Good morning, and welcome to ImmuCell Corporation Reports Fiscal Year 2022 Unaudited Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note that this event is being recorded today. I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

Thank you. Good morning and welcome. As the operator 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 year ended December 31, 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, which include any statement that refers to future events or expected future results or predictions about the 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 the safe harbor statement provided with last night's press release, along with the company's other periodic filings with the SEC. Information discussed on today's call speaks only as of today, February 22, 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 ImmuCell Corporation, after which we will open the call for your questions.

Okay. Thanks, Joe, and good morning, everyone. Last night's press release reports no change to our product sales results that were first reported on January 9. The press release also provides the full unaudited P&L results and some unaudited summary balance sheet data. We expect to file our full audited financial results on Form 10-K on or about March 29, 2023. I'm not going to spend much more time on this call discussing the financial results. I think it is more important to use this time to discuss the impact of a serious product contamination problem in our production process. We are going to take a hit in the first quarter of 2023. But we are working diligently to address the situation and believe we are taking the appropriate steps to emerge from this problem stronger with production capacity in place to produce more than $30 million of product per year going forward. We disclosed this situation in detail in last night's press release, but I'd like to recap the important points with you now. In 2018, it became clear that the demand for Tri-Shield First Defense was outpacing production. In response to this increasing demand, we began a series of investments during 2019 to increase our production capacity to over $30 million per year. The necessary facility expansions and new equipment to increase production capacity were in place by the end of 2022. The troubling thing is that, just as this increased production capacity is coming online, a production 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 the contamination and production ran without issue during the balance of the fourth quarter of 2022. What makes matters even more challenging is that during the first quarter of 2023, our standard in-process quality control testing has detected a second contamination event. This is resulting in a slowdown in production output as we take the necessary steps to assess and remediate the issues and ensure that any product that is put to market meets all quality standards. We believe that the ongoing implementation of our capacity expansion plans and the corrective actions being taken in response to these contamination events should allow us to operate at a higher level of production output going forward without further significant contaminations. The slowdown in first quarter production output has, in part, contributed to a more than doubling of the order backlog since the end of 2022. We expect to report reduced sales during the first quarter of 2023 and a large increased backlog as of March 31, 2023. Due to the loss in earned gross margin being incurred during the first quarter of 2023, we have made the decision to defer for the time being the completion of the incremental plan investments and increase our production capacity further to over $40 million per year. The increase in sales demand for First Defense is both exciting and difficult for us. At the same time, we are preparing all the data required to make our third submission of the CMC technical section, the approval of which by the FDA is required to market Re-Tain. The submission will be subject to a six month review by the FDA. We aim to resubmit during the first quarter of 2023, subject to the completion of several critical path items that require results from external laboratories. So by way of conclusion and to be very direct, one view is that we have the backlog and contamination on the First Defense side while not yet achieving FDA approval of Re-Tain. However, the other view is that we are approaching both $30 million in annual production capacity for First Defense with the flexibility to get to more than $40 million in the future, while at the same time, we are advancing to the final stages of a very significant FDA product development initiative. I take the latter view as I work to attract, retain and motivate our greatest assets, that being the employees who are working so diligently to make all this possible. 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 to the Investors section of our website and click on Corporate Presentation or Contact Us for a copy. We expect to disclose more information about the impact of the product contamination and the updated status of our remediation efforts in our annual report on Form 10-K on or about March 29, 2023. With that said, I will be happy to take your questions. Let's have the operator open up the lines.

We will now begin the question-and-answer session. Our first question will come from Charles Sherhaummer with SMI.

Hi, Michael. How are you today?

Hi, Charles. Good morning. I’m doing all right. Thank you. How are you?

All right. We are doing good. Just walked outside this morning, we got eight inches of snow and that’s a lead into the call here. Michael, I just had a couple of quick questions. I didn't see a big charge-off on the operations statement due to the contamination, in other words, a line item. Were you able to salvage any of those batches or were they a total loss?

