Good day and welcome to the ImmuCell Corporation first quarter fiscal year 2018 financial results conference call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. At this time, I would like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead, sir.

Thank you, Denise, and thank all of you for joining us today to review the unaudited financial results for ImmuCell Corporation for the first quarter of 2018 which ended on March 31, 2018. My name is Joe Diaz. I'm with Lytham Partners. We are the investor relations consultant firm for ImmuCell Corporation. 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 Securities and Exchange Commission on Forms 10-Q and 10-K as well as with today's press release. I should also note that the full details to the company's first quarter financial results are available in its quarterly report on Form 10-Q and the summary press release they were both filed earlier today. 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?

Thank you all for taking the time to join today's call. I would like to highlight some key financial points and then review the current state of our business. Though customer demand for our products is up, however, orders shipped during the first quarter of 2018 were well below our expectations. We could not meet the 16% increase in demand that we experienced during the peak selling season over the record first quarter of 2017 because of some production limitations that I will explain later. We ended the first quarter with a $1.2 million backlog of orders for the First Defense product line, which was comprised of about $900,000 of our legacy bivalent products and about $300,000 of our newly released Tri-Shield First Defense. The two most important causes for this shortfall are, first, the output of the entire First Defense product line was reduced by decrease from the biological yield from our expanded supply of colostrum. Second, production difficulties and scaling up the new vaccine used in the manufacture of Tri-Shield have limited our supply of vaccine, which in turn limits our supply of inventory. We have probably reacted to both problems by addressing the science behind the vaccine manufacturing issue, improving quality control processes, modifying production methods to increase yield, and implementing manufacturing redundancies. Since March 31, the backlog for the legacy format of the First Defense product line – that is excluding Tri-Shield – have been cut by 41% to approximately $536,000. We expect to clear this backlog in June and proceed forward with adequate inventory. It will be closer to year-end for Tri-Shield. These production challenges have also resulted in higher cost of goods sold, reducing our gross margin which is something that we expect our actions noted just above will correct going forward. On the…

Thank you, Mr. Brigham. [Operator Instructions]. The first question will come from Tom Fox, a private investor. Please go ahead.

Hi, Michael. My question is about the backlog. I'm having a little trouble understanding. Was this an issue that you just weren't prepared for the amount of sales that you experienced during the quarter because of the Tri-Shield production? If you could just kind of elaborate on that. Thank you.

Yeah. Thanks, Tom. Sure. So, yes, but only in part. The sales aren't so much beyond our expectations. We planned for growth. Tri-Shield did throw something new at us. So, yes, in part, Tri-Shield definitely had an impact as it took time, it took place in the facility, in the production plant. But, really, the overriding issue here is biological yield. As we grew, we took on a lot of milk that did not yield as many doses. So, we were producing batches that per plan would've been bigger, but in reality there were fewer doses. So, we absolutely had to correct and we had to correct it back at the beginning with these new farms and the growth in our colostrum supply and we had to get better yield. So, it's the same amount of time for every batch, but we needed to get – we now have gotten back to getting the better number of doses, the expected number of does out of that same production time. But that hit us hard right as we went into peak season and we were stuck just very small, very low yielding doses that when coupled with the Tri-Shield challenges, that just threw us way behind. I guess I would add just one more thought which is – I don't know what that sounds like to you as far as biological yield and control of the process, but keep in mind, all of those challenges and all of those fixed need to be applied to a six-month production cycle. So, it just doesn't turn on a dime. It's six months from our vaccine to a USDA-released dose. So, we were lagging and now we're gaining as we're back on track.

Mr. Fox has disconnected unfortunately, sir. [Operator Instructions]. And your next question will come from Sam Rebotsky of SER Asset Management. Please go ahead.

Good afternoon, Michael. As far as dealing with the problem, the reason there were fewer doses, it was – that you weren't familiar with the herds of cattle that you got the colostrum or these were newer animals you were getting the colostrum from or what was the reason for the – I didn't understand the reason why they're fewer doses –

Why has it changed? So, both new farms, new cows and more milk, but just not optimal milk. So, while we're getting doses out of the milk, we weren't getting the standard or enough doses out of that milk. So, that milk was essentially not potent, not concentrated enough, not filled with enough antibodies to be efficient in the liquid processing plant.

