Joe Diaz - Managing Partner, Lytham Partners, LLC Michael Brigham - President and Chief Executive Officer.

Kevin Ellich - Craig-Hallum Capital Group LLC Scott Billeadeau - Walrus Partners, LLC Sam Rebotsky - SER Asset Management.

Good morning, and welcome to the ImmuCell Corporation Third Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I’d now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead, sir..

Thank you, Cole, and thanks all of you for joining us today to review the unaudited financial results of ImmuCell Corporation for the third quarter of 2018, which ended on September 30, 2018. My name is Joe Diaz. I’m with Lytham Partners. We’re the Investor Relations consultant firm for ImmuCell.

Before we get started, let me say that statements made by management during the course of this call include forward-looking statements. Actual results could differ materially from what is discussed in those forward-looking statements.

Additional information on factors that could cause such differences is available in the company’s most recent filings with the SEC on Forms 10-Q and 10-K, as well as in last night’s press release.

I should also note that the full details of the company’s third quarter financial results are available in its quarterly report on Form 10-Q and a summary press release that were both filed with the SEC last night.

With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation, after which we’ll open the call for your questions.

Michael?.

E. coli, coronavirus and rotavirus in one preventative treatment at birth.

Additionally, we have gained substantial traction with our Beyond Vaccination message that positions our product as a viable alternative to traditional vaccines that are given to the mother cow or dam intending to prove colostrum that she produces and that is later fed to newborn calves to protect them from scours, even though we know that responses to these vaccines are variable.

Previously, we could not compete effectively for these sales because the dam-level vaccines include the rotavirus claim that we did not have until late last year.

Initial customer feedback indicates that producers are responsive to the compelling benefits of our product, benefits that include reducing stress-causing injections to the cows and delivering a guaranteed level of antibodies to the calves.

The calf-level market is worth something like $18 million per year and the dam-level market covers about twice as many calves. This is a large new market opportunity for us. Now with Tri-Shield, we’re in this bigger game. Our production has been limited to about 250,000 worth of product sales per quarter since launch during the fourth quarter of 2017.

But we do expect to be able to about double that during the fourth quarter of 2018. Gross margin as a percentage of product sales has dropped below our target level of 50% so far in 2018. This decrease was largely driven by lower biological yields from our milk and higher costs from the initial batches of Tri-Shield First Defense.

While we are not happy about this, it is not a big surprise to us as we launch a new product and scale up production. We expect to improve this percentage going forward. Sales, marketing and administrative expenses increased by 9%, or $239,000 to $2,765,000 during the first nine months of the year in comparison to the same period during 2017.

That increase is in line with our increase in sales. Product development expenses are a different story. We are investing significantly to bring two new products to market, but this controllable expense that can be – is a controllable expense that can be reduced in the future.

Product development expenses increased by 72%, or $941,000 to $2.3 million during the nine-month period ended September 30, 2018 in comparison to the same period during 2017. That increase of $941,000 was greater than our loss before income taxes of $822,000.

Our net loss was $250,000, or $0.05 per share during the three-month period ended September 30, 2018 in comparison to a net loss of $339,000, or $0.07 per share during the three-month period ended September 30, 2017.

And our net loss was $1,269 million, or $23.00 per share during the first nine months of 2018 in contrast to net income of $27,000, or $0.01 per diluted share during the first nine months of 2017. The increased expenses are planned and strategically necessary at this time to bring our new products to market to create top line growth.

That said, I don’t like losing money. I’m a former Ernst & Young guy. I know my GAAP numbers.

However, sometimes I feel that reporting results in accordance with GAAP can miss a point about our operations that is important for investors to see, because cash rules, in my view, I like to look at our loss before income taxes and add back certain non-cash expenses.

Two of these significant non-cash expenses are depreciation from the Nisin plant that is not yet generating sales and stock-based compensation pertaining to our outstanding stock options. Additionally, we have deferred tax assets that are fully reserved for, but available to offset some of our future income tax liability.

