Adam Lowensteiner - Lytham Partners Michael Brigham - President and Chief Executive Officer Bobbi Jo Brockmann - Vice President, Sales and Marketing Betsy Williams - Vice President, Manufacturing Operations.

Sam Rebotsky - SER Asset Management.

Good afternoon and welcome to the ImmuCell Corporation Third Quarter Fiscal Year 2016 Financial Results Conference Call. [Operator Instructions] Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Adam Lowensteiner of Lytham Partners. Sir, please go ahead..

Thank you, Jamie and thank you for everyone for joining us today to review the financial results of ImmuCell Corporation for the third quarter of 2016, which ended on September 30, 2016. As Jamie indicated, the conference call operator for today, my name is Adam Lowensteiner. I am with Lytham Partners.

We are the Investor Relations consulting firm for ImmuCell. With us on the call representing the company today are Michael Brigham, President and CEO; Bobbi Jo Brockmann, Vice President of Sales and Marketing; and Betsy Williams, Vice President of Manufacturing Operations.

At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Please direct your questions to Michael Brigham.

If anyone participating on today’s call does not have the full text of today’s press release or the company’s quarterly report on Form 10-Q, you can retrieve them through various financial sites on the Internet or by request to the company. Before we begin with prepared remarks, we submit for the record the following safe harbor statement.

Statements made by management of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.

Words such as believe, expect, anticipate, estimate, will and other similar words or statements of expectation identify forward-looking statements.

Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties detailed from time to time in filings the company submits to the Securities and Exchange Commission.

Investors are cautioned that forward-looking statements made during the course of this conference call are based on management’s current expectations and involve risks and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligations to update forward-looking statements.

A more complete safe harbor statement was included in today’s press release as well as in the Form 10-Q filed by the company today. With that, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation.

Michael?.

Thanks, Adam and thanks to all of you participating on today’s call.

Because our financial results have been disclosed in complete detail in our summary press release and our quarterly report on Form 10-Q that were both filed publicly earlier this afternoon, I’d like to direct the emphasis of this call more to current market dynamics and where we see this business going in the near future, say about 2017, and the slightly more distant future, say about 2019, rather than taking too much of your time to review numbers that you can read on your own as well as I can recite them to you.

So first, a quick review of the bottom line and top line results for the third quarter of 2016, our results reported today are very much in line with the preliminary results we announced on October 18. We recorded the ninth consecutive quarter of positive net operating income.

We reported net income of $35,000 or $0.01 a share, $0.01 per diluted share for the third quarter and $478,000 or $0.11 per diluted share for the nine-month period ended September 30, 2016. Total sales during the third quarter were down 20% in comparison to the third quarter of 2015.

This decline included a 16% drop in sales of our lead product, First Defense. During the nine-month period ended September 30, 2016, total sales declined 3% and First Defense sales declined 2%.

Despite these declines, sales of First Defense did increase by 2% during the six-month period ended September 30, 2016 compared to the six-month period ended September 30, 2015 and have increased during 21 of the past 24 quarters in comparison to the respective periods of the prior years.

Looking back a bit, as you may remember, total sales for the year ended December 31, 2015 were up 35% in comparison to the year ended December 31, 2014. This rate of growth was not continued into 2015.

However, total sales for the nine-month period ended September 30, 2016 were 36% greater than the sales during the nine-month period ended September 30, 2014 skipping over the same period in 2015 and indicating a still positive, longer term sales trend.

I would like to share some comments about some of the causes of the sales decline in the current periods, the prolonged period of order backlog, which began in early 2015 and extended through the middle of 2016, disrupted normal shipping patterns. We reduced the backlog of orders as of June 30 and eliminated it as of September 30, 2016.

Having now reset distributor inventory levels after a long period of order backlog, we do not expect to experience sales growth during the fourth quarter of 2016 in comparison to the period – corresponding period during 2015 when a competitor was largely out of the market.

Presently, we are fighting against several negative market dynamics in addition to the impact of the order backlog discussed above. When customers were unable to secure supply of First Defense, some moved to other products, with and without claims, and some opted to use no scours preventative at all.

A competitive product that experienced interrupted supply during the market – in the market during late 2014 and through the first half of 2015 has returned to the market. Some customers have reverted back to using this product. Our sales team could not focus aggressively on acquiring new customers during the period of scarce product supply.

Further, the value of a bull calf has dropped from approximately $450 last year to about $50 to $200 presently. Lastly, the average Class III milk prices declined from $15.80 per 100 pounds during 2015 which compares to $22.34 for 2014 to $14.38 during the first nine months of 2016.

The average price has been trending upwards from $13.48 during the first six months of the year to $16.18 during the third quarter of 2016. We do operate in a cyclical business. We are hopeful that these market dynamics will begin to swing back in a more favorable direction in the relatively near-term.

