ImmuCell Corporation

Good morning and welcome to the immune cell corporation reports fourth quarter and year ended December 31 2023 on audited financial results conference call. Today, our participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask your questions. I would now like to turn the conference over to Mr. Joe Diaz with listen partners. Please go ahead, sir. Thank you, Chris.

Good morning and welcome to all. As Chris indicated, my name is Joe Diaz. I'm with Litham Partners. We're the investor relations consulting firm for Emucel. I thank all of you for joining us today to discuss the unaudited financial results for the quarter. And the year ended December 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 results 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 that 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 the safe harbor statement provided in this press release that the company filed last night, along with the company's other periodic filings with the SEC. Information discussed on today's call speaks only as of today, Wednesday, February 28, 2024. 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.

Thanks, Joe, and good morning, everyone. Let me open by stating the hard truth straight up. 2023 was an extremely difficult year for us. The contamination events that plagued our production process were harsh and expensive. Growth is challenging and we are growing. The good news is that we believe we have moved into 2024 in a much improved state. The investigation into and the remediation of these contamination events taught us a lot. It is relatively simple to run at lower production rates for the 30 years between 1991, the original USDA approval date of first offense, and 2021. The contamination events we suffered during 2022 and 2023 were largely the result of our processing more milk than ever before in order to meet increasing customer demand. As we enter 2024, we believe that we have much improved processes and controls in place from the farms through liquid processing. I would like to speak about two financial disclosures that I think help demonstrate this critical turning point for our business. First, with sales, Excuse me, while sales were down 6% year over year, they were up 30% during the fourth quarter of 2023 compared to the fourth quarter of 2022. This improvement is largely the result of increased production output. The production level we reached during the final two months of the year would annualize to about $26.8 million in sales value, which equates to an average quarterly production of about $6.7 million. Our objective is to meet or exceed this level going forward. Second, EBITDA, earnings before interest, taxes, depreciation, and amortization, decreased by $2.9 million during 2023 compared to 2022. But EBITDA during the fourth quarter of 2023 improved by $657,000 in comparison to the fourth quarter of 2022. So that's the big picture. With regards to the other financial results, last night's press release reports no change to our product sales results that were first reported on January 8th. The press release also provides a full unaudited P&L results and some unaudited summary balance sheet data. I will not take our time on this call to review all those numbers in detail, but I would like to discuss a high-level overview. When we compare the year end of December 31-23 to the prior year, The $3.3 million increase in our net loss was largely caused by the $3.8 million decrease in gross margin. The lower gross margin in 2023 was largely the result of contamination scrap and a lot of fixed costs being spread over lower total sales as we slowed down production output to remediate the production problems. As a result of all this, cash is tight. In response, we have frozen certain capital expenditure investments for the time being. And we recently secured an extension of our $1 million line of credit until September of 2025. We have been driven by data as we resolve this temporary production problem. All production batches are and always have been routinely tested by our quality control team at the beginning, middle, and end of the production process to ensure that no out-of-specification product ever gets to market. Improvements made throughout the production process are allowing us to come back into full production. We believe that the operational improvements implemented will help us run more effectively at a higher output level going forward. We have worked incredibly hard to address these challenges. To be successful, we must avoid future significant contamination events and equipment breakdowns and operate with good production yields. Based on our responses and progress, I am optimistic. about what we can do in the coming quarters. Despite this significant diversion of our resources, we made our third submission of the CMC Technical Section for Retain to the FDA in August. This type of submission is typically subject to a six-month review by the FDA. However, the FDA notified us in late October that they had refused to review our August submission because of a misunderstanding about where. and by whom we intend to have our drug product aseptically formulated and filled. Our understanding is that the FDA believed that our plan was to bring those services in-house, which we might do down the road post-approval, rather than to continue to have these services provided by our contract manufacturer, which is what we are doing currently. In response to this notification from the FDA, we were forced to refile our submission in November. We are in communication with the FDA to resolve this unfortunate miscommunication, but if we fail to reach a compromise, the expected response date for their review could be delayed until as late as May 2024, which is six months from the November resubmission date. Regardless, 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 with zero milk discard and zero meat withhold claims. Lastly, I encourage you to review the press release that we filed last night. Also, 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 February update was just posted to our website last night. See the investor section on our website and click on corporate presentation or contact us for a copy. We plan to file our full annual report on Form 10-K for the year ended December 31, 2023, around the end of March. With that said, I'll be happy to take your questions. Let's have the operator open up the lines, please.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Frank Gasker, a private investor. Please go ahead, sir.

Hi, thanks for taking my question. The inspections, are all the inspections of facilities completed?

I would answer that, Frank. Good morning, Frank. In process, I see no issues, but it is an ongoing process at both our site and our contract manufacturer, so we're making progress and responding to their action, but it's ongoing so far, so good.

How about The backlog, you made no comment. I know that's a little iffy because of the circumstances.

Yeah, it's interesting. It's still very large. So we've done two things that might have resulted in a decrease in backlog. We have increased sales, increased production and sales at our door. Yeah. And we also did have an increase in selling price, about 8% back in November. But however relevant or not relevant those two things are, the fact is the backlog is pretty stable, pretty strong. So obviously, Frank, we focus on production. And you know what? The backlog is, I guess, a good sign at this point. But certainly, the objective is we've got to clear it. We've got to clear it. But it remains strong. It's a good problem to have, but it's a problem. We're going to clear it. But great demand. It's very interesting to watch. I would have thought it might have been leveling down by now.