The specific numbers to this non-GAAP financial measure can be found in last night’s press release. But my summary is that, this non-GAAP adjustment is enough to flip the reported losses during – the reported losses before taxes during both the three-month and nine-month periods ended September 30, 2018 into the black.

Lastly, let me update you on the development status of our Nisin-based intramammary treatment for subclinical mastitis.

As many of you know, our goal is to revolutionize the way mastitis is treated by making the treatment of subclinical infections, economically feasible by eliminating the standard requirement to withhold milk and meat during and for a period of time after treatment. No other product can offer this value proposition.

This important claim and competitive advantage was confirmed at the end of the third quarter by the issuance of a Technical Section Complete Letter for the Human Food Safety Technical Section by the FDA.

Nisin, the active ingredient in – is a bacteriocin, 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 known as superbugs.

The timeline to completion of this product development project is now all about the manufacturing technical section known as Chemistry, Manufacturing and Controls, or CMC Technical Section with the FDA. During the third quarter of 2018, we began production of three – of the three registration batches required for the CMC Technical Section.

We now anticipate making the first phased submission of the Nisin Drug Substance CMC Technical Section to the FDA before year-end. We intend to issue a press release announcing this milestone when it happens.

The second phased submission, which would include the Drug Product data, as well as responses to the first phased review is expected to be filed during the middle of 2019. Adherence to this anticipated timeline supports obtaining FDA approval by late 2019 or somewhere during the first-half of 2020 with subsequent market launch.

So I will not read out the other financial numbers on this call that you can access in last night’s press release and in our Form 10-Q, I’d rather hear from you. So with that said, let’s have the operator open up the lines for your questions..

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Kevin Ellich with Craig-Hallum. Please go ahead with your question..

Good morning. Hey, Michael, thanks for taking the questions. I appreciate the update on – that the progress at Nisin.

What do you need to do to get ready for the approval and launch? I mean, do we need to – what sort of investments are you making in terms of ramping up the field force, getting out to see more customers? Can you walk us through that process, please?.

Sure. Yes, thanks, Kevin. As we launch the product, I do see our sale team expanding. Going into launch, that, that expansion is going to be minimal. We’re going to launch with our team plus or minus, maybe one or two more reps. But as market acceptance has proven, I can see that team being augmented with smart technical service reps.

So some growth in later 2020. Really, what we need to do to prepare for launch is build a little bit of inventory during the last stage here of the application with the FDA. And we’re going to piggyback right on top of Tri-Shield.

As frustrating as this Tri-Shield launch has been, because we just haven’t had enough product to meet the real strong demand. There is a silver lining. And that silver lining is, we’re building some really good relationships with some key large producers. We simply can’t put this product out through distribution to all-comers.

This call that – would call on the distributor and just ask for the product like they do with the bivalent First Defense capsule. So we’re targeting these large producers working directly with them, making sure that they do come off that dam vaccine and we will have a product waiting for that calf when it – when it’s born.

So those relationships are really strong. They’re really key essential opinion leaders. So we will be working right with them as we launch Nisin. These are people that are willing to try something new, saw the benefit of the Tri-Shield. And we think they’d be willing to take a look at something new like a discard mastitis treatment.

Kind of a long answer to your question there, Kevin, but does that help?.

No, very helpful, very helpful. And actually, that kind of segues Nisin to the issues or policy you’ve had with meeting product demand with Tri-Shield. It seems like the batch yields have been kind of challenged for the last several quarters.

What – can you remind us what the issue is and what you’re doing to improve it and when we should see that improvement?.

Right. So when we have milk here in Portland, Maine, we have a liquid processing system that is pretty smooth. That goes forward with – we run that process for over 25 years now. With – what’s been the challenge is upfront at the farm level, at the vaccine to the cows, so that affects biological yield. So there’s a lot of – you can get approval.

We got approval based on small batches, approved the efficacy, got the USDA license. But when you go to scale up and take this to a lot more cows, we need a lot more vaccine. And there’s always a little bit of development, a little bit of tweaking as far as what’s the right level of that vaccine. The interaction between the three vaccines the E.

coli, corona, rota. But mainly, we just haven’t had enough vaccine. And with the limited vaccine, we haven’t had the optimal response in the cows. So the milk coming into Portland has been limited, that limits the supply to the market..