We are optimistic about the prospects for our business going forward. We believe the sales decline in the current periods, are primarily caused by the short-term negative impact related to emerging from the backlog situation.

Given our recent investment in sales and marketing personnel and marketing programs, we are well-prepared to reengage customers lost during the period of scarce product supply and to begin acquiring more new customers given our recently increased production capacity and available inventory.

This makes us optimistic about the long-term health of our business. Looking ahead, we continue to make significant progress towards our product development objective of adding a rotavirus claim to our product line during 2017, which would be the first calf level product to offer this unique breadth of claims.

We are working to establish USDA claims for our gel tube formulation of First Defense Technology. We have increased production capacity. We have begun to seek additional distributor partnerships to bring First Defense into new international territories. Our objective is to bring the most effective technology to market.

Our competitors, companies like Zoetis, Elanco, Boehringer Ingelheim and Merck maybe bigger than we are, but they do not offer the kind of product we do. Gaining market share from these existing competitive products provides a great growth opportunity for us.

Let me now turn the call over to Bobbi Jo Brockmann, our Vice President of Sales and Marketing, for some perspective on our sales and marketing initiatives.

Bobbi?.

Thanks Mike. And yes, I concur that the third quarter is largely a casualty of being in and emerging from that backorder situation. To underscore what Mike indicated, we had loyal customers that we lost when they could not secure product. We also had a sales team that was unable to establish new customers because of the scarcity of supply.

And then finally, we overflowed our distribution chain with product as we filled nearly all of our outstanding orders the end of second quarter. Now that all said, I think it’s important to note that we weathered the storm very well, in my opinion. So we are a team of seven sales people who must multiply our efforts through our distribution network.

That distribution network is an important group, who deals with product shortages and often feels burned by product shortages from other manufacturers all the time.

When we were in that tight supply situation, we refused to stick our heads in the sand or throw our hands up and say there is nothing we can do when distribution was scrambling for product. On the contrary, we increased our attention to those distributor reps.

We did not want them to feel abandoned or restricted by a product allocation strategy based on prior history or first-in, first-out timing, which is typical for large manufacturers dealing with backorders.

We stayed very close to these distributor reps, to the extent where we helped rattle shelves to find products and transfer products within the chain to try to meet as many end users’ demand as possible. And as a result, I believe we emerged with even stronger distributor relationships.

Our distribution network remains engaged and ready to carry our message forward. Now while not able to establish new customers during that backorder time, the sales team also used that time to work on larger lead marketing initiatives, such as collecting video testimonials.

We now have over two hours of testimonial footage from 30 different producers and these are First Defense users. We are and we will continue to use that footage in different advertising mediums.

And now that our sales team is back to establishing new customers, I think it’s important for you all to understand how well our message resonates with the end user. So Calf-Guard, Zoetis’ product, they are the market share leader, but their product puts a calf through vaccination stress and can be inactivated by colostrum.

On the contrary, our product provides calves immediate immunity that can be administered with colostrum as soon as possible after birth, which is a best practice. Bovine Ecolizer from Elanco is indeed back on the market.

Now their volume is relatively small compared to ours and Calf-Guard’s, but we are still aggressively displacing that product by reminding customers about the importance of our coronavirus claim, which the Bovine Ecolizer product does not have. And by discussing new data from our lab that shows a dose of First Defense contains 28x more E.

coli antibody than that of Bovine Ecolizer. We also see the total market is growing and our message is conducive to that, gaining – to gaining market share from these competitors, while also continuing to grow the pie by establishing new users of scour preventions. So as we grow that pie, we are not focused only domestically.

As Michael indicated, we are establishing new distributor relationships in international countries, namely Germany, China and the Middle East. Now it’s going to take some time for those markets to develop, but we are intent on growing our footprint internationally.

We are also very excited for the anticipated addition of USDA claims to our First Defense technology line and certainly, for the addition of a rotavirus claim to our product line. That USDA stamp of approval, which we expect in 2017, will be very influential.

So hopefully, that gives you all some insight into our sales and marketing investment and vision. With that, I am going to hand it back over to Michael.

Michael?.

Thanks Bobbi. To underscore Bobbi’s comments, we like the calf scours market. We believe that, that disease costs the dairy and beef industries about $740 million per year. That’s a good size market. The mastitis market is even bigger. With Mast Out, we would move from the calf to the cow and enter the mastitis market.

Mastitis costs the dairy industry about $2 billion per year. It is the single largest cause of economic harm to the industry. Presently, mastitis is treated with traditional antibiotic products and treatment is generally reserved for clinical infection, when the cow produces non-saleable milk.

Our groundbreaking product innovation is unlike other antibiotic treatments on the market today. Our goal is to revolutionize the way mastitis is treated by making the treatment of sub-clinical infections economically feasible by not requiring a milk discard or meat withhold during or for a period of time after treatment.

