have a summary of the second quarter and year-to-date financial results from last night’s press release and the details from the Form 10-Q we also filed last night. Since that information is available to you, I will not take your time here to review all the line item detail, but I would like to touch on some of the highlights.
As you may know, on July 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 product sales, which I believe is the most critical measure of our operations and financial performance early in the reporting period. I have no changes to that previous disclosure. It is going to be a bit of a bumpy road as we exit from a long period of short supply to our emerging new state with expanded and still expanding production capacity. This transition was complicated further during the second quarter by a material disruption in the supply of needed plastic syringes used in our gel product formats. If not for this disruption, quarterly product sales would have been about flat in comparison to the second quarter of 2021.
Despite the supply disruption, sales were up 14% and 27% during the 6 and 12-month periods ended June 30 respectively compared to the same periods during the prior year. EBITDA, which is an important non-GAAP financial measurement for us given the high level of non-cash depreciation expense that we carry, increased to $1.5 million during the 6-month period ended June 30, 2022 from $1.1 million during the 6-month period ended June 30, 2021. This non-GAAP financial measure should be considered in context with our statement of cash flows that is presented in accordance with GAAP.
Our balance sheet is looking pretty solid in my opinion. Cash increased to $11 million at June 30, 2022 from $10.2 million at December 31, 2021. Net working capital increased to $14.8 million at June 30, 2022 from $13.7 million at December 31, 2021. Stockholders’ equity increased to $32.8 million at June 30, 2022 from $32.6 million at December 31, 2021. Here is a fun fact. Our current market cap is equal to a little more than twice our stockholders’ equity as of June 30.
Next, I would like to talk about our very important capital expenditure projects that are more specifically detailed under the Liquidity and Capital Resources section of Item 2, Management’s Discussion and Analysis in the Form 10-Q that we filed last night. We raised $27 million in common equity from 2016 to 2021. After several bank debt financing, we had $9.8 million in outstanding bank debt as of June 30 that bears interest at the blended fixed rate of 3.52%. We are using those funds together with the gross margin from product sales to transform this company.
Prior to our introduction of the newest extension of the First Defense product line in late 2017 namely Tri-Shield First Defense, annual production capacity of about $16.5 million was adequate to cover sales promptly without an order backlog. However, our world teams with the introduction of Tri-Shield we have been investing millions of dollars in capital expenditures to increase our production capacity. This kind of significant investment in real estate, manpower and equipment does take time despite all the urgency and energy our team puts into it, particularly in this current environment featuring supply chain difficulties and increasing costs.
In my next few comments, I am going to refer to our capital expenditure projects by the letters are signed in our Form 10-Q. Much more specific detail and description about these investments is available to you in the 10-Q. The objective of Project C, which was initiated during 2019, was to increase our production capacity from $16.5 million to $23 million at a cost of about $3.7 million. We have achieved that goal. Project E and F which were initiated during 2021 are nearing completion for a combined cost of about $1.7 million, increasing our annual production capacity to about $30 million. We are working to complete Project G, which was also initiated during 2021 by year end to further increase our annual production capacity to about $35 million. That work continues as planned.
Looking forward, I am really very excited about the value of our newest investment in what we call Project H to increase our annual production capacity above $40 million and provide optionality for further investment north of that. The capacity estimates I have just mentioned vary based on biological and process yields, product format mix, selling price and other factors. It’s been very difficult and stressful for our manufacturing and sales teams to work through this period of short supply. And we sincerely regret the difficulty in frustration this situation has caused for our distributors and end user customers.
We are now exiting from a period when sales demand well exceeded production supply and entering more of a just-in-time supply environment as we transition to where we want and need to be, that is having supply that exceeds demand. This makes me very optimistic about the end of 2022 and about 2023 and thereafter. None of this expansion happened soon enough for anyone. The thing I like most about Project H is that we are making – now making investments in further production capacity expansion before that output is needed by the market. This is a more comfortable way to plan, invest and grow. All this is been ongoing while we look – while we continue to work on and fund the development of retain.
So let’s talk about that project now. In addition to increasing first events production capacity, our other company changing goal is to achieve FDA approval of Re-Tain. Our product development objective is to demonstrate that our polypeptide antimicrobial, Nisin A, can play a productive role in the treatment of subclinical mastitis in today’s dairy industry, offering an effective alternative to traditional antibiotics.
Based on – excuse me, because label requirements of all intramammary mastitis drugs on the market today require that milk be discarded and the meat be withhold during treatment and for a period of time thereafter, it is common practice to not treat sick cows that are still producing saleable milk. Re-Tain provides an animal welfare benefit by removing this economic disincentive to treating subclinical mastitis and allowing sick cows to be treated without the milk discard and meat withhold penalties. In addition to improved animal welfare, Re-Tain enhances food safety and sustainability by utilizing Nisin, which is not used in human medicine. This is important because the overuse of traditional antibiotics, including in food production animals, is believed to create antibiotic resistance, which is an ongoing public health concern.
You may have seen our July 27 press release, we recently received a technical section in complete letter from the FDA with regards to our second full submission of the last significant technical sections pertaining to Re-Tain, specifically the chemistry, manufacturing and controls, or CMC, technical section, which is required to complete our new animal drug application.