So, at this point in time, you've indicated, as of May 11, you've reduced the backlog and the doses and the yield has increased where they were what you had expected or they just – you have more animals to produce?

Getting more animals is part of the fix, but we've got to control our measured doses per cow, concentration of that milk. So, yeah, I feel confident making the projections, those forward-looking projections I made about both the problem, but more about the fix. So, May 11 was to show, as we went to filing last Friday, was it growing or was it shrinking? It shrunk a bunch. And then, we went one step further to say, we can see those next batches even in the preliminary stage where they're going to come out and that gets us clear in June. So, not a good thing, but at least it's not a long-term thing. Those fixes that we put in place as soon as these problems started to arise are real, are working and that's how we can make projections about both as of May 11 and where we will be in June.

Okay. Does it seem possible to the extent – as you work on getting your backlog reduced to sort of come out with some kind of press release indicating to the extent you might have reduced it going forward before the June or at the time you end your June 30 period or – I'm not sure if you've discussed that or if that's advisable.

Yeah. One way I would look at it, Sam, is I'm confident – remember, that projection was about the bivalent format, the First Defense. Because Tri-Shield is on a different schedule on a different track. But when we say June, it's June. I would be more obligated – if that doesn't happen, I would have to report some bad news. That's going to happen and we've made that forward-looking projection. I think we should go forward confident of that. And if some parts have developed to the negative, I'm obligated to update of our projection.

Okay. Okay. Now, the Tri-Shield, it's a matter of the learning process. And do you feel we know enough to sort of increase the production based on the substantial demand we have for Tri-Shield and get it more in line?

Nice problem to have because the alternative is the market doesn't want the product and we're not on backlog. So, demand is very strong. That's the good news, but Tri-Shield kind of basically takes a double whack because it suffers from the same – that yield issue, that doses per cow issue is across the board. That affects bivalent and trivalent. But then, as I said, most importantly on Tri-Shield is the vaccine. So, that did not scale to plan. That did not get us the quantity we needed as quick as we needed it. And thereby, there comes the six-month timeline. I feel like we're in good shape now and that's why we've made the projection for around year-end because it's going to take that six-month cycle to take that fix and then run it all the way through the six-month production cycle. So, that's why that one is different. It will lag the bivalent – the fix on that Tri-Shield backlog will lag the June fix on the bivalent backlog.

Do the two freezers that we have, are we able to have more – get more colostrum and build up our inventory to go forward, so that we're – as the demand keeps increasing that we have a larger inventory to deal with the demand, which would hopefully continue to build up.

Absolutely. Not having that second freeze dryer, we're a different company. With that second freeze dryer, the answer to your question is yes. But, again, the key here is – there's like certain number of trays in a load – in a freeze dryer load. And until you do the assay, it's a volume of milk. What we need is more doses in that milk. And that fixed cycle and that fixed volume and that fixed time cycle and that's where we get back to the quality of the milk and the concentration of the antibodies, so that when we shut the door and turn that thing on, it's producing more doses. It's always processing the same volume of milk.

Okay. Do we need to still get more cows to produce this or do we need to work any longer hours or is it just we're doing the right thing to get what we need going forward?

Yeah. The cows, they're going to work out. So, it's the right number of cows. We just need better purity per cow, if you will. So, that growth was right in numbers. It just wasn't right in concentration. So, I feel good on the cow supply. And I do feel good as far as more hours. Some of these cycles run overnight. We run a pretty full schedule. It's enough to handle what we have for projected sales, 2018, 2019, down the road. We're always looking at what's the next level of capacity, running closer to 100%. Once you get to 100%, you're looking at a third freeze dryer. I think those kind of investments are a little bit out in front of us. The catch we need to make right now and the relaunch of Tri-Shield and the catch-on bivalent is going to be handled by current labor and current equipment.

That sounds good. Now, the mast out which we expect to submit to the FDA, you described submitting it in two batches of ability. And everything, assume, is working according to – as you go along, everything is meeting all the requirements? Or what do you have to do? What do you need to do to get to produce what you need to submit to the FDA?

