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spk02: Good morning, and welcome to the NUSEL Corporation Report's second quarter and the June 30th 2024 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. 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 call over to Joe Diaz of Lyft and Partners. Please go ahead.
spk05: Thank you, Anthony. Good morning and welcome. As Anthony indicated, my name is Joe Diaz with Litham Partners. We're the investor relations consulting firm for Emucell. I thank all of you for joining us today to discuss the unaudited financial results for the quarter ended June 30, 2024. Listeners are reminded and cautioned 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 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 provided with the press release and the Form 10-Q that the company filed last night, along with the company's other periodic filings with the SCC. Information discussed on today's call speaks only as of today, Wednesday, August 14, 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.
spk04: Thanks, Joe, and good morning, everyone. I'm not going to take your time to review all the financial details during this call today. Those numbers and results are available to you at the summary level in last night's press release and in much more detail in the Form 10Q that we also filed last night. I would like to point out that we had very strong top-line sales growth during the three, six, and 12-month periods ended June 30, 2024, in comparison to the same periods ended June 30, 2023. These results demonstrate that we have largely completed the production capacity expansion work that we have been investing in since 2022. During the six-month period ended June 30, 24, finished goods production was approximately $12.7 million. This level of output would annualize to approximately $25.4 million or approximately 85% of our estimated $30 million annual full capacity target. This top-line success has not been matched with adequate gross margin to the bottom line. Our gross margin as a percentage of product sales did improve from 19% during the six-month period ended June 30, 2023, to 28% during the six-month period ended June 30, 2024, but this is still well short of our 40% target. As we began to operate at this higher output level, we incurred some significant product contamination events from late 22 to early 2024. We have investigated these events thoroughly. Some of our problems were caused by an unusually high bio burden in our source raw material, which is colostrum, as we rapidly contracted with more source farms for more cows to meet anticipated demand. We believe that this front end problem has now been largely fixed, while it will require ongoing monitoring going forward. We also believe that some of the contamination was caused by equipment and processes that were not adequately optimized to run at the higher level of production output. The remediation of the contamination events required several adjustments, all within our USDA-approved outline of production. We disclosed the cost of scrap inventory in detail in our 10-Q filing, but it's not just the scrap that reduced our gross margin. It is also the lower sales in the prior periods when we slowed production to remediate the contaminations. This missed sales data is also disclosed in our 10Q filing and is the key reason we have not yet cleared the backlog of orders, which was set at 7.9 million as of August 6th. New remediation steps implemented during April of 2024 in response to the most recent contamination events appear to be very successful so far because we have run without contamination since then and to the present. For clarity, I'd like to confirm that throughout these contamination events, all product that was sold to market had passed final USDA release testing requirements. Like most other companies in this economy, we are facing challenging inflationary pressures on the cost of labor and components. This impacts just about everything we buy. In addition, the other cause of the gross margin deterioration is the production yield losses that we have incurred during this period. We have disclosed some specific targets that we are working on to improve process yield in the coming quarters. When I look back, I see this, I see something that is now very understandable. After successfully running the same process for over 30 years, sudden growth is hard. We work with a high bioburden source material, that being farm milk, We needed to better control quality at the source of this growth. We have done that now. Similar challenges were incurred in our processing as we pushed our well-established process and equipment harder. A natural reaction to contamination is to introduce more heat to reduce bio-burden, but this heat also kills antibodies. We are optimizing that mix to maintain acceptable bio-burden levels while also maximizing yield. We believe that the operational improvements implemented are allowing us to run more effectively at the higher output level going forward. To be successful, we must avoid future significant contamination events and equipment breakdowns and operate with good production yields. With those strong sales, we were able to improve earnings before interest, taxes, depreciation, and amortization, or EBITDA, from negative $2.2 million during the six-month period end of June 30, 2023, to negative EBITDA of $340,000 during the six-month period end of June 30, 2024. No doubt cash is tight. In