Good morning everyone and welcome to the ImmuCell Corporation reports second quarter fiscal year 2020 financial results conference call. All participants will be in a listen-only mode. Please note, today's event is being recorded. And at this time, I would like to turn the conference call over to Joe Diaz of Lytham Partners. Sir, please go ahead.

Hi Joe. Are you on mute maybe? Good morning everybody. Sorry about that glitch. I am not sure what happened. I had Joe on the line a minute ago. I will just read his intro real quick and get right down to the business here. So we just want to preface this discussion 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 that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the cautionary note regarding forward-looking statements or Safe Harbor statement in the company's press release and its Form 10-Q, which can be obtained from the SEC or by visiting the Investors section of the company's website. So with that, introducing myself, I will jump right in. I am Michael Brigham, President and CEO of ImmuCell Corporation. I thank you all for taking the time to join today's call. I do appreciate that. As you may know, last night we filed our Form 10-Q for the three-month and six-month periods ended June 30, 2020 and issued a press release summarizing some of the key results. I am going to rehash a lot of the detail that you can pick up from the Q and the press release, but I would like to highlight a few of what I see as the more important disclosures. First, as you may know we issued a preliminary press release covering our topline sales results only on July 7. We are doing that to give investors a very timely look at this critical measure of our operations. There has been no change to those preliminary numbers. Product sales were up 9% in the quarter over the same quarter of the prior year. Product sales were up 11% for the six months ended June 30, 2020 in comparison to the same period of the prior year. And product sales were up 19% for the trailing 12-month period ended June 30, 2020 in comparison to the trailing 12 months ended June 30, 2019. We had a backlog of orders worth about $945,000 as of June 30. That is down from about $1.4 million as of March 31. We are working to complete the $3.5 million investment to increase our production capacity. The first phase of the project is complete. We have moved our capsule assembly operations out of 56 Evergreen, into the renovated space at 175 Industrial. That commercial production is now going very well at 175. The second phase is installation of the increased freeze-drying capacity at 56. The third and final phase is moving the gel formulation operations out of 56 and over to 175 and then doubling our liquid processing operations at 56. We are on track to complete the latter two phases of this investment before year-end. Let's move to gross margin. You can find a detailed analysis of gross margin on page 28 of the MD&A section of the Form 10-Q. Gross margin dollars are up in all periods reported. However, gross margin as a percent of sales was down for both the quarter and the six-month period in comparison to the same periods during the prior year. The two leading causes for this increasing percentage of sales are gel tubes and biology. First, gel tubes are more expensive to make than a legacy capsule format, but we are selling a lot of them. Second, as we increase colostrum collection to grow production, we need to work with new cows that have not seen our proprietary vaccines yet. The biological yield should increase as these cows come through our program a second time. So we do expect to improve this gross margin percentage over time, but our first priority right now is increasing the total dollar amount of gross margin. Product development expenses continue to be our largest operating expense line item. I think it's important to look at the impact of non-cash expenses. Depreciation and stock-based compensation comprise about 39% of our product development expenses during the six-month period ended June 30, 2020. Most of the depreciation charges result from the drug substance facility we constructed and the related production equipment for Re-Tain. Obviously, the initiative to bring Re-Tain to market is very expensive. We are proceeding on plan to make our second phase submission of the CMC Technical Section to the FDA during the fourth quarter of this year, which will be subject to a six-month review by the FDA. I do focus more on cash flows than our GAAP net loss at this stage in our development. Page 4 of last night's press release provides a look at the impact of all non-cash expenses on our financial results. This is an important metric to consider in understanding our cash flows but the most important measure is the statement of cash flows on page 4 of the 10-Q. Lastly, let me comment on the COVID-19 pandemic. This situation is tough on everybody and tragic for many. We are doing okay so far. Maine has some pretty low infection rate data. We have not lost significant time in production due to the pandemic. But everything is different. Our dedicated production team has been flexible and creative pushing First Defense production forward. Our sales team has been able to pivot to stay safe and be successful at a time of reduced travel and farm visits when almost all tradeshows have been canceled. We are grateful to be ahead of last year's sales pace but we are not achieving our budgetary objectives. So in conclusion, I encourage you again to review the Form 10-Q and the press release that we filed last night. Also, please take a look at our updated corporate presentation slide deck. An August update was just posted to our website last night. I believe it provides a very good summary of our business and objectives as well as our current financial results. See the Investors section of the website and click on Corporate Presentation. With that said, I will be happy to take your questions. Let's have the operator open up the lines.