It's really the same endpoint as when we first broke ground. It's really the same end point from before when we broke ground, when we were looking at a CMO to make the Nisin product for us or potentially a partner. The endpoint, the objective is to make three validation batches. So, for quite some time, we've been saying construction will be complete. And it was, October of 2017. Equipment installation validation, to get it from the position of making that first submission. Having produced three validation batches, middle of 2018, so the update today is middle of 2018 does not include June. It's third quarter. Still middle of 2018, but I look at second and third quarter as the middle of the year. This is going to be third quarter from where we stand today, but generally on track to the middle of 2018. Once those three batches are made, then the submission goes in.

So, are all three batches made at the same? Do you have some knowledge of, say, batch one, whether you're satisfied with what you produced or do they get all produced at the same time?

No, they are sequential. It will be one, two, three, during the third – it will be all the third quarter. One, two, three – tight sequential production and then immediate submission.

I see, I see. Okay. I'm going to step out and come back to the queue to see if there is anybody else that has any questions.

Hang on just a second because I can see on the screen, Sam. Denise, unless I'm wrong, I'll keep talking to Sam. I don't see anybody in the queue. Is that correct?

Please proceed, sir. That is correct.

Okay. So, the important thing right now is dealing with the problem. For some reason, the stock had moved up. And is there any thought on – to tell the story a bit even with the problems you have which you expect to resolve or do you wait till the problem is – you have better visibility that the problem is solved before you go out on road and tell the story.

No, I think I'll stay active with Joe and Lytham Partners. I think we've designed today's disclosures to give you and others the information, so that I can go talk to new investors all on equal and fair disclosure basis. So, yeah, no hold back on that. We're generally out and about after each quarterly release. I think we keep that going and really use the press release – there's a quite a bit more detail in the Q as a script and as a Reg FD sort of clearing hurdle, if you will. We can talk very openly about – these are the same discussions I have with my board coming right out of the MD&A and the Q.

And, Michael, this is Joe Diaz with Lytham Partners. I might direct you to the ImmuCell website where the new slide deck has been loaded up today that has all the most current information. And that information will be used when we speak to investors on a one-on-one basis. So, there is complete transparency on every topic that may very well be broached in a one-on-one meeting. So, the information is there. And please make use of it.

Michael, I'm 100% behind your getting out on road and telling your story because this is really transformative what you've been doing and this is – and the fact that you have the substantial demand for your product, the Tri-Shield, and that's what you have to do. And it appears to me it's just going to take the time. And the sooner you end June and get your – get things done and meet your requirements, it's not a long time, you should be able to get…

I've never done that before. Usually, I end the quarter and take a breath, but this one is really different. It's like how quickly can we get these two numbers together because it is awkward and that's why there's just extra – you get it, Sam, but if you don't follow closely and you don't read the detail, you might get confused by what I see as the timing difference in this backlog. So, we just put the numbers out there, we put the details out there, what it is, why it is and what the timing is, and like Joe just said, we'll go talk about it. And he's good to remind us about that slide deck because – yeah, there's nothing in there that isn't covered by an FD disclosure in the Q or press release, but it really helps me present and it's worth a flip of those slides because that's how we tell the story. And I think we've continue to subscribe to the – whether it's good news or bad news, given all the news. And I think that's what we've tried to do this quarter, so this backlog thing doesn't become – I'm not trying to dodge it, I don't want a backlog, it's not a good thing, but it is better than the alternative. [indiscernible] where the demand is and the production will catch up.

Well, that's clear, Michael. And I think the more you talk about it, the more comfortable everything will become. And with the time of increasing the production, this will resolve. And to the extent, the farmers are happy with your product, which they have been relative to increasing the backlog on the Tri-Shield and you'll get there. And then as it competes with the other products in the market, it will happen. So, you've been doing an awful lot, so that's one of the reasons on dealing with this new situation. Michael, good luck and we will talk again soon.

Good, Sam. I see a couple of other questions coming up. So, I will grab those.

Okay, good.

Alright, thanks.

The next question will be from Jack Daley of Tyler Technologies [ph]. Please go ahead.

Hi. Thanks for taking my question, guys. I thought I'd jump in here at the end. I would like to note that I am calling again on my personal behalf, not out of Tyler Technologies, but that does happen to be a fellow main growth company. So, definitely, I'm following you guys closely and very excited about the prospects.

I've been reading your news too. Good luck and congrats. Some good stuff happening there.