response, we continue to be prudent with our expense controls where possible, and we have frozen non-essential capital expenditure investments for the time being. But we have no draw outstanding on our $1 million line of credit that is available to us until September of 2025. So that's the big picture. With regards to the other financial results, the press release provides the unaudited P&L results and some audited summary balance sheet data. Further, our Form 10-Q provides all the unaudited financial details and management's discussion and analysis. As I mentioned, I'll not take your time on this call to review all... all that in detail. We will remain focused on the commercial opportunity we have with First Defense as we work through what we see as the final steps of the regulatory process and our effort to bring Retain to market. In May, the FDA issued a CMC technical section incomplete letter in response to our third submission of the CMC technical section for Retain. Pursuant to the incomplete letter, the FDA has provided some minor questions about our submission requiring a forced submission, which is typically subject to a six-month review. However, the FDA has indicated that this resubmission potentially could be handled through a shortened review period because the open items are not complex. Most critical to the timeline, however, is that the FDA has also required that we not resubmit the CMC technical section until inspectional observations at the facilities of our drug product contract manufacturer are resolved. Our contract manufacturer submitted its responses to the inspectional observations in early July. Given the unique facts and circumstances, we are working with the FDA and our drug product contract manufacturer to obtain an expedited review. This is part of the process, and we are continuing to move forward. 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 without an FDA-required milk discard or meat withhold label restrictions. Lastly, I encourage you to review 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. An August update was just posted to our website last night. See the investor section of our website and click on corporate presentation or contact us for a copy. With that, I will be happy to take your questions. Let's have the operator open up the lines.
spk02: We will now begin the question and answer session. To ask a question, you may press star then one in your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Tom Fox, a private investor. You may now go ahead.
spk01: Good morning. Thank you for taking my question. I actually have a couple of questions. My first one is about a first offense. As I understand it, you guys get your main ingredient for the drug from the mother cow's milk after she gives birth. This is the milk that she spits out after giving birth. What I'm wondering is if there's a potential bottleneck here because you're getting it from an animal, not a machine, and you're getting it at a certain point in their life. On top of that, what is your relationship with these farms? Do you think that you'll be able to contract out more farms if First Defense keeps growing? Thank you. If you could just talk on all that.
spk04: Yeah, Tom, sure. Thanks. It's a good question. So you've got it right. That's the early milk. Right after she freshens, it's called colostrum. It's really rich with antibodies. We hyperimmunize those donor cows so that it's very specific antibodies to our target being E. coli, corona, rotavirus. But we've been very successful at growing the quantity of milk we bring in. There's actually a disclosure. If you don't find it, sidebar with me. I don't have the page number with me right at the moment, but I did detail a little bit about the growth of that work and process inventory. So we are in really good shape on the quantity of the raw material, the colostrum, the milk that we buy. And I did discuss the challenges in growing those farms and those cows and those contracts. We did run through this contamination problem we needed to sort of assimilate our growth and, you know, training, quality standards, you know, all that. I think we're in a much better position now on the quality end. So good shape on the quantity and improved shape on the quality. So I don't see that as a limit to our production growth.
spk01: Okay, thank you. That answers my question. I do have another question, kind of a quick one. Sure. I understand that your chief scientist retired recently. Do you guys have any plans to replace him?
spk04: Yeah. You're referring to Dr. Joe Crabb. I'm very pleased to maintain an open consulting relationship with him, but true, he did retire from full-time work. You know, he's the developer of First Defense, going back to the early days of the first USDA approval. He is the initial developer of Retain. He did pass both of those projects on. First Defense is into, you know, a production team now. And the Retain is being run by Betsy Williams. She's our VP of Manufacturing Operations. So there was good transitions there. And, you You know, we really do not have a large active new program, so our investment in product development outside of Retain is very limited and is managed by Dr. John Zinkraff. He is our director of product development. So, no, not to replace at the VP level or at the, you know, full-time level, but that team, that production team, Betsy's team, work and John Zincrath's work really cover the science for us quite well.