No other products can offer this value proposition. Nisin, the active ingredient in Mast Out, is a bacteriocin that is not used in human medicines and would not contribute to the growing concern that the widespread use of antibiotics encourages the growth of antibiotic resistant bacteria or superbugs.

So over the past years, we have explored several alternative strategies to access commercial scale production of Nisin. First, we engaged a contract manufacturer, but we found the cost of production and the required minimum volumes to be too high under contract.

Then we explored corporate partnerships, but would have lost a significant portion of the gross margin to the partner. During 2016, we have issued the aggregate of almost 1.8 million shares, raising net equity of nearly $8.5 million in two separate financing transactions.

We do not take the dilution created by issuing these shares lightly, but this strategy had allowed us to move forward towards commercializing Mast Out on our own, while controlling the costs of production and not sharing sales or gross margin with a partner. After these two equity financings, we still have less than 5 million shares outstanding.

We feel this as a prudent price to pay to give us the opportunity to enter this huge market. So for some comments on the status of the Mast Out project, I would like to bring on Betsy Williams, our Vice President of Manufacturing Operations, for an update.

Betsy?.

Thanks Michael. We initiated construction of our $20 million pharmaceutical facility to produce this Nisin drug substance during the third quarter of 2016. Through September 30, 2016, we have invested approximately $651,000 towards this project.

The spending going forward will be heavily weighted from the fourth quarter 2016 through the second quarter 2017 and this is due to the heavy construction activity as well as equipment purchases.

The objective is to complete the construction, as well as the equipment installation in 2017 and this will be followed by process validation in 2018, with subsequent regulatory filings, thereby maintaining the timeline that we have anticipated for FDA approval in 2019.

I would like to note that the Mast Out drug product, that is the sterile filled syringes of the Nisin formulation that we will produce here. That Mast Out drug product, will be provided by Norbrook Laboratories.

They are located in Northern Ireland and we are working very closely to align and support our timeline for approval with their supply of the drug product. So with that update, I would like to turn it back over to Michael..

Thank you, Betsy. Let’s have the operator open up the lines for your questions..

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] And our first question today comes from Sam Rebotsky from SER Asset Management. Please go ahead with your question..

Yes. Good afternoon Michael and everybody.

The numbers that you showed, you stated that – is the size of the market the same, even though your sales are down $0.5 million or is the size any different?.

Hi Sam, two thoughts on that, when we talk about the size of a market, I was giving an indication of the cost of the disease. The $740 million is the economic impact of the disease on the industry, so not to be confused with sales of products.

So for us, the market of our – we named our direct competitors’ calf level products for scour prevention being the Zoetis product that Bobbi spoke about, the Elanco product that Bobbi spoke about, also a Boehringer product and a Merck product.

Those products, within that category, we do see growth in that total market category based on the market research we have access to. So, we do see that market growing and Bobbi tried to detail some of the ways we are trying to capture a bigger share of that growing market based on our, I believe, in my opinion, superior product performance..

So even though the size of the market increased, we decreased in this current quarter based on the inability to get the product and sell it to some customers that we had sold before?.

Right. I will not blame the drop in sales on a decline of the market. We do see our product category growing, our share did not, again largely that backlog issue and the timing related to that and some of these other dynamics.

But the good news is the total market is still growing and we think we are in a good position to compete aggressively for that growth with the outperforming product features..

Okay. And as far as the overseas market before in the June quarter, we weren’t able to sell into that market, I assume because we didn’t have product.

Have we been able to sell into that market in this quarter and what is the size of the overseas market that we are trying to sell into?.

Yes. So, our current international markets where we actually sell product are really limited to Canada, Japan and South Korea. Some of the initiatives Bobbi is speaking about are opening up new distributor relationships and our strategy here is to work with in-country experts for both the regulatory requirements the import-export and the marketing.

I mean, we are just not going to do that in these other territories. So, she did mention these being sort of longer lead kind of initiatives, because they are – they are not impacting – we are not seeing sales currently. We are building relationships and gaining regulatory approvals for sales in the future..

Is it similar to the size – is it 50% of the U.S.

market, these countries that we want to sell into, or 100%, what is the size of the market compared to the U.S.?.

Yes. Well, one way to measure that or one way to answer that question is just to look at cow counts.

So when we combine dairy and beef cows, if we can define that as our total customer base, we are looking at 40 million in the U.S., so far greater than any of the markets we serve compared to under 5 million in Canada just 1.4 million in South Korea, 1.3 million in Japan, but these new markets, China, 66 million cows; EU, 36 million cows; Australia, New Zealand, 21 million cows.

So, that will be my best answer just by a cow count. Some of the markets we are in internationally are relatively small. Some of the ones we are working to get into have huge opportunities, similar and bigger than the U.S. market as measured by number of cows, total dairy and beef..