Yes, that's a good question, Charles. A little tricky. So third quarter, as I mentioned, two events. That third quarter event, of course, is reflected in the 2022 results, and we'll detail that in the K with the cost of goods discussion in the MD&A. So, and then we're still evaluating this first quarter, but you're right. It's not all a write-off. I think the immediate impact is timing. So it does slow down production; some of that product can be successfully reworked, and some of it will become a write-off. And that is all under careful evaluation. That's what I was referring to. I think we'll have better data to assess that or report that in a couple of weeks here with the three or four weeks for the 10-K. But you're right; it's two things. Some of it can be salvaged, reworked. Some of it will be a P&L write-off.

Okay. And in your deferred investment, I would assume that that's for preservation of capital reasons. Would that be correct?

Yes. That project was largely funded by sales, by gross margin.

By profit, yes.

By profit. So we've taken a cautious approach. It's not immediately needed with sales being around $20 million, with our current capacity being about $30 million. The objective was to get ahead of these investments, as you see, and take some time in a number of years. So we want to get ahead and get to that $40 million level, but I think it's prudent cash flow-wise and safe production-wise to pause on that, settle, get back up and running at the $30 million, and I still intend to put that program back in place, but the start date is not that urgent.

Okay. And then do you have any idea of what the attrition rate is on the backlog? Do you guys lose a lot of that backlog to other products, or do most of those backlogs come to fruition?

That's another great question, Charles. Our sales team works so hard on that answer every day. I mentioned the doubling of the backlog. A lot of that happened even before the contamination-related slowdown, so demand is really strong, and the orders continue really strong, but we do know that these calves are born and many of these customers will go find an alternative product. So we'll lose some, and the challenge is to bring our supply and go get them back and just to sell our efficacy. In my opinion, they're going to move to a product that's not as effective. That's why our orders are so strong. They want First Defense. So bringing in supply and the sales team has a huge challenge with the balance of the year. We'll find those that switched over to something else and bring them back.

Well, I know you've got a great product. So if you've got a good sales team, they'll get it back for you. I have another question. When you go to raise the funds that you've deferred, what methods do you look at to raise those funds? Is it loans? Or is it to sell more stock? And if you do sell more stock, is that dilutional? If you could just talk about that for a second. And that would be in the future, obviously, with what you had said.

Yes. If I could just go back for a second. I appreciate your confidence in the efficacy of our product, and you said if you have a good sales team, and I would just add, our sales team is uniquely positioned to bring this back to get these lost customers to regain the sales that work so hard and suffered so long through this backlog is going to be a joy to have selling with inventory on hand. But then as to financing, your question there, yes, my first objective is gross margin. That's the best way to fund this business. We've done a lot of equity and we've done a fair amount of debt. But in a situation like this, we're going to keep our eyes open, be flexible to all three, and find what's the best way to make up for this first quarter loss that’s still being evaluated. So I would say it's only prudent to have all options on the table.

Yes, it's an early question, and I apologize for that. We are looking to launch our Re-Tain product hopefully in 2024 or late 2023, but we cannot speculate on that yet. Will the Re-Tain be produced in the same facility or lab as your First Defense? If so, should we be concerned about potential contamination issues between the two products?

Charles, that was another great question.

I'm sorry, these are tough questions but…

No, no, no, it's just spot on. They are good questions. I appreciate it. So let me just first comment on the timing. Just to be clear, this submission that goes in will be subject to a six month review. And then there's a two months, let's call them administrative review at the end. So I just look at it as eight months from submission. But you're right, that's what we control, the submission, and then the review and the approval are in the FDA's hands. So we will have that news complete or incomplete eight months from submission. But no, to production, it's a very fair caution, but it's a completely different facility. It's a short walk out of our back door. It's still different standards as far as air control and separation of process, it's FDA regulated as opposed to USDA. I would say this remediation process in part is taking some lessons from the Re-Tain facility, not all of which can be implemented into the USDA facility. But it is a very different facility, very different inspection standards and we have no crossover at all of product or equipment and very little crossover of even people. So same company, but a little bit of a different world over there at what we call 33 for Re-Tain.

Yes. Thank you very much for I learned something today about the difference between USDA and the FDA, just I wasn't thinking about that. So thanks for opening up that horizon for me.

I think when you look at the development budgets and I talk about capacity expansion for First Defense compared to the investment we're putting into Re-Tain, it comes at a price. That Re-Tain facility cost us $20 million. We've invested just about $5 million to get to this $30 million on First Defense. So yes, it is different. But we move to one quality fits all.

