ImmuCell Corporation (NASDAQ:ICCC) Q3 2022 Earnings Conference Call November 22, 2022 9:00 AM ET
Company Participants
Joe Diaz – Lytham Partners, IR
Michael Brigham – President and CEO
Bobbi Jo Brockmann – Vice President, Sales and Marketing
Conference Call Participants
Jim Barrett – Barrett Investments
Operator
Good morning. And welcome to ImmuCell Corporation Reports Third Quarter Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz at Lytham Partners. Please go ahead.
Joe Diaz
Thank you, Chad. Good morning and welcome to everyone. As Chad indicated, my name is Joe Diaz with Lytham Partners. We are the Investor Relations consulting firm for ImmuCell. I thank all of you for joining us today to discuss the unaudited financial results for the third quarter which ended September 30, 2022.
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 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 or better known as a Safe Harbor statement provided with last night’s press release and with the company’s quarterly report on Form 10-Q for the three-month and nine-month periods ending September 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 ImmuCell Corporation. After which we will open the call for your questions. Michael?
Michael Brigham
Okay. Great. Thanks, Joe, and good morning, everyone. So a summary of the third quarter and year-to-date financial results are now available to you from last night’s press release and the details are available from the Form 10-Q for the quarter ended September 30, 2022 that we also filed last night.
We did file this Form 10-Q about five business days late to allow time to restate our first quarter and second quarter filings with the SEC. The restatements were made to reflect a noncash accrual of deferred compensation expense consisting of earned and unused paid time-off during the first quarter of 2022. This change increased our administrative expenses and accrued expenses by approximately $222,000, once again, with no impact on our cash position or on our product sales.
As you may know, on October 5th, we issued a press release covering our preliminary topline 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.
Have no changes to that previous disclosure. Again, sales were down about $350,000 during the three-month period ended September 30, 2022 compared to prior year. The sales were up 24% or $935,000 over sales during the second quarter of 2022.
As we look at the longer periods of time, sales were up 6% or $858,000 and 15% or $2.56 million during the nine-month and 12-month periods ended September 30, 2022, respectively, compared to the same period during the prior year.
We are experiencing a bit of a bumpy road as we exit from a long period of short product supply to our emerging new state with expanded and still expanding production capacity. Prior to our introduction of the newest extension of the First Defense product line in late 2017 and its popularity with our customers, namely Tri-Shield First Defense, annual production capacity of about $16.5 million was adequate to cover sales promptly without an order backlog. I should note that the capacity estimates that I mentioned on this call vary based on biological and process yields, product format mix, selling price and other factors.
Beginning in 2018, our world changed for the better with the introduction of Tri-Shield. We have invested — 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 the energy our team puts into it. This transition from backlog to buffer stock was complicated further during the second quarter by a material disruption in the supply of the needed plastic syringes used in our gel product formats. We have solved that supply disruption challenge.
Recently, we experienced some contamination events in our production process around the end of the third quarter of 2022. This resulted in a write-off of approximately $412,000 and it has pushed us back into a backlog situation. We believe that we have addressed these challenges going forward.
Installation of two critical pieces of equipment needed to increase our production capacity are on track to be operational by the end of the year. Investments being completed through the end of this year should bring our annual production capacity to the stated goal of $35 million per year at 100% operating levels going forward into 2023. This is what we need to increase our production capacity and solve the backlog going into 2023.
A new investment that is referred to as Project H in our SEC filings represents an investment in building, modifications and equipment to further increase our annual First Defense production capacity from the $35 million level to approximately $47 million during the second half of 2024 with options for further expansion. Project H also provides improved facilities for powder milling and much needed additional cold storage and warehouse space.
In contrast the past capacity expansion investments that could not possibly be completed soon enough, the time line for this investment is much more reasonable for all involved including our employees, contractors and equipment fabricators.
The levels of production output that I just mentioned requiring — require running equipment and staff at nearly 100% of capacity. We have been running hard near to that level over the last couple of years in order to fill the backlog of orders.
The facility is up to product contamination and forces us to defer preventive maintenance of equipment, while subjecting us to more disruptive emergency maintenance. One of the objectives of Project H is to create a more sustainable production schedule.
For example, by running at 80% of maximum capacity, Project H could increase our annual production output from approximately $27.7 million at the end of this year to approximately $37.3 million during the second half of 2024.
EBITDA, which is an important non-GAAP financial measure for us given the high level of non-cash depreciation that we carry decreased to approximately $1.3 million during the nine-month period ended September 30, 2022, from almost $2 million during the nine-month period ended September 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.
Looking at our balance sheet, cash decreased to $8.8 million at September 30, 2022, from $10.2 million at December 31, 2021. Net working capital decreased by just $12,000 to $3.7 million at September 30, 2022 compared to December 31, 2021. Stockholders’ equity decreased to just under $32 million at September 30, 2022 from $32.6 million at December 31, 2021.
All this has been going on while we continue to work on and fund the development required to achieve FDA approval of Re-Tain. Our product development objectives is to demonstrate that our polypeptide antimicrobial, Nisin 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 labor requirements of all intramammary mastitis drugs on the market today require that milk be discarded and the meat be withheld during treatment and for a period of time thereafter, it is common practice to not treat sick cows that are still producing saleable milk.