And our first question today comes from Nathan Weinstein from Aegis Capital. Please go ahead with your question.

Good morning Michael. Congrats on the quarter and thanks for taking my questions. So just firstly here, coming through an unprecedented first half, can you talk about the general financial health of your customers?

Yes. Thanks Nathan. Good morning. It's a crazy ride. I think maybe the simplest metric to follow is the Class III milk price, which is extremely volatile. So some may know, back in March producers were dumping milk. There was simply no place to put it. There was no place to move it. It was being dumped on farms. That milk price that I track dropped down to a really low level of around $13 or $12 during the April and May period and has rebounded very significantly here in May and June. The July price was $24.54. I have a chart that tracks this back to 1980. It's the second highest price, only lower than the September 2014 high by $0.06. I mean it's an all-time high. So the milk price is strong and that's a leading indicator for good economics on the dairy. But I caution, because I think it's high now and it's likely to continue to be variable. So far, so good. I think we came through the worst of March and April. July looks great. But I am concerned about the volatility. Let's see what August, September, and the balance of the year brings. But at the moment, things look pretty good.

Okay. Thank you. That's helpful. And next if we could just turn to the product side between the commercial-stage product, First Defense, and then thinking about Re-Tain which we are anticipating in the future. Can you maybe just compare and contrast those markets in terms of their size and any discussion just comparing them, please?

Yes. So first, let's define the two products. First Defense is for calves, Re-Tain is for cows. First Defense is the product we have been selling for years, preventing scours, or diarrhea in newborns. So that market I have defined I think pretty well and I refer you to a slide in our deck, because we kind of look at that market in two ways. So if people have a chance to look for the specific answer, refer to slides 16, 17, and 18 of the slide deck to see how we are doing against two markets. One is the products given to the calf. There are other products that are given to the baby, and we are growing in that area. And then the products that are vaccines given to the mother with the expectation that she will produce better colostrum to be fed to the babies. Now we compete in that area too because we know those vaccines can be quite variable. The response of those vaccines is going to be variable. The quality of the colostrum is going to be variable. We understand that very well because we manage that in our production. Every batch we make has variability. Of course, we equalize for that in our fill rate. So the calf getting our product receives a measured dose. But yes, those are the two markets we are competing in and we have a lot of opportunity, as the dam-level vaccine market is much larger than the calf-level.

Thank you. Great. And I guess just one more from me. If we are thinking about the model, if and when Re-Tain comes to market, how could presenting that product in the portfolio impact maybe seasonality in your P&L and also margins?

Yes. Thank you. I kind of dropped the second half of your question. So Re-Tain is for the cow. This is a very novel treatment for mastitis, specifically subclinical mastitis. It's novel because it's not a traditional antibiotic and it's going to be the first and only product that can be delivered without a milk discard requirement. In other words, when you are using antibiotics, you have to dump the milk because of the residue in the milk. Our product will have a zero milk discard claim. So it's a new entry there into a different way of treating mastitis. To address seasonality, First Defense is very seasonal. Our beef business is extremely seasonal. All those calves are born early in the year, say February, March, April. Mastitis, on the Re-Tain side, is present throughout the year. It's not seasonal like a beef calving season. So Re-Tain will give us a more level sales profile throughout the year.

Okay. Thank you, Michael. Thanks for taking my questions.

Thanks Nathan. No problem at all.

Our next question comes from Sam Rebotsky from SER Asset Management. Please go ahead with your question.

Good morning Michael. How are you getting through this COVID? Hope everything is going well there.

Good. Thank you.

On the Re-Tain, which we expect to submit is basically in December. Is that the latest we will submit the Re-Tain to the FDA? Is that what our expectation is at the moment?

