iFabric Corp

TSX:IFA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Deborah Honig]

Good afternoon. Thanks for joining us today. We have an exciting update with iFabric. They just reported record Q2 numbers last week. So if you haven't had a chance to check those out, you can find them on the company's website or at SEDAR.

With me, I have Hylton Karon, iFabric's CEO; and Hilton Price, iFabric's CFO. We're going to run through the quarter and do a Q&A today. We're not going to work off a presentation. But as always, this session will contain forward-looking statements. If you would like to know more about those, you can find them on the company's website.

[Operator Instructions] And with that out of the way, I'd like to introduce Hylton Karon. Hi, Hylton, thanks for joining us today.

[Hylton Karon, executive]

Deborah, thank you, and thanks, everyone, for tuning in and hearing about our Q2.

Before I hand it over to Hilton Price, I just want to remind it to the investor community, we did change our financial year in the end of last year. So I think it's important when one is comparing our Q2 results of this year, our calendar, which really our financial year, are now being Jan 1 to December 31. It's important when comparing historically that one looks at date and not necessarily at Q1, Q2. We've done our best in the last MD&A to revise the charts to be as accurate as we can be from a date perspective, but I just would like everybody to know last year's report was a 5-quarter report and this year being a 4 quarter. So please, when we talk in Q2, we're talking March through June numbers.

And without any further ado, I'll hand over to Hilton and I'll come back in when we get into the Q&A.

[Hilton Price, executive]

Thanks, Hylton. Welcome, everybody. Good afternoon.

As Deborah mentioned, we did put out a comprehensive press release on our Q2 results. And these are available on our website together with our financial statements for the quarter and the management and discussion and analysis related there too. Accordingly, I'm going to focus on what I consider to be the highlights of the quarter.

Beginning with revenue, this came in at $5.8 million compared to $5.3 million for the comparable quarter of last year, an increase of 10%. Interesting to note that the full increase was contributed by Intelligent Fabrics division. And as Deborah mentioned, this was a record quarter in terms of revenue or while setting -- revenue for the quarter ended June, it was a record. And this is historically one of our weaker quarters. So although not a big increase, it is significant in that regard. Of more significance is the fact that there has been some seasonality or seasonal changes in the delivery of our merchandise or inventory so that the revenues for the quarter were actually contributed by new revenues, which is a very encouraging thing. So basically, we've had replacement revenues to replace revenues which have been or will be delivered in other quarters.

Our gross margin came in at 42% compared to 40% for the prior period. And that for us is a very satisfactory level of margin, anything above 40% is good for us. And in this regard, the new programs carry some of our best margins actually, which is a great thing.

Admin and selling, here, we had quite a big increase, 34% increase in admin and selling expenses compared to last year, and that's mainly as a result of increased personnel. Personnel costs, expenses like travel. At the moment, we're investing quite heavily into infrastructure, building out our infrastructure to cater for the growth that we know is coming later in the year and into next year. So it requires quite a lot of logistical changes, which we're making to encompass that.

Travel, in particular, has increased massively. We're doing a lot more of that. And we found the best way of closing deals is to get in front of the customer. There's no better substitute for that. I mean online works fine to some extent, but being in front of the customer for us works best.

We had a legal claim. We've got a legal claim, which is ongoing. In the quarter, we actually collected $400,000 against that claim. We had previously impaired the whole payment on December 31, 2023. So this was a recovery against that impairment. And our efforts or our collection efforts in that regard are ongoing. The process of collecting is ongoing. We have identified other pools of assets to go against. We've got a very competent growth in China that's pursuing our claim. And I would expect that we'll have further recoveries. Just not sure when that's going to be as time lines in China are not things that you can speak to. They're very uncertain, but I am sort of confident that we'll see additional recoveries of our claim, well, against our claim.

Cash, cash decreased by about $500,000 compared to the previous quarter. And that's in relation to our deposits, we put money down against future purchases. Historically, that's always been the case. That could be between -- anywhere between 10% and 40% and this will be in respect of deliveries that will take place later in the year.

Working capital, a small increase in our working capital, which stands now at around $18 million. And that's basically attributable to the earnings for the quarter.