As far as your work in progress or process for your inventory, have you had anything in the fourth quarter that would affect future?

uh revenues or sales frank when you say anything do you mean like any further contaminations yeah yes yeah no fourth no uh fourth quarter was was really super strong um I mentioned in my comments no significant contaminations. I don't think we'll ever be in a state where we'll never have a contamination, but that fourth quarter worked. We go back to September for the last contamination event.

I guess what I'm asking is like in the third quarter you had issues that affected fourth quarter. Is there anything in the fourth quarter that's going to affect

No, that disclosure was current. That's our most recent contamination challenge in September, but it does affect October shipments.

Okay. That sounds great. I guess the only issue that I have remaining would be the statement in regards to working with the FDA as to when the start of the third submission. Is that known or not known at the present time?

It is. I mean, I have to put my mind around they're going to stick to their schedule. That doesn't mean I think it's fair, but their schedule is May and we're continuing to talk about How could you possibly advance that a little bit? But I guess I do know what six months from the resubmission is. Resubmission in November and six months later is May. So that's why we had to sort of say by the end of May. It's tough. I think there should be some compromise and I think it should be something in between. The original expectation was February. The range was separated in May, but at this point I have to just be realistic and say it's out of my hands. They have the power and it may not be until May.

And given that approval could be as late as May and then the two months prior Are we in a position to, as far as cash, to begin that sales and marketing?

Oh, yeah. Oh, yeah. I mean, but keep in mind those disclosures we made, what we call a controlled launch, and we're not going to be blitzing the market with a huge... advertising and sales and marketing budget. But yeah, no, I think your timeline is right and the cash is there for that. If CMC is complete by May, if you add 60 days to that for what's called the administrator review, May goes to July. Then you have a month or two for labeling and just organizing. So it's there July, August, September where you actually initiate that control launch. But That is not a – there's not a cash burden on that that scares me at all.

Okay, great. Okay, Mike, thanks again for taking my questions. That's all I have.

Great.

Thank you.

Be well.

Again, if you do have a question, please press star, then 1.

And at this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Joe Diaz.

Hey, Chris, while we're still there, maybe could we grab Sean?

Oh, yes. Yep. Thank you so much, sir. And the next question comes from Mr. Sean Kirkwood with SRK Capital. Please proceed.

Hi, thanks. Sorry for jumping in late there.

No, that's good.

Can you hear me, Mike?

Yeah, go ahead, Sean. Thanks.

Um, so I had a question about the cash. Um, so on the balance sheet today, there's roughly a million dollars. It looks correct. Are you anticipating that the company's going to need cash throughout the year or where's, where's the first quarter going to start the cashflow?

Well, yeah, that is a thin capitalization. That's a thin cash balance. We can manage it. We're frugal. We know how to do it. I mentioned the CapEx freezes. I don't like freezing CapEx. CapEx investments are important for the future, but we have to deal with the present. That line of credit news is important to me. That's nice flexibility. I don't like to lean on that, but I like to have that back pocket safety. And, you know, yeah, the main thing, the most important thing is... continue what we saw there towards the end of the fourth quarter into the first quarter that, that first offense cash flows, this business and at these higher rates of output production output, um, 24 looks a lot different than 23. So, um, we would expect those numbers to be released on April 8th. We were in the habit of which I would continue, uh, that top line only press release early after the end of the quarter. So, uh, let me confirm my projections on April 8th.

Okay. Yeah. I mean, just from looking at it, it seems like the business should do well this quarter. Um, can you speak a little bit to, uh, the mess status sec segment, um, a bit about maybe the losses that are they supposed to be in line kind of with historical losses this year in that segment?

So you mean like the health economic loss impact to the dairy producer?

So within the retained segment of your business, I think historically it's been around $4 million a year of losses in that segment. Should we expect something around that number this year?

Okay. You're not talking about the market. You're talking about our product development.

Right. That's correct.

Yeah, no, I did specifically call out CapEx investment pauses or freezes, but we're also super careful on that retained spend. So we do, I think you're picking up, Beth, is it note 17? Either way, that segment note, sorry, I put our team on the spot here.

That's fine, you can get back to me.

I think it's 17, if my memory is any good, but it's the segment note. We wanted to be able to answer your question very specifically as we go through this launch to look at the first defense business, the retained business, and the other. So all I guess long-winded to say, yeah, the bulk of the production for this launch and for the bulk of the regulatory costs and investments related to retained are reducing as we complete that process. Less than 23 as we go into 24 when we look at that product development expense line. And that's just part of that cash management. Got to do it. It's a stretch, but good. I'm glad we're not in the middle of the heavy spend on the regulatory submission process. At the same time, we're looking at this million in cash. The big spend is behind us.

Good. Well, it sounds good. It sounds like the year is very optimistic. So thank you. Hey, thanks for checking, Sean.

Good deal.

Thanks. Take care.

Bye now.

And this does now conclude our question and answer session. I would now like to turn the conference back over to Mr. Jared Diaz for any closing remarks.

Hey, Chris, we may have lost Joe's line there, but let me just jump in on his behalf. All we wanted to say at this point was thank you for participating in today's call, and we look forward to talking with you again to review the results for the first quarter ended March 31, 2024, towards the end of the week of May 6, 2024.

And thank you. This now does conclude our conference. Thank you for attending today's presentation and you may now disconnect.