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spk01: Good morning and welcome to MUSL Corporation Report's first quarter 2023 Unaudited Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 over to Joe Diaz of Lithum Partners. Please go ahead.
spk00: Thank you, Chad. Good morning and welcome to everyone. As Chad indicated, my name is Joe Diaz. I'm with Lithum Partners. We are the investor relations consulting firm for Emusel. I thank all of you for joining us today to discuss the unaudited financial results for the quarter ended March 31, 2023. I would 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, which include any statement that refers to future events or expected future events 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, or better known as a safe harbor statement provided with last night's press release, along with the company's other periodic filings with the Securities and Exchange Commission. Information discussed on today's call speaks only as of today, Friday, May 12th, 2023. The company undertakes no obligation to update any information discussed on today's call. 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 Emusel Corporation, after which we will open the call for your questions. Michael.
spk02: Thanks, Joe. And good morning, everyone. Let me get right to the tough news. We have persevered through what I see as the most difficult quarter in the history of the company. I would like to spend most of this call describing what happened and how we are fixing it. But first, with regards to the financial results, last night's press release reports no change to our product sales results that were first reported on April 5th. The press release also provides the full unaudited P&L results and some audited summary balance sheet data, as well as our non-GAAP earnings before income taxes, depreciation, and amortization, or EBITDA. Also, we filed our Form 10-Q for the quarter ended March 31, 2023 last night. I won't take our time here to review those financial results in detail. So let's review the hard stuff. In response to increasing demand for the First Defense product line, we began a series of investments during 2019 to increase our production capacity to approximately $30 million per year. The good news is that all the necessary facility expansions and new equipment needed to increase our production capacity were in place by the end of 2022. The very hard thing is that just as this increased production capacity was coming online, a product contamination event was detected by standard in-process quality control testing around the end of the third quarter of 2022. We took immediate steps to address this contamination and production ran without issue during the balance of the fourth quarter of 2022. However, during the first quarter of 2023, our standard in-process quality control testing detected another contamination event. In response to this second contamination event, we made the strategic decision to significantly reduce production output in order to assess and remediate the problem. The production slowdown resulted in a significant decrease in sales during the first quarter and contributed to an increase in the order backlog from about 2.5 million as of December 31, 2022 to approximately 8 million as of May 3, 2023. Due to the loss in earned gross margin that was incurred during the first quarter of 2023, we made the decision to defer for the time being completion of certain capital expenditure investments. We are being driven by data as we resolve this temporary production problem. I would like to explain what I mean by that a bit. All production batches are tested by our quality control team at the beginning, middle, and end of the production process. From February 1, 2023 through May 3, 2023, the incoming test has met specifications 88% of the time, while the mid-process and end-process tests have both consistently met specifications. We continue to make progress at improving the beginning stage of the production process. Improvement throughout the process from the depth of the contamination problem in January is allowing us to come back into full production. We believe that the operational improvements we have implemented throughout the production process as part of this remediation will help us run more effectively at higher output at a higher output level going forward. As we recover and resume full production, we aim to produce more product quarter after quarter than we did during the first quarter of 2023. When this contamination event is fully behind us, our goal is to be able to produce at least $6 million worth of product per quarter, which would annualize to about 80% of our 30 million full production capacity. While not losing sight on the criticality of stabilizing supply, regaining lost business and reestablishing our growth objectives, we are at the same time preparing all the data required to make our third submission of the CMC Technical Section for Retain before the end of this second quarter of 2023, subject to completion of several critical path items that require results from external laboratories. This submission will be subject to a six-month review by the FDA 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. So with that, lastly, I do encourage you to review the press release and the quarterly report that we filed last night. Please have a look at our corporate presentation slide deck. I believe it provides a very good summary of our business strategy and objectives as well as our current financial results. A May update was just posted to our website last night. Just see the investor section of our website and click on corporate presentation or contact us for a copy. With that said, I'd be happy to take your questions. Let's have the operator open up the lines. Thank you, Chad.
spk01: You're welcome. We will now begin our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we will pause momentarily to assemble our roster. At this time, I'll turn The question over to Joe Diaz with Liftham Partners, who will pose a question.
spk00: Thank you, Chad. Michael, have you determined the cause or the source of the contamination issue?
spk02: Well, that's fair, Joe. You know, I think it's important that we not point to one specific event or place. We are sort of rebooting the production process from start to finish, from farm to finished goods. But that data I shared does give some indication that we're in very good shape in the mid process, very good shape at the end process with 100% meeting specs and still a bit focused on that front end. And we'll continue to be, to move that 88% up to a much higher number. I don't know if it needs to be at 100, but we'll move it up from 88, 89 where it is today. So I guess my answer is we focus farm to finish, the start to the end, but we've got some more work to do on the front end.
spk00: So it sounds like you can get closer to 100%. I mean, is it possible to actually eradicate this issue with new procedures?
spk02: You know, I don't think so. I mean, we want to get as close to 100% as possible. There's definitely room for more improvement, but We have to be cognizant that we're dealing with dirty raw material. It does come from a barn, and our specs are set up to allow and to anticipate that. So it's not aseptic, it's certainly not sterile, but it needs to be held below the standards the specification level, and what happened in this contamination is some of these batches popped up above that level, so we need to just move it down so there's a margin between where we operate and where that line is on pass-fail.
spk01: Thank you. And again, if you have a question, please press star, then 1.
spk00: Okay, since we do not seem to have any other questions queuing up, I would like to thank everybody for participating in today's call. We look forward to talking with you again to review the results of the second quarter of 2023 on or about August 11th. Have a great day. The conference has now concluded.
spk01: Thank you for attending today's presentation. You may now disconnect.
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