Yes. That definitely is our goal at this point. It's achievable. I mean we could have a surprise along this final path here, but now all efforts between ImmuCell and our contractor, everything we are doing here is geared towards a fourth-quarter submission. As you know, Sam, we need to get it in of the five technical sections, four need to be complete. This is the fifth. We get it in and it goes for a six-month review. Then we will really know where we are as far as the timing of the launch because they are either going to come back with a complete response and we can launch or they are going to come back with questions and we will have to resubmit for another six months. We need to start with the fourth-quarter submission.

Okay. Initially when Lonza submitted to the FDA and got the zero discard, are we producing ten times? Or what kind of percentage times more material are we submitting than we initially submitted to the FDA?

Yes, Sam, I'm a bit confused. Lonza was involved as a potential drug substance manufacturer many years ago, but no submissions were ever made with them. I assume you might be referring to the final section known as CMC, which stands for Chemistry, Manufacturing, and Controls. We have divided that into two phases: a first phase and a second phase. Is that correct?

Yes. My understanding is when you first submitted to the FDA and they agreed you met the zero discard and now you have to submit a larger quantity for production. I am just trying to determine how much larger the production is. And generally speaking, will you have somebody on the ImmuCell site before you submit to make a judgment if it meets the zero discard before you submit it to the FDA?

Yes. It's really to, I think we need to separate it, two different questions. So human food safety was one of the four technical sections completed. That drove the zero milk discard claim. So that's been complete for a while. You are right; based on small quantities. Everything up until the CMC was based on research scale. Human food safety was completed in the third quarter of 2018. So all four technical sections were small quantities. The fifth technical section is basically the FDA saying, 'Hey, do the same, produce the same product but at commercial scale.' That's been the whole objective. That's a huge investment in the facility, the drug substance facility for the fifth technical section. So that first phase submission, we went ahead and submitted in drug substance and said, 'Hey, have a look at that.' They came back with an incomplete response. We expected that because they hadn't seen the drug product. But it got us moving down the path of CMC submission. So when we submit the second phase drug substance and drug product, the Nisin and the Nisin-filled syringe, we will be responding to their questions for the drug substance first-phase submission and we will be completing the submission with drug product produced at commercial scale.

Okay. That sounds very exciting. Now one more thing relative to Tri-Shield First Defense. We had a backlog and we reduced the backlog and we are waiting to produce more when the facility is available. When do we expect that facility to be available? And how much more production can we do currently as we could increase sales even though we reduced the backlog and so we could meet all the, I think it's 27 million or 18 million, whatever the number currently and then increase production and hopefully sell more internationally? So that's my question relative to the Tri-Shield First Defense?

Yes. You are getting towards the three-stage investment that I described. So the first phase was getting that capsule assembly out of 56 Evergreen because we needed to create space in this facility for the additional freeze-drying capacity. So objective one is complete. We made the space as we speak. We are in the final stages of getting that new freeze-dryer final construction, shipping, installing, validating, and running in the next few months. Everything in the second and third phases should be completed as soon as possible this year. The freeze-dryer will come first, and that is critical. What we need to do is increase our production through the freeze-dryer. By the end of the third quarter or the beginning of the fourth quarter, we should have everything we want: the additional freeze-dryer capacity up 50% and the additional liquid processing capacity up 100%. So that investment is ramping up quickly. It was always about triggering those three steps, and we are pushing them to complete as early as possible. That's how we get out of the backlog. That's how we turn the corner.

Michael, it sounds very exciting. I am looking forward to ImmuCell meeting all our milestones and hopefully looking forward to the rewards at the end of the day. Good luck, Michael.

I know. Thanks for your patience, Sam. I appreciate it. Thanks.

Our next question comes from Tom Fox. Please go ahead with your question.

Good morning. Thank you for taking my question. It's about subclinical mastitis testing. Correct me if I am wrong here, but in order to detect subclinical mastitis, you need to test for it. So I have a two-part question. One, what percentage of farmers actually test for subclinical mastitis? And two, of the ones that don't, would there be a learning curve to learn how to test for it? Or is it something that the vets do? If you can just elaborate on all that. Thank you.