Great. Thanks, guys. So, I just really wanted to jump in with pretty much a softball question, but in your 10-Q you mentioned milk prices and how that kind of had a relationship to spending on your products. And in recent two months, the milk prices – I'm looking at the index, the NASDAQ has rallied quite sharply. So, I just was wondering if you could comment on maybe that as a tailwind to spending on your products from the dairy farmers [indiscernible]. Thank you.

Thanks. We're always trying to find a relevant industry index. And I think milk price is one. I think milk to feed ratio is another. Those are the two we probably most focus on, so it's not just our numbers drilled out quarter after quarter, but what's happening to our customer and what's happening to our market? And the milk price, 2014 was the boom year. It's down, down, down. And it got pretty low here recently. And we are just seeing signs and some projections – I just saw this morning, literally this morning, some optimism for late 2018. So, it's a tricky market. The bottom line to me is I think our product is so effective – I don't want to suggest that people come off as soon as the milk price drops below a certain level. They're into for the long haul. They know their calf is their asset in two years coming into milk, that they're going to invest that six bucks. Today, they find a way. But it's just easier to find that way at a $15, $16 milk and it is at $12, $13 milk. So, I guess, I'm trying to say is milk price is relevant and that's why we track it. The better our customers doing financially, the better for us, but I don't think it's a direct cut off when milk price goes well. They have to be forward looking. They know two years later, the milk price will cycle around because it always does. It's driven just simply supply and demand, the huge impact of the export markets. And, yeah, you are absolutely right. We've seen some projections just very currently that put some new optimism on a better milk price later in 2018. Good for everybody.

Great. Thanks for taking my question.

Yeah, thanks.

[Operator Instructions]. And the next question will be from Doris Rossiter of Shattemac Capital Management. Please go ahead.

Hi, Mike and Joe. I'm working on my model here and just wondering what to do with the gross margin in particular. I'm wondering, Mike, it may be early, but do you have a view on the impact that Tri-Shield will have on the gross margin going forward?

Yeah. Thanks, Doris. So, not a pretty quarter, gross margin wise for all those reasons, but we did feel confident in sticking with our projection of staying over 50. So, as we blend the two products together, you've got additional costs and the additional claim for Tri-Shield, but you've got a higher selling price. So, I think the answer is to stick with 50. And once we get this yield thing figured out – well, we haven't figured it out. Once the yield fix manifests in full doses, how much over 50 can we get, we can begin to show that. But I think we've got an update to this. The call out the first quarter is sort of an unusual aberration and that we're going to stay at 50 and above going forward, both products.

Okay. I'm just wondering if, in your mind, you expect Tri-Shield to ultimately – maybe we have to wait 12 months to get there, but, ultimately, do you think it'll be a higher gross margin for Tri-Shield versus First Defense or…?

No, I think we've got to look – we've got a price challenge here. That's a very expensive product. So, it is more costly to make and we do recover more on the selling price, but I think we'd still – when you blend the two together and getting over 50, we have to be careful on Tri-Shield as far as we're competing with $2 and $3 vaccines with the product that's retailing $10 to $12. We seek gross margin neutrality. I think we're close to achieving it. What I mean by that is we want the customer to have a choice. You want to go over here to the bivalent, you're not concerned about rota, we don't want to see that as a negative. That's a choice. You come over to Tri-Shield, you pay a little more, you get a little more and keep us at that 50% on the customer's choice.

Okay. Okay, good. That's great. That helps clear this up for me. Thanks.

Thanks, Doris.

[Operator Instructions]. And in showing no additional questions at this time, we will conclude the question-and-answer session. I would like to hand the conference back to Joe Diaz for any closing remarks.

Thank you, Denise. And I'd like to thank all of you for participating in today's call. We certainly appreciate your continued interest in the company. I would like to note that ImmuCell's annual meeting of stockholders is scheduled for Thursday, June 14th at 3:00 PM Eastern Time in Portland, Maine. You're all welcome and encouraged to attend. A tour of the company's facilities will be offered following completion of the business matters and we'll look forward to talking with you again at the conclusion of the second quarter sometime around mid-August. Have a great balance of the week. Thank you.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines. Once again, the conference has concluded. You may disconnect your lines. *