Balance sheet remains strong, a very underleveraged balance sheet. It's always been that way. And we have a credit line of $6.750 million, which is unutilized at the end of the quarter. I'm not sure when we will utilize it. At the moment, we're fine. We've got about $3 million in cash. We had $3 million in cash at the end of the quarter and we had $6 million in receivables. So we collect our receivables and recycle that into purchasing inventory. So we probably will use our credit line sometime towards the end of the year when the big programs commence and I'll let Hylton and Cameron speak to those that see as province. I think he'll have something to say in that regard. And that essentially summarizes the salient aspects of the quarter. I'm happy to deal with any questions.

[Deborah Honig]

Should I jump right into the questions then Hylton and Hilton?

[Hilton Price, executive]

Yes, please. Go ahead.

[Deborah Honig]

All right. So one of the audience questions, if your guidance is around $30 million plus for the revenues for the year, that would mean 50% plus growth for the last 2 quarters of the year compared to last year. Can you comment on that?

[Hilton Price, executive]

Yes, I'll do that. The first 3 quarters will be pretty much of the same stuff. You'll see the massive growth come in Q4. We've got 4 major programs shipping in that quarter, 3 of which are new. So that quarter should be north of $10 million, which would easily take us to our guidance number.

[Deborah Honig]

And G&A expenses increased by $0.5 million year-over-year and sequentially. Was there any unusual items?

[Hilton Price, executive]

Not really. We've got royalties, which is a variable cost, which varies according to revenues. As I said, we've expensed quite a lot of money on travel, personnel costs, a little bit of the increase may be attributable to [indiscernible], but not as significant as the other components.

[Deborah Honig]

And have you looked at a share buyback in NCIB?

[Hilton Price, executive]

We have been discussed at our Board meetings. It's something that probably we will -- it is being contemplated and the majority feel that it's a good thing, given our undervalued share price. So I'm guessing it's something we will put into play probably later of the year.

[Deborah Honig]

Okay. Then I have another question about insider share purchases. Why haven't there been any open market insider share repurchases, given that the company is forecasting 25% revenue growth and record revenues with potential company builder type catalysts, which are said to be imminent and the stock is near 10 multiyear lows.

[Hilton Price, executive]

Well, insiders hold a significant block of shares as it is. I mean, I think we've got enough. We don't want to keep reducing the available float in the market, then we'll get accused of making the company look like a private company. So it's a balancing act for us to keep a float that's highly tradable. I think the challenge is to get more eyes on our stock and higher volumes to get people buying our stock on a more regular basis. So I think that's a challenge, and that's something we're looking to overcome.

[Hylton Karon, executive]

I also think that, sorry, Deborah. Sorry, I think it's important for everybody to understand that the [ Insights CIB ] is one tool. But I think it's important for everybody to really appreciate the kind of guidance and the kind of growth that this company is going through and there's got to be a balancing act in terms of the level of cash that is required when the company is going at the rate that we are growing and our future growth that is going on.

These things need to be financed. And taking working capital for a buyback, when you're in a high-growth rate that we are in just puts extra pressure on the company. So there's nothing wrong with the obviousness of the strategy. We far from peaking out in terms of where we are in terms of our growth and so one has to look at all the aspects of the company when making these comments and requests and understand that we are looking at all aspects of the company.

And while we're not using our lines of credit now, I think it's only a matter of time where we're going to be heavily into our lines of credit which we're actually looking to increase at the bank because we got that level of growth in front of us. So I just think that there's more to that aspect, and it's not taken -- we do understand the strategy.

[Hilton Price, executive]

Yes. I'd add to that by saying that banks don't look kindly on using your credit lines when you are using them for share buybacks. The purpose of those lines is working capital, and I'm sure we hear from them in that regard if we did that.

[Deborah Honig]

I guess just to remind investors, you referenced management owning a significant position. Can you remind us what that position is?

[Hilton Price, executive]

Close to 20 million shares, 70%, 68% of the float.

[Deborah Honig]

Okay. I had a question about guidance that I think you've already answered that you believe you're going to reach your revenue guidance target, correct?

[Hilton Price, executive]

Yes.

[Hylton Karon, executive]

No, I think absolutely, we're very much on target. We understand our quarterly projections and we're very comfortable that what we put out as a guidance, for '24, there's really no reason why it shouldn't happen. There are minor things outside of our hands. I saw one of the questions somebody was asking was, will the railroad strike affect us.

If it affects us, it affects everybody. And I think that our customers will take goods. If it does come in a week or too late, they've got empty shelves like everybody else. I don't think this is a situation that's going to affect us as any different to any other supplier. We do bring in goods well in advance of ship dates. So I would say in short terms, are we concerned? No.