Yes. It's a great question, really important because it defines the launch rate here of this product as we are entering into a new way of thinking. So you are right. A lot of these cows, these producers know that they are sick. They are walking around sick. High somatic cell counts are measurable, but they ignore it. Because the milk is still saleable. Our objective is to come in and help the producers identify these cows and show them the benefits. The main reason they are ignored is that producers know they are sick, but if they can sell the milk, they just overlook it and let the cows suffer. We will come in, help them, and say, 'Here is the benefit. You have been ignoring that cow because you know if you treat her, you will have to dump the milk. Now don't ignore it. It's bad for the animal, bad for your milk production, bad for your milk quality and quantity. Treat her because you no longer have to dump that milk.' That is one of the biggest objectives for the launch: we are creating a new market. There is a lot of education that's going to need to go on here. And I was just trying to reference one thing in the Q for you. A little more detailed answer. With me one second. So there is a risk factor if you will, on pages 38 and 39. I think it is very relevant to your question. These are the things we need to overcome. Sorry, I made the wrong reference just struggling to find it. Here we go, sorry, finally it's not 38, it's 37. Uncertainty of market size and product sales estimates. That is our answer to your question. We need to create awareness and demand for this new treatment paradigm.

So are you saying that they do not have—maybe I didn't catch this when you answered it—but are you saying that they do not have to test for subclinical mastitis?

They don't have to. Obviously, we will be showing the benefits of why they should. They all have somatic cell count measures. So they can see an indication. They can culture anytime they want. We have to create the demand for culture and the use of more culture tests and somatic cell counts, and not ignore these sick cows. So it can be done. This is not done because the producers may get a result, yes, she is subclinically infected, but they are not going to treat her if they have to dump the milk. So that's the paradigm shift.

Okay. That answers my question. Thank you very much.

Thanks Tom.

And our next question comes from Brad McCurtain from Maine Securities. Please go ahead with your question.

Thank you. Hi. Good morning Michael. And as always, thank you for all of the time you spend with us to help understand the process and the products and everything else. You are really, really wonderful at explaining, giving us time to ask questions and I appreciate it. Just, I have two questions. One, I just wanted to follow-up on the prior question about the testing and education. And then secondly, I wanted to ask you a little bit about the labeling process for the Nisin products for mastitis. On the testing situation, do we have our own test kits? Or is that a third party for them? And how do you plan to get the test kits into their hands if it's not our product, how do you plan to get that test kit in the farmer's hands at a reasonable price and educate them on how to do the testing? Do you have a partner out there who manufactures these? Or is it a distributor?

Yes. That's the idea. Thank you. It's third-party. That is not our business. They do sell the California Mastitis Test, which basically helps you identify which quarter of the four are infected. But the culturing is done by vets. The somatic cell count is done by your milking system. These tests exist. There are a couple of different vendors that dominate the space. We are going to help them sell more of their products.

Sure. So, I mean, it involves a vet having to come out. There is nothing you can do yourself? The vet has to come out.

Yes. There are some on-farm culturing and there are some on-farm testing that can be done. Some tests are sent back to the lab. So it's a mix. But yes, the somatic cells are all on-farm. It's right off the milk line.

And what's the timeframe that a cow will be using our product before it is recovered? I realize, with zero discard, that's not really an issue. But the milk production goes down quite a bit when a cow has mastitis. And so I am wondering how long it takes to build that back up again?

Well, the treatment involves three successive milkings. Some farms are doing three milkings in one day, so they are done treating in one day and they are going to see that recovery over the next few milkings. So it's pretty quick. But you have to get through three successive milkings. If you are milking twice a day, it's a day-and-a-half. That is the treatment period. The response or the healing or the correction is right after that third treatment.

Okay. Compared to the antibiotic alternative, is that just a couple of weeks?

No, you are going to see a response quickly, but you are going to see discard anywhere from 24 to 96 hours. So I think when we compare Re-Tain to traditional antibiotics, we will be comparing, not just the response rate, but also the discard period. You may be getting a response, but it doesn't matter if she is healthy after that last infusion of antibiotic if you still have to discard for up to 96 hours.

