Good morning, and welcome to the ImmuCell Corporation Reports Second Quarter ended June 30, 2024, 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 this event is being recorded. I'd now like to turn the conference call over to Joe Diaz of Lytham Partners. Please go ahead.

Thank you, Anthony. Good morning, and welcome. As Anthony 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 quarter ended June 30, 2024. The 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 SEC. 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 ImmuCell Corporation, after which we will open the call for your questions. Michael?

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 10-Q 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, 2024, 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 improved 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 2022 to early 2024. We have investigated these events thoroughly. Some of our problems were caused by an unusually high bioburden in our sourced 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 resolved, although 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 10-Q 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 6. 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. For clarity, I'd like to confirm that throughout these contamination events, all product sold to the 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 yields in the coming quarters. When I look back, 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, which is 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 bioburden, but this heat also kills antibodies. We are optimizing that mix to maintain acceptable bioburden levels while also maximizing yields. 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 ended June 30, 2023, to negative EBITDA of $340,000 during the six-month period ended 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. However, we have no draw outstanding on our $1 million line of credit that is available to us until September 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 unaudited 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 won't take your time on this call to review all of 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 Re-Tain to market. In May, the FDA issued a CMC Technical Section in complete letter in response to our third submission of the CMC Technical Section for Re-Tain. Pursuant to the incomplete letter, the FDA has provided some minor questions about our submission requiring a resubmission, 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 the 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 Investors 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.

Our first question will come from Tom Fox of Private Investor. You may now go ahead.

Good morning. Thank you for taking my question. I actually have a couple of questions. My first one is about First Defense. 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 provides 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, I mean, 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?

Yes, Tom, sure. Thanks. It's a good question. So yes, you've got it right. That's the early milk right after she gives birth, called colostrum, which is really rich with antibodies. We hyperimmunize those donor cows so that it produces very specific antibodies to our targets: E.coli, corona, and rotavirus. We've been very successful at growing the quantity of milk we bring in. There's actually a disclosure I can share with you offline about the growth of that work-in-process inventory. So, we are in really good shape with the quantity of the raw material, the colostrum, the milk that we buy. And I discussed the challenges in growing those farms and managing those contracts; we are now in a much better position regarding quality. Therefore, I don't see that as a limit to our production growth.

Okay. That answers my question. I do have another question, kind of a quick one. I understand that your Chief Scientist retired recently; do you guys have any plans to replace him?

Yes. You’re referring to Dr. Joe Crabb. I'm very pleased to maintain an open consulting relationship with him, but that is true; he did retire from full-time work. He is the developer of First Defense, going back to the early days of the first USDA approval. He is also the initial developer of Re-Tain. He did pass on both of those projects. First Defense is now under the production team, and Re-Tain is being managed by Betsy Williams, who's our VP of Manufacturing Operations. So, we had good transitions there. We really do not have a large active new program, and our investment in product development outside of Re-Tain is very limited, managed by Dr. John Zinckgraf, our Director of Product Development. So no, we are not looking to replace him at the VP level or at the full-time level. But that team, the production team, Betsy's work, and John Zinckgraf's work cover our scientific needs quite well.

Okay. Thank you for taking my questions and good luck to ImmuCell moving forward.

Of course. Yes. Thank you, Tom.

Our next question will come from George Melas with MKH Management. You may now go ahead.

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 clarity you provide in the Q&As; it's interesting to read. Just trying to understand, it seems like the first quarter was really impacted by some of the previous contamination events of 2023. The second quarter was less affected by contamination and maybe more by yield issues, is that right? Or is that just oversimplifying?

Yes, that's a fair assessment. I think you're correct in your understanding that it was a bigger hit in the second quarter compared to the first quarter. So, it has been a combination of both. I don't know exactly how to separate contamination impact from yield impact, but I know for sure that contaminations must go down, and yields must go up. That's what we were trying to address regarding our progress and detail on both fronts. Is that fair?

Okay. On page - I don't know what page it is, but you mentioned in the 10-Q about some yield improvements that you have already sort of achieved. One of them is by reducing heat and another is introducing new filter equipment with an expected improvement of 17% and 5%, respectively, is that 17 points of margin? Or is that 17% over what you have achieved previously?

Yes, more the latter. So you are in the vicinity of Page 35 in our materials. Yes, what's interesting about the 17% is that we can identify it. We know that target, but we have not had the technical fix to achieve it yet. However, it is something that could give us that much more at that filtration step each week, plus or minus an estimation range. That filtration step can be improved. However, that product still needs to be finished through the rest of the production cycle, formulated, and filled. So it's not that I was trying to suggest that 17 points drop to the bottom line, but rather that we're aiming for a 17% improvement on that liquid process step.

So it means that if - right now, you have an output of 100, that output would move to 117. Is that what you mean?

Yes, and then we would incur the additional cost, labor, and materials to finish it. But yes, then each week, we'd be in that ballpark of doing the same work and getting those extra 17 doses.

Okay. Looking at the future, 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, steps, and knowledge to get there? Is there a plan to reach that target that you understand?

I called out those two specific yield items because we do understand them well. One, I feel like we have implemented the 5% improvement and just need to see it achieved repeatedly. The 17% is still in the development stage with the manufacturer to find that solution. However, these manufacturers sell equipment that they claim works well. We need to adapt it to our process and make it work 17% better. So that one we need to hedge on because it hasn't happened yet. But I think both are attainable. I selected those two because they are significant and identifiable. Yes, I believe we can achieve both.

Okay, great. Best of luck. Thank you.

Cool. Thanks, George.

It seems there are 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.

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.

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