When we get into, if the strike goes on for 5, 6 months, will it affect us? Absolutely no question, but then it will affect every supplier and every company supplying our customers. Keeping in mind that we have some of the largest turnover in Q4 in the U.S., nothing to do with Canada at all. So I think that while we do have some major drops in Canada, we also have major drops in the U.S., which will negate some of that concern. So the railroad strike is concerning. It's just something that's out of our hands.

[Deborah Honig]

There was a second follow-up question about revenue guidance for 2025. Do you still expect $50 million annual revenue by 2025?

[Hylton Karon, executive]

I think the number was $40 million, Deborah, I think you're pushing us.

[Deborah Honig]

It's the same.

[Hylton Karon, executive]

Yes, it's okay. Yes, I think that we work, we're working well into '25, almost into '26 as we speak, to be seen what programs we get as Hilton Price said a few minutes ago. Our growth is coming from new programs. And as these programs grow, we enjoy the benefit of the long-term growth of these programs. I think we continue to see based on our efforts, new segments and new products based on the dynamic opportunities that our chemicals bring to us.

So I think that you can look out for new market segments that are completely new to the company that we will be marketing in '25. So is $40 million a realistic target for '25? I would say, yes, I'm comfortable saying that, that's not a number right now that is not attainable. I think another thing to keep in mind all the growth that we're doing being generic growth are all growth that we're successful growing without our clinical trial release from the journal without our EPA put to bed.

The use, if in the next few months, any of that comes to fruition and gets completed, who knows what that number could then go to. So we are -- the guidance we're giving is based on the status quo of now. We're not relying on any of those other efforts to bring that kind of growth and hopefully, only better days ahead on top of the kind of growth that we're able to achieve.

[Hilton Price, executive]

Yes. Whilst we were waiting for those approvals, we've really diversified our revenue base taken a lot of the risk of our company. I mean we didn't sit there waiting. We went out in the market looking for business. We found that business. We're using our technologies or other technologies to great advantage, and I think that's highly positive.

[Deborah Honig]

Since we're on the topic, can you provide a status update on the EPA approval -- for approval claim?

[Hylton Karon, executive]

Well, we're doing this leaching study, which is happened to be done in Europe because there was nobody in the United States, in North America, able to do this specific study and it's progressing. We do get updates and it's progressing. Do they give us dates, absolutely not. And from everything we've been communicating with EPA, this is the final hurdle that they want us to overcome. When we get the report, we'll be happy to announce it and furnish it to the marketplace. And there's really nothing more that we can say right now.

It's out of our hands. It is in the lab, and they've given us an update that it is progressing. Who knows how long it could take, it could take another month, it could take another 2 months. I can't give a date. It will be irresponsible of me to give a date. All I know is that they've given us nothing but positive that it is progressing. So I've got to take that as a positive.

[Deborah Honig]

Just going back through some questions here. Somebody asked how many investors are tuned into the broadcast. I can answer that. That's 43. That's why I had 40 on my brain Hilton. $50 million rather. Sorry.

[Hilton Price, executive]

Well it could be $50 million. Who knows?

[Deborah Honig]

Well, that would make me very happy. Any thoughts on selling your real estate building and leasing it back. Right now, not many investors are valuing that in the share price?

[Hilton Price, executive]

I don't feel. No. What's not understood is that we've owned that property for a long time, and the low carrying cost of the property gives us a huge advantage in the market in terms of the cost structure for purchasing goods. Our competitors all have to have expensive warehousing. We've got a very valuable property, but our warehousing is cheap by comparison.

[Deborah Honig]

And what percentage of sales do you expect from the U.S. going forward?

[Hylton Karon, executive]

Interesting question. I would say that I don't look at it really percentage-wise, but it's easy to interpret it that way. I would say that our big growth is no doubt in the U.S. So while the preponderance of sales right now is still Canadian-based. There's no doubt in my mind that 2, 3 years from now, the U.S. could represent 50%, 60%. And that number, I don't ever see going down again. I just don't think the Canadian marketplace will ever afford us the long-term growth that the U.S. marketplace will.

So right now, it's under 40% turnover. I see that number very quickly. While we're growing, I think that the kind of growth going from $24 million, $23 million last year to $30 million to $40 million. I see that amount of growth coming primarily from the U.S. So I think that in the future, the preponderance of growth will come from the U.S.