Principal issue remaining as a successful preapproval reinspection of our manufacturing facility. We are completing preparations for this reinspection and tend notify the FDA of our readiness for the pre-approval reinspection during the third quarter. Our continued focus on these preparations is critical to a successful outcome. We do not see any substantive issues raised by the FDA and their other six comments, which are not related to the safety or efficacy of the product.
The comments principally relate to drug product, not drug substance. These comments require that we provide additional information about raw material specifications, drug substance labeling and stability testing. This clarifies the required remaining path to product approval. We are working to make our third submission of the CMC technical section during the third quarter, which would be subject to a 6-month review period by the FDA. We believe we can successfully complete the pre-approval reinspection inside of this time frame. We remain poised and excited to revolutionize the way that subclinical mastitis is treated.
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 August 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. You’ll see the Investors section of our website and click on Corporate Presentation.
With that said, I’ll be happy to take your questions. Let’s have the operator open up the lines. Anthony?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from George Melas with MKH Management. You may now go ahead.
George Melas
Good morning, Michael.
Michael Brigham
Good morning, George. Hi there.
George Melas
Hi. About the material disruptions in the quarter, was it just plastic syringes or were there some other factors that also disrupted production and sales?
Michael Brigham
No. Really, George, just that we need these tubes and we’re having some progress with that fix, and I think we’re going to continue to have progress. That’s why I mentioned I think we’ve got – we’re working on this in the third quarter. So we just need a lot of tubes. Our business is really shifting from the bolus to the tube, and we had a failure in contractor supply that we’re going to fix, but did hit the second quarter.
George Melas
Okay. And how may – may I ask how many supplies you have of the syringe tubes?
Michael Brigham
Yes. It’s more than one, but it’s one primary. And obviously, we need to shift the weight.
George Melas
Okay. And is that supply your domestic, or are they European or international?
Michael Brigham
Yes. We have got to access some mix. So, just I think what we are seeing is the domestic supplies is just – has not been reliable for some time now, and it finally it crashed and peaked here in the second quarter.
George Melas
Okay. Was it a failure of the product, or was it that you just could not get enough of it?
Michael Brigham
Yes. Strictly supply. The product we receive is usable. We are just not getting enough of it. It’s a factor of getting less and also needing more.
George Melas
Okay. And how do you expect to solve this problem?
Michael Brigham
Just buy more from more people.
George Melas
Okay.
Michael Brigham
Yes. It’s just not complicated, it’s just – it’s the same tube, no changes. We just need more of them, and we need…
George Melas
And you don’t require any kind of FDA clearance to do that?
Michael Brigham
This would be USDA, and it is a regulated product, but we can manage that. The USDA understands multiple vendors.
George Melas
Okay. And so how do your customers – how do the farmers sort of deal with the disruption like this? Do they stop using your product? And do they shift to a competing product for a period of time, or do they not use it at all and hope for the best? What’s the alternative from a user perspective?
Michael Brigham
Alright. Well, it puts a lot of burden on our sales team. They manage this very closely. And there is product available in distribution, and some of that product can buffer these shortages out of our plant. But it’s a problem of all levels. So, it’s all of the above, George. Some customers will get frustrated and leave, and we need to go get them back. Others will be able to find products through distribution. And we are just trying to get the rest out as soon as possible, produce it, ship it and get it to the farm. So, it’s really a huge stressor on manufacturing to push it through and sales do the best they can to allocate and prioritize and keep it moving.
George Melas
Okay. And I was just trying to understand the inventory information you provided in the Q because inventory has increased, and finished goods inventory increased at the end of the quarter. And I mean it’s not a big number, right? But it’s almost $0.5 million in sales, so it’s meaningful. But what does that mean that finished goods inventory increase?
Michael Brigham
Well, largely, the timing difference. We only ship – the gel product is refrigerated, and we don’t want it in a hot warehouse, hot truck over a weekend. So, we only ship Mondays and Tuesdays. So, there is always going to be a bit of product that is called a backlog, but because it didn’t go out, but it is on our books because it’s available and then we will ship the next Monday, so mostly timing difference. So, that’s why we have just got to keep getting ahead, so we are not counting released to shipping within a week.
George Melas
Okay. But does that number suggest that you are actually sort of making progress to solve the issue because there seem to be a fair amount of finished goods inventory that you can ship – that you were able to ship the first week of July?
Michael Brigham
Yes. No, we are definitely making progress. It just isn’t – the project is not going to be complete until we are further ahead and more in finished goods. It’s just – we are too close, I referred to sort of a breakeven or just in time kind of where we are right now is we are watching each release almost by the hour, but certainly by the day. And we just – we need to build up our inventory and then build out distributors’ inventory and just have a more logical flow. So, it’s this transition. I said bumpy road. It’s a little bumpy road transition from short supply to sufficient supply through our shelves, through our cooler right through distribution, right throughout to the firm.
George Melas
Okay. Great. Alright. Good luck.
Michael Brigham
Thanks.
Operator
[Operator Instructions] It appears there are 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.
Joe Diaz
Thank you, Anthony, and thank all of you for participating on today’s call. We will look forward to talking with you again to review the results for the third quarter of 2022, sometime in the early part of November. Have a great weekend, and stay safe. Have a good day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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