Okay.

Is it feasible or given the current market conditions – dairy market conditions, which seems like it’s suddenly in soft with a lot of supply and maybe not enough demand to meet that supply? Is it possible to get milk from other parts of the country?.

Well, let me clarify. We have enough cows that produce enough milk. We just need them responding to our vaccine and we need to deliver the vaccine to those cows. So it’s not a shortage of cows, it’s a shortage of high titer responding – cows respond to our vaccine and having enough vaccine to immunize enough cows to generate that response.

So, the relationship we have with these farmers are really strong. They really appreciate our program, especially in a down market, because the compensation is fair to both parties. So it’s not about getting more cows, it’s about getting more vaccine into the cows we have..

Got it. And then, lastly, looking at the balance sheet, it looks like cash came in a little bit over $2 million.

Can you update us on your cash burn? And I guess, how long this cash will last you and if you will need to go back to the market?.

Sure. So, the – if you look back basically over the last two years, mostly the last 18 months, it’s been a crazy cash flow. A lot of money coming in from debt and a couple of equity raises and a lot of money going right back out as planned into the Nisin plant.

So the biggest, like turning point, if you will, on our cash flows is completion of that Nisin plant. So, as of September 30, I mean, literally, we’re down to like $40,000 a couple of small pieces of equipment we needed to buy. So that crazy in and crazy out or high in and high out, the planned $21 million investment in that Nisin plant is done.

So things kind of rationalized, things kind of get back to a more cash flow positive way. We don’t have another huge investment like that on our near horizon..

Okay, excellent. Thanks for the update. See you soon..

Thanks, Kevin..

And our next question comes from Scott Billeadeau with Walrus Partners. Please go ahead with your question..

Hi, thanks for taking my call. You have a – maybe just a couple of my questions have been answered. But maybe give me a little sense.

The – you explained it pretty well, but just reconfirm kind of the timing and what you need to submit for the Nisin approval? And what do you get back? And is there a response time, maybe just kind of lay out that cadence again for me, that would be great? Thank you..

Sure. Yes, it’s really quite different from the USDA. With the FDA, we really have a very, very scheduled process. So there are five Technical Sections, I mentioned that fourth one being Human Food Safety confirming the zero milk discard, the key competitive advantage. That one was just completed.

The prior – the other three have been previously completed. They issue a – the FDA issues a Technical Section Complete Letter. So four to five done. The fifth, again, is manufacturing. So that, that required us.

We have made Nisin at small scale for studies, all those studies efficacy and safety and all that, we – what the FDA wants to see is Nisin at commercial scale. So this is the $21 million investments in Nisin plant.

We need to finish the completion of these tests batches basically, registration batches they’re called, that all gets submitted will make two submissions. So the first submission is drug substance alone, the Nisin, that will be going in shortly. That will be subject to a statutory six-month review.

They don’t usually come in early and they don’t usually come in late. That’s a sort of an agreement with industry. This is a six-month review. So we will be preparing – during that six-month review, we’ll be preparing the second submission, we’ll call it the second phased or the drug product submission, so that’s the Nisin fully formulated in syringes.

So we’ll get that six-month turn on the first submission. We’ll respond to their questions. We’ll supplement with the drug product and that will go for another six months. So at the end of that, we would be hoping for a complete.

We think we would have answered their questions on the first submission and we would have added the drug product element of the submission. Then there’s really at end is a 60-day administrative review, where your label and other administrative matters are put together. So, again, probably too long an answer to a good question.

But two, six-month reviews of the CMC Technical Section is a 60-day admin review and spend a little bit time here in the front and a little bit of time in-between..

Yes. Okay, great. Yes, because I know this – my little familiarity with kind of FDA where if – when they give you questions back, my understanding is that clock on the six-month stops ticking. But again, not knowing the difference between this type of product versus a human drug, so I’m kind of referencing that.

