ImmuCell Corporation

Good morning, everyone, and welcome to the EMU Cell Corporation Report's first quarter of fiscal year 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please say no to a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Joe Diaz with Lithium Partners. Sir, please go ahead.

Thank you, Jamie. Good morning and welcome to all. As Jamie indicated, my name is Joe Diaz. I'm with Lithium Partners. We're the investor relations consulting firm. We're in the cell. Again, we thank all of you for joining us to discuss the unaudited financial results for the first quarter of 2021. 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 in last night's press release and the company's quarterly report on Form 10Q. With that said, let me turn the call over to Michael Brigham, President and CEO of Emucel Corporation, after which we will open the call for your questions. Michael.

Great. Thanks, Joe. I appreciate the opportunity to provide some updates on what is going on at Emucel, the press release and the quarterly report on Form 10Q. that we disclosed last night cover the key financial highlights and all the details. As you may know, on April 7th, 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 dollars 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 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 shelf sometime during the third quarter. The drop in gross margin to 39% of sales during the first quarter of 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 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 retain. 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 colostrum 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 for 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 retained to market, we continue to report a net loss. However, I think we should focus on our cash flows more than our gap net loss at this stage in our development. Page four 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 four of our quarterly report. Third and lastly, the road to regulatory approval of Retain. It has been a long and it has been an expensive road, but we are nearing completion of the work required to achieve FDA approval of this novel subclinical mastitis treatment for lactating dairy cows without a milk discard or meat withhold. During the first quarter, we submitted the last of five technical sections required for FDA approval. This kind of submission is subject to a six-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 six-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 that approval comes through in response to our first submission. Retain 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. A 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. 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.

Ladies and gentlemen, we will be in the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handsets before pressing the keys to ensure the best sound quality.

To withdraw your questions, you may press star and... Once again, that is star and then one to ask a question.

We'll pause momentarily to assemble the roster.

And ladies and gentlemen, once again, that is star and then one to ask a question. Our first question today comes from Sam Robotsky from SDR Asset Management. Please go ahead with your question.

Good morning, Michael. Tell me, how many employees do you have now and how many do you expect to have in June and where are we on that?

Right, yeah. So the queue discloses right around 54, you know, FTEs. We've got about six part-times. So 53, 54 currently. That's going to go right up to 60 and on above up to around 70 when we're fully loaded and launching retained into next year. I see 54 going to 60 quick and 70 over the next year.

As far as the June 30th date, we're comfortable with that date in being ready to start manufacturing or What do we need to do?

Well, we're at the end of the process, so we're 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, and I think I kind of referred to that in the gross margin discussion, there are some of these costs already incurred. So in the new building over at 175 where we do our finished packaging project, and formulation and filling of product, you know, 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. You know, all the facility renovations are done. Just poured the floor. The epoxy coating on the floor this week, it's gorgeous space. So it's plumbing and USDA, and I feel good about June 30.

Okay. And now as far as the retain, we have submitted that to the FDA. And have we gotten any indication how the FDA is operating under COVID-19? And is it six months or what is the time frame?

Yeah, the time frame, you know, pre-COVID and as far as we know in COVID is six months. So we've seen no indication that that would be changed. So we do still expect 1Q to go to 3Q on that critical submission, that six-month review. The FDA just in the last few days did publish – some information on remote inspections. So that's obviously relevant to us. You know, we, we are expecting an inspection of our facility and it, it looks like, um, that may be remote. That's, um, I've got a whole zoom set up and that's what they've told the industry to be prepared for. So we'll zoom in ready.

Right. And, and, and with the backlog, uh, hopefully, uh, How do we look at reducing the backlog? You know, it's June 30th. You'll hopefully have everything up and running. Is the backlog continue to increase? And what do we do relative to reducing it?

Yeah, well, right, the 3.1 is a huge number. So the backlog goes up and down. We do see 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. So what we're doing here in the second quarter is taking advantage of as much capacity as we can push in the second quarter and you know, in advance of the full completion of the project. And then going to third quarter, just run straight out. We'll just run until we catch it. And that's our goal somewhere there in the third quarter. Get back to the point where sales is on the road, knowing that inventory is available to ship when a PO is placed. You know, get this backlog stress out and behind all of us.