Now we've got a lot of confidence in you, Michael. So I hope that things continue on. One more question for you, and then I'm finished. I'm sorry to take up too much of your time here, but where do you see ImmuCell going in, let's say, 2024 or 2025? Can you just give a quick thumbnail sketch of kind of what your vision is for these next two years?

Right. It's pretty clear, and it hasn't changed except that one real significant surprise challenge put right on top of us. So the goal pre-contamination remains the same post-contamination, which was 2023 was a great year of transition, a great year of milestone achievements, huge catalysts being, number one, $30 million capacity. The ability to grow sales, $10 million on top of the current $20 million, just on the doorstep of having that; we get the setback on contamination. So we work with sort of the new twist; it’s the same for the First Defense, but remediate the contamination. And then the other thing that just hit the same year, 2023, when I say it's a year of two big catalysts, the second was this FDA reading, seeing that. And so the goal is always just to get out the backlog, produce more First Defense and give the FDA another opportunity to say yes. So as we turn to the second year in your question, 2024, we're much more commercial focused, much less product development and just selling a bunch of First Defense and initiating what we call that controlled launch, that market introduction of Re-Tain to the industry.

Yes. It sounds like with all your hard work, we need a little bit of luck to bless us on this thing.

It requires skills on the First Defense side and hard work, and on the FDA side, a bit of luck is necessary.

Yeah. There is no question. All right, Michael, you have done a fine job for me and I want to thank you for your time and really good luck with these impending challenges lying in front of you.

That’s great, Charles. And I appreciate the chat. And we will keep the communications very current.

Okay. Thank you, sir.

Our next question will come from Frank Gaster, a Private Investor. Please go ahead.

Mike, thanks for taking the call.

Yes, thank you.

I have a question about Re-Tain. I saw in a press release that the last submission was related to a facilities inspection. Has that inspection been redone?

That's a good question. The inspection is expected to occur sometime after the submission, likely during the six-month review period. Essentially, the FDA tends to wait to deploy their inspection team until there's a serious commitment from us. The submission is currently pending and under review, so we still have that process ahead of us.

Okay. It seems like a kind of odd way to go about it, where you under the prospects of having the simple inspection dictate release?

I understand. It's a challenging process, but I should clarify that they completed their first inspection and provided their list of items to address. As we continued our communication with them, we discovered that we need to wait. When we make our submission, one of the items on that list will be to inform them that we are ready for inspection. I believe they are quite busy and have adopted the mindset that they can complete this within six months, so they prefer not to engage unless we have made our final CMC submission.

All right. Could you please provide more details regarding your comments about the critical path and some lab results from third parties related to Re-Tain?

Yes. I mean essentially, what the FDA required is to have certain analysis, certain testing procedures done by two labs. So we've been able to control the method and completion, the process on our hands, but they want it to be robust enough that someone else can do it. So that is the critical path item to have that repetition done outside of ImmuCell.

And you're still going with the Q1 submission time frame?

Yes, we are all on track. We understand how crucial this is; the timeline is quite tight. It's already late February, and while my projections may shift slightly due to changing circumstances, I am very confident that we are just days away from our target, not months. Everyone involved in the project is still aiming for completion in March.

Okay. And one more. Could you give me some idea about the SG&A line? It seems to be significantly higher than a year ago.

Yes, I understand your inquiry. The details are indeed noted, and while the press release summarizes the information, I can clarify that the administrative expenses are stable and show a slight inflationary trend, typically not exceeding $100,000 to $200,000. We have intentionally decided to raise our selling expenses, which are managed as a percentage of sales. This increase has been influenced by key personnel hires and effective programs. Notably, the addition of Dr. and his team, along with Mark Listenberg, who brings 30 years of cheese industry experience, has been instrumental in addressing our contamination issues. As a result, our sales team and programs have expanded in proportion to sales while remaining below 20%. In 2022, we anticipate a slight increase in sales expenses and a smaller increase in administrative expenses, and I will provide more details in the upcoming K filing.

Okay. That’s all I had, Mike. And I’m looking forward to the potential for First Defense coming to fruition. It’s been a long time.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Joe Diaz for closing remarks.

I'd like to thank all of you for participating in today's call. We look forward to talking with you again to review the results for the first quarter of 2023, on or about May 16, 2023. Have a great day.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.