But just trying to get comfortable that when you get a question back, at least, on the human drug side that six-month stops ticking until you submit the answers back. But the idea of what you’re going to submit to them is really not so much efficacy or stuff, it’s just purely manufacturing.

So there probably isn’t going to be a ton in terms of those types of things you have to deal with at this point.

Is that a fair assessment?.

I think it is. I’m not super familiar with the human side. But I do know on the animal side that that six-month clock stopping that you referred to. Yes, we don’t expect to hear much of anything during that six-month period and then that six-month period will expire. The answer will come in just like the Human Food Safety Technical Section.

We were literally watching the calendar as we came up to 180 days. There was our response, it was complete. So yes, we do need to allow sometime in-between after the first six months to whatever questions they come up and have to be answered. And then we would make the second submission and that would start that second six-month clock..

Great, thanks. And then just a follow-on. I think I heard right on a previous answer is, this is really just going to be put right in the bag of the current First Defense Tri-Shield product. It’s literally – it’s the same go-to-market, same people talking to the same.

Is there much different with this product or your guys out there are the ones that are going to deliver this and….

Right. Yes….

And when will they start talking about it and prepping the market? I mean, is there something you can do in this 12-month period to do anything, or can you just not talk until it’s approved?.

Yes, you’re right. There are – you have to be careful. We can’t make claims or make bold statements without the FDA license. But we are talking about the direction and the concept of treating animals early and the cost of ignoring subclinical disease. With or without our product, these are real conversations.

So our sales team is really good at sort of drawing the line about, talking about market needs and disease management and the potential for our product without going out there and making a claim for a product that’s not approved. So….

Great..

And you’re right. Like I said, we’ll – these Tri-Shield customers, really these are – a lot of these are customers that didn’t ever try the bolus, but they’re creative and they’re aggressive and they’re progressive and they like this Beyond Vaccination. So they’re opinion leaders.

They’re big farms and they’re new relationships to us that we earned through earnings through Tri-Shield. So yes, we would like to go back and say, “Hey, you tried something new a year ago. We got something new now.” That’s how we would start that launch of the new product..

Great. And then just a final question here quick. Any – you’ve been working on this for quite a while.

Has there been – as you guys look around to the industry, anything coming down the pipe, anyone new coming with this type of or anything you see that’s coming behind Nisin with similar, or what the competitor is going to do? Again, it’s – you’re going to kind of blaze a new market here, because no one can really attack this market anyhow because of being able to keep the milk.

But any thoughts there at all?.

Well, as small as we are things that – small things are very material to us. Match that with our style, our strategy as full disclosure. We just really get into quite a bit of detail So we would tell a lot more about – we are telling a lot more about what we’re doing than the big guy would.

So when you look at Zoetis or Elanco or Merck, they would never be providing disclosure of the detail that we do. So the answer is no. They could have something that just not talking about that we don’t know about that similar or down this path, but we don’t see it. And we think we’re way ahead with the FDA process.

And as long as it’s been for us, it’s going to be long for anybody to bring something novel, something new through the FDA. So to the best of our knowledge, we’re ahead and we’re unique and that’s definitely that – what keeps us going..

Great, thanks. I appreciate it..

All right, Scott. Thanks..

[Operator Instructions] And our next question comes from Sam Rebotsky with SER Asset Management. Please go ahead with your question..

Yes. Good morning, Michael. Thanks for taking my call. And this is a milestone when you submit the Nisin.

Do we think we’re going to submit it like just before Christmas, or we’re just closer to – how are we looking at, because Christmas is very busy at the FDA, people on vacation and holiday, so we have any thoughts there?.

Yes, everyday. Hi, Sam, thanks for the question. Everyday. It’s a tradeoff just getting the best possible package versus the soonest possible package. So we’re just tweaking that final decision. And when the date is right, when the batches are right and – we can wait a long time to have a perfect submission.

And we, on the other end, we could have submitted prior to now and have flawed submission. So we are – there’s quite a team on this just sort of navigating that last decision. And that’s why I mentioned it is material. It is a big milestone.

And when that goes in, I’d think it warrants a press release to tell you and others that, yes, that’s where we made the decision. We’re in and the clock has started, whether they’re on holiday or not, that 180-day clock will be the same from the start of the submission..