Well, that sounds very good. Good luck, Michael.

Hey, thanks, Sam. I appreciate it. Good to hear from you.

Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2.

Okay, well, the...

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

Yeah, so I mentioned to Sam, I do feel really good about June 30. Everything is falling in place. We really have as long as this 18-month project has been since we started the beginning of 2020, it has stayed to our timeline and to our dollar budget. So, yeah, the second duplication of our cheese line, in other words, increasing our liquids processing 100%, is really the last step here, and those tanks are going in as we speak, and that's a Somewhere, there's a little flex here, but we think it's a two- or three-week process. We're really tight with the USDA. They know what's coming, but we have to allow about two or three weeks for them to do their review and just make sure everything checks. So on the first defense side, I feel good. It's right in front of us here. And then retain, again, I think it's a 21-week. objective to complete the regulatory, you know, and 22 is when we launch. And it's just a question of what happens here with this first submission. If they like it and don't have questions, you know, we move on to the administrative review, which is the end of the process, labeling and all that, freedom of information labeling and all that. And if they have questions, at least we'll know what they want to see. We answer them and submit. That's the one that adds another six months. So, I mean, both of these objectives, which are so critical for our business, are right in front of us. Get out a backlog and get approval and then launch Retain. The next 12 months are going to be, I think, very exciting. Thank you, Mike.

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

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

Yeah, thanks, Jennifer. Very fair. I would also first, I guess, refer you to the queue where I really answered that question in a lot of detail because it's an important question and I I want to get that answer out there exactly where we're spending that money. So project by project, the $5.4 million, really exciting investments. So the first defense capacity was already budgeted and sort of cash funded. What's new is advancing the pre-marketing launch expenses for retain and taking first defense to the higher level. So this new money, it just allows us to be a little more aggressive, move a little quicker on next level first offense, and then completing and pre-launch marketing on retain. I don't know. Does that help? Is that a full answer, Jennifer?

You know what? Forgive me not having read the queue yet. I just was wondering with that raise, you know, whether or not – if this would extend your, I mean, I realize you've got an, you know, you need to build inventory, you're driving the top line.

Yeah.

And it, I just didn't know if you had characterized whether or not beyond sort of, you know, EBITDA positive. Yeah. Um, if you would need to raise additional capital for a more formal launch.

Yeah, no, I mean, that's a, that's a lot, a lot of detail on a filing that just got out last night. I didn't mean to assume you'd read it. It was probably too much detail for me to talk on this call. So it's there for a backup, right? It's just there for support when you get a rainy day or you get insomnia in the middle of the night. But, you know, I think now I really understand your question. What we're looking at is, I mean, the next big thing we would need to do, the next big use of capital for Immysale, that would be related to retain post-approval. So retain launches with a 10 million capacity. I'd love to be in a situation where we could look out and see that 10 million is not going to be enough. And that's sort of a new era and a new challenge, and it's out in front of us. So I think to be specific, we do not need more capital to bring our capacity on first offense to 30 million. and we do not need more capital to both launch and initiate sales of Retain.

Perfect. Perfect. That's great. Thank you.

Great.

Once again, if you would like to ask a question, please press star and 1. Our next question is a follow-up from Sam Robotsky from SEARC Asset Management. Please go with your follow-up.

Yes, Michael, you answered my follow up. And I guess the question really is, did we need any more money after this? And evidently you did. And good luck. You have enough capital.

Right. Yeah. This last raise was just so well supported by the Pessin family and and some other key investors, and just, you know, I don't know if I can consider it optional, but it did put together, it did allow us to launch some really important growth investments, but, you know, I separate that from that retained production capacity north of 10 million, different topics, different times, different needs.

Sounds good.

Good, Sam, thanks.

Hey, sure.

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

Hey, Joe, are you on mute maybe?

No worries.

I think I am on mute. Okay. Wrap us up. 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.

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