Okay, that’s helpful, Michael.

Now you expect to get the rotavirus in 2017, do we have to submit – we submitted the product to the FDA yet and when do we expect to submit it in? Is there a 6-month turnaround once we submit for approval from the FDA?.

So, it’s a little different, Sam. This is USDA, not FDA, so that kind of 6-month – that kind of statutory turn would be for like Mast Out for an FDA application. This product will be USDA just like our current First Defense claim is with the USDA.

It’s typically a little shorter, but it’s also not statutory whereas the USDA can come back as quick as they want or take the time they need. So what we know to-date is that we have concurrence with the USDA on sort of the safety and the efficacy.

In other words, they’ve seen our animal studies and they are concurring with our claims, label claims, the rotavirus disease claim, and what they need to see next and finally is production, they need to see production serial, they need to confirm the way we make the product. That’s the stage we are in the middle of right now.

When we lay out the timeline for the middle of ‘17, we are allowing time for the production that’s going on now into the beginning of the year, then this final submission with what’s called the pre-license serials, and an estimated review time. And that’s why we’ve always said 2017, because it’s hard to pick a month or even a quarter.

But we think it’s pretty reasonable, based on where we are and where we will be when we make the submission, to look for the middle of ‘17 for allowing enough time for the USDA to review that submission and put it all together into a product license approval..

So you are saying it will be submitted for approval by the middle of ‘17 or expect a response by the middle of ‘17?.

We are looking for the response. We are going to finish up that manufacturing towards the beginning of the year. The truth is we would like to see a 3 to 4-month review. They could take 9 months and that would put us into later ‘17.

But what we are pleased with and what’s positive is we are not looking for a review of our efficacy data, we are just looking for a review of our pre-license serials, and so that’s why we have stuck out that projection for middle of ‘17.

I think it’s reasonable and we’re doing everything possible to stick to it and again, 2017 – mid-2017 for the USDA approval..

Okay, that sounds good, Mike. I am going to step out and I will rejoin the queue after. I will let somebody else have a chance..

Thank you, Sam..

[Operator Instructions] And ladies and gentlemen, at this time, I am showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks..

Sam, I do know by the screen I am looking at, people are still listening. I appreciate the people on the call. If you want to come back in with another question, I would be happy to take that now or we can wrap here. It’s up to Sam and any other interested participants..

And sir, we do have a follow-up question from Sam Rebotsky. Please go ahead with your follow-up..

Okay, thank you. Now as far as – we are going to start the construction pretty soon for the Mast Out and we are going to spend the money most of it in 2017 and it’s exciting that it could happen, but are you comfortable with the timeline? 2019 seems far away.

Is there anyway where we could get this done sooner or is it depends on the construction of the facility?.

I can let Betsy touch on that as well, but Sam, I would say that’s a very aggressive timeline and we are monitoring it extremely closely, every week matters, but I can’t anticipate significant improvements to that 2019, but....

Yes, so construction is well underway. We are – footings in place and really aiming to get a winter-tight building by December and then sit out in the first part of – the first half of 2017.

But yes, the timing is aggressive, but we believe achievable, that we are – we have done things to de-risk that timeline through meetings with FDA and also engaging our commercial partner, Norbrook.

After construction, what’s critical path is having full scale commercial batches, resulting stability and then filing and we have got several phases of that filing. So everything is well in order for our timeline, but yes, everyday, every week, counts and we are tracking it with the highest level of scrutiny as we go forward..

Yes.

And I looked through your 10-Q and I think there is $2 million plus for the building construction, how much is allocated for the equipment at this point?.

It’s roughly $9 million..

The budget is kind of half and half on that $20 million budget allocating exactly between what’s infrastructure on the building and piece of equipment, it’s roughly half and half on the $20 million, but I would caution also, Betsy has got the right team working with her.

I mean, this crew is busy and engaged and incentivized, but no matter what they do, we still need to allow – we are allowing in our timeline to 2019, two submissions that gets back to your first question, directing that over to Mast Out, two six-month reviews of this manufacturing and technical sections.

So just in FDA review time, we have got a full year in there, two separate six-month reviews..

Alright. Well, it sounds good, it’s been a long road and hopefully that it gets there sooner and that the rotavirus comes in, so you could increase your revenue and compete, because you expect you have the ability to make more First Defense, so good luck, guys..

Thanks Sam. I appreciate you staying in touch and thank you..

[Operator Instructions] And sir once again, I am showing no additional questions..

Yes. Go ahead, Adam..

Thank you, Jamie. I would like to thank you for participating in today’s call, everybody. We look forward to talking with you again at the conclusion of the current quarter, which will be our year end and everybody, have a great evening. Thank you..

And with that ladies and gentlemen, we will conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your lines..