ImmuCell Corporation

Good morning. This is Anthony from Coors Call and I'll be assisting with your conference call this morning. To get things started, let me ask Joe Diaz to open up the call.

Good morning and welcome to all. As the operator indicated, this is Joe Diaz. I'm with Welcome Partners. We are the investor relations consulting firm for Emucell. 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 three-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 Emucel Corporation, after which we'll open the call for your questions. Michael.

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 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 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 this Supply disruption, sales were up 14% and 27% during the 6- and 12-month periods ended June 30th, 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 six-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. Networking 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's a fun fact. Our current market cap is equal to a little more than twice our stockholders' equity as of June 30th. 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 two, management's discussion and analysis in the form 10Q 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 30th 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 TriShield First Defense, Annual production capacity of about 16.5 million was adequate to cover sales promptly without an order backlog. However, our world changed with the introduction of TriShield. 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'm going to refer to our capital expenditure projects by the letters assigned 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. Projects 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'm 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 and 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 has been ongoing 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 Retain. Our product development objective is to demonstrate that our polypeptide antimicrobial, Niacin A, can play a productive role in the treatment of subclinical mastitis in today's dairy industry, offering an effective alternative to traditional antibiotics. Because label requirements of all intramammary mastitis drugs on the market today require that milk be discarded and that 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. Retain 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, RETAIN enhances food safety and sustainability by utilizing niacin, 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 incomplete letter from the FDA with regards to our second full submission of the last of five significant technical sections pertaining to RETAIN, specifically the Chemistry, Manufacturing, and Controls, or CMC, technical section, which is required to complete our new animal drug application. Principal issue remaining is a successful pre-approval reinspection of our manufacturing facility. We are completing preparations for this re-inspection and intend to notify the FDA of our readiness for the pre-approval re-inspection 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 in 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 six-month review period by the FDA. We believe we can successfully complete the pre-approval reinspection inside of this timeframe. 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. An 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. So see the investor 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.