spk00: Okay. Thank you for taking my questions, and good luck to Emicel moving forward.
spk04: Of course. Yeah. Thank you, Tom.
spk02: Again, if you have a question, please press star then 1. Our next question will go from George Melas with MKH Management. You may now go ahead.
spk03: Thank you. Good morning, Michael. Hi there, George. Good morning. Good morning. Just trying to drill down a little bit more on the gross margin, and thank you for the, you know, for some of the clarity that you provide in the cues. It's interesting to read. Just trying to understand, it seems like the first quarter was really impacted by some of the previous contamination event of 23. The second quarter was less affected by contamination and maybe more by yield issues. In a nutshell, is that right or is that just too simplifying?
spk04: Yeah, that's a good, not too simple. That's generally true. I mean, we did that... I really think it is hard. The smaller the period, the harder the analysis. So I do prefer six over three, but we do report quarterly and we do... You're reading those numbers right. There was a bigger hit in 2Q than 1Q. Yeah. So, I mean, kind of a combination of both. I don't know exactly how to separate contamination impact from... yield impact, but I know for sure contamination's got to go down and yield's got to go up, and that's what we were trying to speak to as far as progress and, you know, detail on status on both sides. Is that fair?
spk03: Okay. Okay. I don't know what page it is, but you talk about in the queue, you talk about... some yield improvements that you have already sort of achieved. One of them is by sort of reducing heat and the other one was introducing some new filter equipment with sort of improvement of 17% and 5% respectively. Is that 17 points of margin or is that 17% over what you have achieved previously.
spk04: Yeah, no, more of the latter. So you are in the page 35 area. I don't know if Tom's still with us, but the work in process question he asked is right above that where we were talking about the inventory. And then, yeah, what's interesting about the 17%, I mean, what's important about the 17% is We can identify, we know what that target is, but that's one that we have not had the technical fix to yet. But it is something that would give us that much more at that filtration step of each week. You know, plus or minus an estimation range, that filtration step can be improved. And then that product still needs to be finished all the way through the rest of the, it's sort of the early cheesing, post-cheesing filtration. that product still needs to be finished through the production cycle, formulated and filled. So it's not, I wasn't trying to suggest dropping 17 points to the bottom line, but 17% improvement on that liquid process step.
spk03: So it means that if right now you have sort of an output there of 100, that output would move to 117. Is that what it is? Yeah.
spk04: Yeah, and then go incur the additional costs, labor and materials to finish it. But yeah, then each week we'd be in that ballpark of like basically doing the same work and getting those extra 17 doses.
spk03: Okay. And then maybe looking at, it's very hard to look at the crystal ball and it's probably a little opaque and murky, but You still have a goal of 40% gross margin, including depreciation. And do you feel like you have the tools, the steps, the knowledge, the processes to get there? Because you still have that goal. I mean, is there sort of a plan to get there that you can understand?
spk04: I called out those two specific yield items because we do understand them well. One, I feel like we just now we have implemented, the 5% are we've implemented and just need to see it be achieved and repeated. The 17 is still in the development stage with the manufacturer to find that solution. But, I mean, these people sell equipment that's supposed to, you know, work well. We need to adopt it to our process and make it work 17% better. So that one I need to hedge a little bit on because it hasn't happened yet. But I think both, I'd pick those two. I mean, there's a laundry list, George. There's a lot of little things, but I'd pick those two because they're significant and because they're identifiable. And, yes, I think we can achieve both of those.
spk03: Okay, great.
spk04: Okay, best of luck. Thank you. Cool. Thanks, George.
spk02: It appears there are no further questions. Pardon me. If you have any other questions, please press star then 1. There appears to be 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.
spk05: Thank you, Anthony, and thanks all of you for participating in today's call. We look forward to talking with you again to review the results of the third quarter, which will end on September 30, 2024, and we'll do that during the week of November 11, 2024. Have a great day. Thanks again.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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