[Hilton Price, executive]

Yes, I want to add that we are dealing with a major Canadian retailer. They're very significant and at any time, they could take projects forward that could explode the numbers in Canada. So it is exciting working with them, we'll see how things play out. We've obviously got a number of irons in the fire. And we could have -- it could be a 50-50 situation, although I think Hylton is right the inclination probably is more towards U.S., but I wouldn't discount how serious Canada could be in terms of revenue if we get a few of the new projects going.

[Deborah Honig]

Have you acquired new clients in the quarter?

[Hilton Price, executive]

Have we? Yes. Where did we start shipping to -- yes, well, at the tail end of the previous quarter, we acquired a major U.S. retailer.

[Hylton Karon, executive]

And they've already told us that they're repeating into '25 with reprofiling, but it's definitely continuing. So as these programs mature, our relationship with them continues to grow. So I think that what we've got in terms of the record growth in the revenues for the rest of this year are primarily they are new programs, but with existing clients, but they are new programs.

[Hilton Price, executive]

Look, as long as we don't use their name in a press release without their permission, I think we can mention that the retailer is Target.

[Deborah Honig]

Actually that relates to a question down here. Why don't you have more press releases to get the word out as to the success and potential of your company?

[Hylton Karon, executive]

I think that people have to understand that and Hilton just said that the kind of people that we're doing business with, the last thing they want to do is have their supplier who we -- we are a real part of their development going forward. What we're working on is 2025 and 2026 product going forward. We really know a lot about what their future offers are going to look like. I really don't believe that they want us trading on their name and telling their competitors what's being developed in the future.

These are pretty heavy projects, pretty sizable. And I think that we really are -- we have to be careful, and we have to be respectful that we have so much inside information that these companies trust us with. And we're certainly not going to compromise our relationship and our growth with these people, the kinds of growth is truly encouraging. And so we're really -- we're not trading on other people's names. I just think that as we get additional releases of these programs, which we will do towards the end of the year, we certainly have no problem putting it out once they are on the shelf and in the marketplace. But a lot of what we're going to be shipping is going to be for the first time, and I certainly don't think that they would appreciate us telling the market in advance of what's going on. I don't think that, that would help foster the kind of relationship we have with them.

[Deborah Honig]

Shifting gears a little bit, is there any risk derived from the Bangladesh protests?

[Hylton Karon, executive]

We're not doing any business in Bangladesh. So it's of no concern. And I think in the last little while, we've done a number of interviews and presentations. And this whole question of where we get our supply from and people always say, well, why are you still doing business with China. And I think it's critical to know that we've got a long-term relationship with these factories, and they've proven their reliability on timing, on quality and working with us. And we can't, as we grow and with the kind of clientele that we have risk onboarding new supply places.

And certainly, I would say, a place like Bangladesh, I don't know anybody in our current employment to get on a plane and want to go and travel to these places. So right now, we should be happy that we've got the kind of reliable chain of supply that we have and we've built a successful and growing business based on the kind of suppliers we have. And this really -- it really doesn't behoove us to move away from them right now.

[Hilton Price, executive]

Yes, and I'd add that you build up trust of credit terms. Things like that. Every year, we get more generous credit terms. So the trust continues to grow. You start off with a new trust relationship. You might not get that they may ask for increased deposits, LCs, who knows what. So financing the business, if one changes might become more of a challenge. So I think we're very satisfied with what we have at the moment.

[Deborah Honig]

I've got a couple of questions on seasonality. Is there a normal seasonality that we can expect? Should we always expect Q4 to be outsized or will this be difficult to determine due to new programs coming into play?

[Hylton Karon, executive]

I think that it's an interesting question. And the reality is that we are dealing, especially with such a big quarter. It's a lot of new programs that we do what's called a drop, which is an initial big drop to these chains. Then these programs become what's called replenishment. So you are going to see a leveling off, which would probably still give you significant sales on an annual basis, but I don't think you're going to see the kind of spike when you are repeating programs as opposed to, which is basically a flow-through and the maturity of a program as opposed to when you're initially doing a drop.

I think we will always be adding new programs. So I think these initial set big orders will continue based on what we're working on, but I think that the business will level off keeping in mind that we do deal a lot in basics. So our product segments are traditionally on the IFTNA side of life, more 12-month business when you're dealing with underwear and basic apparel. I think the lingerie business is more seasonal. However, we've been mature running that business for over 25 years. So we know our seasonality to that business. There are some interesting growth potentials in that business and that we're trying to achieve, which could substantially grow that side of the business. But seasonality, I think we've always had a heavy seasonality to fall.