Well that – that’s good, Michael. It’s better to get it right and then to screw it up. Now as far as the Tri-Shield by doubling your sales in the fourth quarter. You’ve been able to produce more product.

So how do we look at it going through 2019? Do we have – I know you are working to get all the – to help you get more product? Do we think we could consistently improve to maybe $600,000, $700,000, $800,000, $900,000 a quarter.

What is our visibility there on the Tri-Shield?.

Yes. This doubling, if you would ask this question back at launch, I would definitely would have anticipated to have happened, at least, in the third quarter, if not second. So, we’ve put out that projection as an indication of we are starting to ramp up. We are seeing that build, and we’re not stopping there.

So those numbers you mentioned, we got to get into that direction. It’s been the first. It was very consistent for four straight quarters and then this double here in the fifth quarter being the fourth. But the launch was fourth quarter of 2017.

Those first, second third, those four quarters were very consistent and then it double and then we just continued to fall that scale as we go into 2019. So we want to put that out that it’s no longer flat, it’s a double. But we’re not done, we’re going to keep going.

So just the other factor to keep in mind and I know you know this, Sam, but it’s about a six-month production cycle.

So this fourth quarter doubling is really cow work that was done back in the second quarter, beginning of third quarter, because it takes that long from – coming from a produced vaccine to the work with the cow to collection and processing and USDA release.

So we’re battling with that five, six-month production lag for everything we’re doing today, we won’t see the results for five or six months..

Okay, that’s good.

And now as far as improving on the First Defense production, do we have that sort of improve, so that’s on target to have enough product on the First Defense?.

Having been through the backlog that we were recently in the middle of almost never willing to say we have enough, because we want to be able to respond to any changes in the market that competitive product dropping out or just good work for our sales team and growing sales. But not too – we don’t have too much.

I don’t want too much, but we are in a much better place. So we have sufficient and – but we’re still building. That would be my answer. We have sufficient inventory, especially consumer going into the peak season first quarter, but it’s not enough. We’re still building.

So we have enough to meet sales, but we’re still going to – we’re going to build those levels going through even the first-half of 2019. We’re just continuing to rebuild that stock. So, way better position, but still building..

Okay. One final comment. I’m very happy to hear that in your interview with The Wall Street transcript, you’ve indicated, once you get approval for the Nisin, you would look to get a juice to give it – give the Nisin product to the cows the mast out prophylactic. I know that’s far away you’ve got to get approval first.

But are you seeing any rationale for the prophylactic? Do you see any interest in doing that right now or from the farmers, et cetera?.

We’ll be honest, Sam. I don’t remember that specific question or that specific quote in The Wall Street transcript. So I need to go back and take a look at that.

I think, the only topic in that area, I hope is related, is the claim on this product, which we’re going to be very careful about – this is a script product and the claim is going to be treatment of subclinical infection. But we have commented that, that may be the label.

But what a product, any product, not just ours, any product that can treat a subclinical infection is essentially in practice in the real world preventing a clinical infection. So many of the subclinical infections progress to clinical, you won’t see that on your label. But the reality is, you prevented some clinical infections.

And that’s definitely a position our product will be in, treat that subclinical, but avoid the clinical. But again, the label is very clear. The label very clear is going to say the treatment of subclinical. Now with that interest, post-approval, because we want to keep our strategy, our sites, our regulatory plan very narrow, very direct.

By post-approval, we will look at coming back and perhaps running a clinical study to expand that claim and see if we can develop that data for the treatment of clinical infections – same pathogens, just a different disease stage..

Well, that sounds exciting, Michael. Good luck and we’ll see – good luck on the submission..

Great. Thank you, Sam. I appreciate it..

[Operator Instructions] This concludes our question-and -answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks..

Hey, Cole, I think we may have lost Joe, and that’s okay. We really – we’re going to wrap up quick and just say thank you to everybody for participating in today’s call. And we do look forward to talking with you again to review the full-year 2018 results around the middle of February, and have a great balance of the week everybody. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..