Re-Tain 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, Re-Tain enhances food safety and sustainability by utilizing Nisin, 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 in human consumers, which is an ongoing public health concern.
So we are preparing all the data required to make our third submission of the CMC technical section approval, which is required to market Re-Tain. This submission would be subject to a six-month review by the FDA.
We are on track to make this submission during the first quarter of 2023, but the exact timing within the quarter is not presently known. We remain poised and excited to revolutionize the way that subclinical mastitis is treated. Mastitis is a disease that causes about $2 billion in economic harm to the U.S. dairy industry per year.
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. I believe it provides a very good summary of our business strategy and objectives, as well as our current financial results. A November update was just posted to our website last night, see the Investors section of our website and click on Corporate Presentation or contact us for a copy.
With that said, I will be happy to take your questions. Let’s have Chad open up the lines, please.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions]
Michael Brigham
Chad, it looks like we have got couple of people in the queue.
Operator
Thank you. And our first question will come from Jim Barrett with Barrett Investments. Please go ahead.
Jim Barrett
Hi. Good morning, Joe and Michael. Michael, I may have missed it, but are the product challenges that you experienced in Q3, have they been solved and can you explain what happened, was it human error, was there some other factor involved? And if it has not been solved, when would you expect it to be largely behind the company?
Michael Brigham
Yeah. Thanks. It’s fair, Jim. So solved, when you are running a biological manufacturing process, I think you are always subject to contamination. So I’d hesitate to say solved, like, permanently, because it can come around. But what we are very comfortable with is we haven’t seen a contamination since these third quarter events.
So I think some of the improvements we put in place are working and we are proceeding well since then. These events were kind of bunched together and looking for a smoking gun, I don’t really have one, I have a list and we have just implemented a lot of procedures that should and so far have helped us avoid further contaminations.
And as I mentioned in my comments, I really think it’s largely the result of just pushing people and pushing equipment and pushing the process too hard and this is what we avoid if we move from operating equipment at 100% to push it down a bigger capacity yet run it at 80% and do all the right things with preventive maintenance and cleaning and just tightening up the process and the controls. So, so far so good, it’s extremely painful event, but so far behind us.
Jim Barrett
And maybe in the Q, what is the size of your current backlog relative to a year ago or however you measure it?
Michael Brigham
Yeah. Probably the best answer is, what we did put it in the Q is our best projection of what we think it will be around year end and we think it may be around $900,000 at year end, but again, with this new capacity coming on here in the fourth quarter.
We just walk into the busy peak season first quarter with — as our VP of Sales likes to say, it’s not a fire hose, it’s a fire brigade and we just crank at that higher level to turn that around pretty quickly. But yeah, short answer, it’s subject to sales and new product releases and actual figures, but we are thinking it’s going to be up to around 900,000 at year end.
Jim Barrett
And then finally, could you update us on your planned capital spending for both this year and in 2023?
Michael Brigham
Yeah. Now there is a lot of detail in the Q on that. I spelled out Project H to…
Jim Barrett
Okay.
Michael Brigham
…A through H. But we are completing all the current projects and then this H is the new one that will take us to get this next level, but again, for the end of 2024. So I would refer you, maybe, Bobbi, help me here on the page.
Bobbi Jo Brockmann
Yeah. I will read the 10-Q.
Michael Brigham
Yeah. Just the — but specifically to your question, it’s around page 27, where we just detail each project. And I think the summary you are looking for, which maybe I will just read for the benefit of others is…
Jim Barrett
Sure.
Michael Brigham
When we disclosed our cash, obviously, and we set aside about $5.7 million to complete these projects and that leaves about. $3.1 million for go forward.
Jim Barrett
I see. Okay. Thank you very much. I appreciate the answers.
Michael Brigham
Yeah. Thanks, Jim.
Operator
[Operator Instructions] The next question is from Charles Shorehammer from Shorehammers [ph]. Please go ahead.
Unidentified Analyst
Hi, Michael. Thanks for all your hard work. I really appreciate that. My question is towards this rising interest rate environment. Could you opine on how the company is positioned going into this higher rate?
Michael Brigham
Yeah. I think this is a good place to bang a little bit. We — I really like our debt structure. Just before interest rates started going up, we were able to lock everything in and we are at a blended rate of about 3.56%. So most of our debt is right around 3.5%, we do have a couple of stated main loans at 5%, again blended rate 3.56% and it’s fixed. So I think we are in …
Unidentified Analyst
And what’s the duration on that apart from Macquarie?
Michael Brigham
Yeah. I mean there’s four different instruments and they have different — between mortgage and equipment different maturities. But I am going to grab a footnote 10 and kind of refer you to the details there. But on page 13, 14 of the Q, we give the maturity schedule and the breakdown of the different instruments precisely.
Unidentified Analyst
Perfect. All right. Great. All right. Thank you very much.
Michael Brigham
Yeah. Thanks, Charles. Appreciate it.
Operator
[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks.
Joe Diaz
Thank you, Chad. And again, thanks to all of you for participating in today’s call. We look forward to talking with you again to review the results for fiscal year 2022 during the latter part of February 2023. I hope you have a great holiday season everyone. Thank you. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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