But now we've done a lot of swimwear, which is spring/summer business. But what has happened, and it's kind of interesting, we had a huge set order last year in January for the swimwear. It was so successful with the retailer that they've asked us to drop it this year in December. Hence, a really big fourth quarter that we're expecting this year.

So even though it is spring/summer goods, it's going to be shipped to the retailers middle end of December this year, which is really going to boost our 2024 numbers. So seasonality is something that we are trying to address and trying to fill in the bumps of the highs and lows of the business. It's just part of what we do as an apparel company.

I don't think that we're going to be a flat line kind of company. There will be seasonality. That is just part of apparel and fashion, even though they are basics. So I don't really ever see this business being a flat line 12-month kind of revenue. There will be seasonality forever in a day in what we do.

[Hilton Price, executive]

Yes. I mean, Hylton, there's no denying the fact that major retailers do a substantial amount of business in the holiday season, and they're always going to do a significant amount of buying just prior to that. So you're always going to get that aspect to our seasonality.

[Deborah Honig]

Another sort of related question, at least to Coconut Grove. Does your model for 2025 account for any weakness in Coconut Grove, given potential weakness in consumer spending as a result of the economic slowdown?

[Hylton Karon, executive]

Actually, just the opposite. I think that we're working on, and we haven't got it finalized yet, but we're working on programs for Coconut Grove that could literally double the company. So it's an opportunity for us that we're working hard. The fact that we've been invited into U.S. retailers to quote is exciting. So I don't see a downturn in that department, in that division. We are looking at developing and I know what's in the -- we've always got new products in the pipeline, to refresh our offer.

Yes, what's impacting in retail. I think the only thing I will say is we are dealing with the Costcos, the Walmarts, the Targets, the mass merchants, and I think in a tough economy that bodes well for us. So I really think that these are the retailers that in the next '24, '25, '26, these are the retailers that are going to get the preponderance of the market. And so being established with them really only helps us. And their credit is wonderful. We're just as concerned as anybody that we get paid for our hard work. And so we really are profiled really well with the kind of customer base and where they are in the market.

[Deborah Honig]

A couple of random questions in here. When should we expect an update on the potential royalties for PROTX2?

[Hylton Karon, executive]

I don't know exactly what that question is in terms of royalties. We do have chemical sales, if that's the question. But then PROTX2 is so integral in a lot of what we manufacture ourselves for our customers and it's on all the packaging. So we don't per se break PROTX2 as a financial segment in our financials. And at this point in time, there is no major company that has approached us to license PROTX2 in an exclusive area. So I don't really see us breaking out a technology in the financial reporting.

[Deborah Honig]

And going back to the EPA claim, when do you expect the peer review?

[Hylton Karon, executive]

Keep in mind that these journals are doing this free and [indiscernible]. So it's one thing to do when we did our clinical trial we paid for it. And therefore, you're able to call up and ask for answers and demand more than you can as opposed to dealing with the journal. The journal operates on their own time in their own fashion and there's always a fine line between pushing and being irritating and getting your file pushed to the bottom.

So we internally are very, very aware of what these efforts mean to our customers. And I know what it means to the share price and to what shareholders value the company having these things. But there's a fine line between pushing or doing what's right for the company and doing what's wrong. And so we are very sensitive that they are well aware of what it means to us. However, a journal gets many, many applications for releases. I will remind everybody that about 40% of all submissions to journals don't see the light of day and never get published.

So you believe that we have a game changer. We are rather optimistic that not only is this going to be successful, but it's going to be a real change in the markets we're going after, but we're not presumptuous and it's irresponsible for us to start putting out data and expectations. We are pushing. We are trying our level best and there isn't a day that goes by that we aren't internally. We need no one to remind us because we know what it means to our customers and our clients.

So honestly, it will be a great day, and we would love nothing more than to not have to have this discussion anymore. We are working hard. Please believe me from our customers, our own internal requirements, we really are pushing hard. We're doing everything I can we would like nothing more than to have this put to bed for a number of reasons. It's not something that is, by any way, shape or form, not in front of us every single day.

[Deborah Honig]

Has there been an appraisal done on the real estate building or any other info? I heard it could be worth $12 million. Can you comment on that?