And when you use the term 'up to', what determines whether it's 80 hours or 96? Do you have to keep testing for antibiotics in the milk?

Each product is issued with a label and restrictions. So it's a product-specific determination. I have a good slide on that if you don't mind, because we just tried to answer the question a little bit in the deck. If you have a chance to look at slide 25, we have kind of laid out some of the products and some of the discards.

Yes. Okay.

It's by label, by product.

Okay. And then the other question I wanted to ask is on the labeling process. Has that begun yet with FDA?

Yes. Sorry, and my reference should have been to slide 26 on the discard periods.

Okay.

Yes. That's established. That was established in those other four technical sections. So they have issued a draft label. It still needs to be finalized. But what we needed to know to proceed with the drug substance investment is that our label was set and agreed as far as the breadth of claims and the zero milk discard. Those four technical sections sort of established that. Then it's about manufacturing and they will come back in the end and detail the final label. But we have established what is critical: the bugs that will be labeled and the zero milk discard.

Okay. Is that something that? Where would I find them.

Right in my Q.

In the current Q?

Yes. As far as those two key things. Bear with me for one second. Shoot, Brad, I am going to need to find it. But yes, we call out the effectiveness, sorry, page 29 contains a review of the five technical sections and the label of the bugs was established under line number three and the zero milk discard was established under line number four on page 29.

Okay. And are you taking this yourself, you and Joe? Or do you have a site helping you with this?

My role is limited. I encourage the experts. This submission is led by our quality professional, Gustavo Scaffa, along with our production VP Betsy Williams, and our Director of Product Development, Joe Crabb, and John Zinckgraf. The four of them are the leads. We will access consultants, but we drive the process. We make all the submissions.

Okay. So do you have a timetable at all then for this educational piece that you referenced in the prior question? When do you plan to start that? Because right now, we are looking at June 30, 2021 as hopefully a date when we can start going forward with commercial sales?

Yes. You have to be ready for that. It will take a little time; six months is the review period. There is still more to do after that. There is a 60-day administrative review once you get the complete letter. So you are looking at the end of July or shortly thereafter. We need to jump in to start that pre-launch marketing in the beginning of 2021 and hope that’s needed for that first-time complete. If not, you are six months ahead. You have started the education and you might need to do something for another submission

Yes. And at what point do you begin manufacturing?

Well, we are. So we have to be manufacturing to complete the submission. So we are manufacturing today to complete that drug product submission. And then it ramps up into 2021 as we begin to build product for a launch.

Right.

That plant is turned on. That plant is operating commercially right now, not at full capacity, but yes.

Yes. But that’s mostly for submissions, correct?

Most of that product won't be salable until FDA approval. But it would meet all the requirements. We hope some of that will be our initial launch quantities.

Yes. Shelf life is how long from the manufacturing date?

Shelf life? Yes, 24 months, right now. I mean that has to be reviewed and finalized and approved. But we hope it's up to 24.

24 months?

24 months, sorry. Thank you.

Do you plan to scale up manufacturing before receiving approval, or will you wait until you obtain approval? I am just trying to understand.

Yes. We start scaling up next year. I mean we are not going to go to full capacity, but it will be a scaled-up process. We will be prepared on the optimistic third quarter 2021 launch with some product.

So, do you plan to start scaling up manufacturing in the second quarter, or will that happen only after you receive approval?

Yes. So we are manufacturing today and will continue to manufacture right through to launch. It will just be at an increasing rate. It's just a question of how many times per month you run it.

Okay. Well, thank you. As always, Michael, you are very generous with your time and answers on here. It's great. Thank you.

Hi Brad. Thank you. I appreciate that. Very good.

And ladies and gentlemen, with that, we have reached the end of today's question-and-answer session. I would like to turn the conference call back over to Joe Diaz for any closing remarks.

Thank you, Jamie. And thanks to all of you for participating in today's call. We look forward to talking with you again to review the results for the third quarter of 2020 during the week of November 9. Have a great end of the week. Stay safe and be well. Thank you. Have a good day.

And ladies and gentlemen, with that we will conclude today's conference call. Thank you for attending. You may now disconnect your lines.