[Hylton Karon, executive]

We've been given offers. And so it's not something that we've ever had to. Actually, that's not true. We did do an appraisal for the bank for our line. So there was an appraisal done about a year ago. The market is still very strong. It is an off-balance sheet asset of the company. And as Hilton has elaborated, we have no -- there's no effort right now to be putting that on the market.

And we have our reasons. It has proven to be an absolutely invaluable asset in terms of our operating costs. So it underpins our efforts to raise capital for working capital. So it is a wonderful asset for the company, and it helps us tremendously in terms of our efficiency of operation. So there's no effort right now to put that on the market, and there's no discussion to put it on the market right now.

[Deborah Honig]

How much was the appraisal for?

[Hylton Karon, executive]

I believe around $11.5 million, $12 million. I don't have the piece of paper in front of me.

[Hilton Price, executive]

But we have turned down offers of $12 million. Yes. So that's market value. The third party comes in offers $12 million, the market is $12 million. And I think it will go a lot higher.

[Hylton Karon, executive]

And in the area that it is, it's prime real estate. Absolutely.

[Deborah Honig]

Will expenses stabilize at $2.2 million a quarter?

[Hilton Price, executive]

No, not in the short term. I think what will stabilize is the curve against revenues. I mean you can't get to the next level and the next level without spending money, and that's going to go beyond what the current amount is. But I think the measure is taken in terms of what the percentage is to revenue, that will definitely flatten.

[Deborah Honig]

Okay. And then I think this question is asking, will our Q3, Q4 gross margin will be higher than Q1, Q2 since there are more new products that's higher margin. And if they're asking, will the margin be better in the second half of the year? I believe that's the question. And will that continue into 2025?

[Hilton Price, executive]

No, that's never known because you never know what your ultimate mix is going to be. The unfortunate thing is that with these new programs being high volume, they will carry lower margins. So I do expect the margin not to go north of where it is now, possibly drop a bit.

[Hylton Karon, executive]

I would add something to that, though, Deborah, is keeping in mind that as we have gone quite a bit higher in our revenue when we flush out the year-end. Our overheads are carried by $18 million, $20 million in revenue. And you're starting $28 million, $30 million and you've disproportionately lowered your overhead. The extra profit goes to the bottom line.

So I am expecting and we are expecting a much better bottom line than we've ever been able to achieve as a company. And I think that as we grow into the future that trend will continue. There will be a higher overhead, but I think it's going to be disproportionate to the exciting growth that we have for the company. So I think that margin will still return a pretty impressive bottom line as we grow this company with a disproportionate overhead to revenue.

[Deborah Honig]

Makes sense to me. A couple of last questions here. Does the big swimwear order of Q1 '25 moving up into Q4 '24 reflect on your 2025 revenue outlook?

[Hilton Price, executive]

No, no, no. Actually, that big program did ship last year in December. So it's comparable. What is addition to that is 3 new programs which weren't there before. So I think that's where the bump will come.

[Hylton Karon, executive]

The reason why -- and I'll take 2 seconds, the reason why it's not going to affect it is because you're going to get your '25 order for the same program and you're going to have your big drop in December next year again for the same program. So it's not like it's a one-off anomaly. These are the kinds of numbers that should maintain and grow and only grow in the same quarter year-over-year.

[Deborah Honig]

And can you add some details on what a kill claim is and why it's set at 24 hours?

[Hylton Karon, executive]

Well, a kill claim is not set at 24 hours. It's what we elect to do a study in a test. The 24-hour is really a long-term kill. And so when one looks at they are sanitizers, they are cleaners, they are all different categories of kill. And so you get what's almost called an instant kill where companies will test literally at an hour or at 5 minutes because there are a lot of sprays that are disinfectant that you spray on a surface, for example. And if people would only read the bottle and it says a 30-second kill, a 60-second kill, a 2-minute kill, these are sanitizers, yet somebody has sprayed a surface, wiped it with their rag and they believe the surface is clean, most people do not read instruction of what truly is claimed. We, in apparel, are not that instant kill. We want to do that residual long term. We want to protect your wear.

Our clinical trial was for somebody wearing apparel for 8 hours. So it's what contact they came into in the average working day over an 8-hour period. And what did that apparel -- how clean was that or how much cleaner, how much less bacterial load was on that surface as opposed to a garment without the protective values of our chemicals.

And that's where we had an over 95% difference from untreated to treated chemicals. Now you get what's called a residual kill and then you go up to 24 hours. Now we could do it longer and longer. The reason where you really don't want to go over 24 hours is because you are inferring that after you've worn that garment, you're going to wash it.

So you should come home every day after your shift in the hospital setting, and that's going to go in a wash. And what we do, do is we do 20 repeat washes where the inoculum is put on the surface. It is then tested for what is able to achieve in terms of killing that level of inoculum, it is then washed and it has to repeat the efficacy that, in other words, the efficacy is not washed out. It's called durability.

How long can we infuse efficacy into a surface and that it can repeat with that level of performance wash after wash, after wash. And we have done 50 wash tests, and we've done 100 wash tests and therefore, there's really no need to test beyond 24 hours because the likelihood is you really should only be wearing that garment 6, 8, 10, 12 hours at a time, and then it should be washed. And then you're getting rid of all the bacteria, you're getting rid of all the dirt on the surface.

So that means that there's a clean surface with our chemical on it to attack whatever new load is put on to that garment and it is with that in mind and our ability and our impressive ability to have tests with 20 repeat washes, 50 repeat washes at set industrial standards still showing full efficacy of our chemical, full infusion, no dilution of efficacy, no reduction of efficacy of the multiple washes at the laboratory.

These are aggressive washes and the load of pathogen that is put on at the laboratory level is so much higher than you're going to ever get in your day-to-day life that these are really overload tests in our opinion. And so it really is encouraging for us that not only do we have initial kill, but we have long-term durable, repeatable full-term efficacy.

In some cases, the product will be disposed of before the efficacy is reduced. That is pretty impressive for us and it is very encouraging for us and our customers, and that's why the kind of adoption we have for our chemical for the PROTX2 specifically.

[Hilton Price, executive]

Yes. And that's why we would expect the leaching study to be successful. When our chemical gets into a garment, it sticks. It doesn't come out. It's so infused, it's there. Nothing is coming out.

[Deborah Honig]

How long is exclusivity for the company that co-funded the scrubs trial?

[Hylton Karon, executive]

They've had exclusive. Yes, they have. It is to the best of our knowledge running out at the end of this year. And then there will have to be a negotiation on repeating it or whether we -- that is a discussion that we will determine after this year. But the initial period was for so many years. There was a repeat, this is actually now the end of the repeat cycle of the exclusivity.

That doesn't mean we don't extend it to them going forward. It all depends on the commercial use to make sure that they are continuing to use at ever-increasing volumes. We still do a significant amount of business with them. As we get closer to the report on the journal and the report from EPA and putting that to bed will only put pressure on anybody we do business on going forward that our expectations are going to be significantly different, and we'll cross that bridge.

[Deborah Honig]

Last question, any capital needs expected to support your growth equity, debt etc.

[Hylton Karon, executive]

I think that not in the short term.

[Hilton Price, executive]

Working capital. We've got this covered at the moment. I think with our credit lines, and the ability to maybe increase those, we can certainly handle the transition up to probably up to $40 million without running around looking for more money.

[Deborah Honig]

Great. Well, that's all the audience questions I see. I don't have any additional questions. Is there anything that you wanted to cover today that we didn't get a chance to talk about?

[Hylton Karon, executive]

No, I think that we've really just touched on. I think that really understand growth is coming and it's impressive for us. These are new projects, new programs. Yes, most of the time, we are dealing with such big major retailers, the biggest of the big that being in with, they're just giving us more and more and more opportunity in new product segments. The company is growing our ability to bring on projects that are completely new in terms of product segments, we're so good at designing and manufacturing product that we are reliable. Our quality is there. We've built the right track record that gives them a comfort level to be offering us continued growth, and we're going to continue to work with them to grow this business. And we really see no end in sight.

Our sights are set on how soon we can get to 50. And from there, who knows how soon we can get to 100 and beyond. We really have really aggressive growth in our future for many years to come. We're far from mature where we are today.

[Deborah Honig]

Well, that's great. It sounds like exciting times for iFabric. Congrats on the great quarter. Looking forward to the second half of the year, which sounds like it's going to have some pretty good growth. Appreciate your time. If anyone in the audience has any additional questions, feel free to reach out or if you want to one-on-one, happy to set that up. Thanks, everyone, for your time. Have a great afternoon.

[Hilton Price, executive]

Thanks, guys.

[Hylton Karon, executive]

Thank you.