Good morning, and welcome to the ImmuCell Corporation First Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead.

Thank you, Carl. Good morning to all of you on the call today. This is Joe Diaz with Lytham Partners. We’re the Investor Relations consultant firm for ImmuCell. I’d like to thank all of you for joining us today, and as a reminder, this call is being recorded today. I would like 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 the safe harbor in the company’s press release that was issued last night as well as on the company’s periodic filings with the SEC, which can be obtained from the SEC or by visiting the company’s Investors section via at immucell.com. With that said, let me turn call over to Michael Brigham, President and Chief Executive Officer of ImmuCell Corporation, after which we will open the call for your questions. Michael? Maybe, having a…

Great. Sorry, Joe.

We made.

Yes.

Okay. Very good. You’re there. Very good.

Yes. Thank you all for taking the time to join today’s call. I do appreciate that you all have access to the details of our financial results through the press release and the Form 10-Q that we filed last night, so I will not rehash all the details. I am going to speak to you about a few things that I think are most important about these results and our business strategy going forward. So first, let’s start with the top line. Very strong sales for the first quarter of 2019, in fact, an all-time record. So the first quarter is always our best quarter with the seasonality of our sales and this was the best first quarter ever. So let’s look at these numbers in four different ways: for the quarter and for the trailing 12 months, and then within the quarter, let’s look at the GAAP numbers as in the sales shipped out our door and then make a non-GAAP adjustment for – affecting the backlog. So with that, the first quarter on a GAAP basis, as you’ve seen, up $1.5 million. That’s a 53% increase to $4.4 million. On a non-GAAP basis, again adjusting for the backlog of orders, we’re up $679,000 or 19% to $4.3 million. Now I’m going over to the trailing 12 months. So on a GAAP basis, up $2.7 million or 28% to $12.5 million; and non-GAAP, again, adjusted for the backlog of orders, up $1.2 million or 11% to $11.9 million. So a lot of numbers there, a few different ways to look at it. But bottom line, a record quarter for us, which is really exciting to achieve that in this very difficult dairy economy. The milk prices have been feeding at really an all-time low for quite some time now.…

[Operator Instructions] And our first question today comes from Kevin Ellich with Craig-Hallum. Please go ahead.

Good morning, Michael. How are you doing?

Hey Kevin, very well. Thanks for joining the call.

Yes. Congrats on the nice quarter. I guess to start off with, what really – what did you see in the market that changed this quarter that really drove the strong sales that you saw? Was it just better supply of Tri-Shield? Or can you give us a little bit more color as to what’s going on behind the scenes?

Yes. I was careful to point out some non-GAAP numbers. I do think we need to look at that backlog. We did have a big backlog in the second quarter of 2018, $901,000. So that product did not ship in the comparative quarter of prior year. So that’s one factor, just sort of the math, the timing of production and release of products. So that’s one adjustment. Two is what I really care about is getting the product out the door, and that’s our GAAP basis. We got more product produced and more product out the door in second quarter. So yes, number two would be better production supply. Number three out of four would be, as I mentioned, Tri-Shield. We’re just gaining great traction with that product. And the more we produce, the more we sell. I mean we’re just selling it as soon as we make it at this point. And number four would be the beef impact. I think we had better access to the beef market with Tri-Shield. Beef is very seasonal. All the calving that’s going on here, February, March, April. So that beef seasonality and with the addition of Tri-Shield and more available Tri-Shield for sale definitely helped the first quarter.

Sure. That’s helpful. And then I think I caught your comments about Norbrook and you – are the plans to still do the aseptic filling and I guess what’s the time line on retain with the FDA?

Yes. So, I do feel and have said we’re making progress in Norbrook, but really doesn’t mean that much to you or to me or anybody else until I get a signed agreement. That signed agreement will be subject of a press release. We will announce that as soon as we have it. So making progress there, but I’ve got to get it finished. And then, ultimately, that really drives the time line. So the quicker we – I think we’ve said the quicker we can get going with the CMO and I think that’s the fastest way to get FDA approval and initial launch. But we are understanding that, that will not be a long-term solution. Norbrook would like us to exit as they focus their business on proprietary products. So what we’re looking for is a short-term bridge to our own aseptic filling and that will – the success of those two events will trigger the answer to your question win FDA approval. Sooner, 2021 with a CMO; later, 2021, 2022 without that CMO. That’s like priority number one around here is getting an agreement and defining that path and – as well as the timing of that investment to bring that. Long-term, it’s going to come in-house and that’s an important use of proceeds from that equity raise is to enable us to do that. But again, fastest and quickest approval and launch with a CMO is the best recourse. So work-in-progress, but making progress.

That’s good to hear. And then of the $3 million of proceeds that are going to be used to increase production capacity, how long will that take before you do have that increased supply?

Yes. The good news is we raise some money now and we’re starting the project now so we’ll have it in place when we need it, which is the second half of next year. So parts of that will come online as this project gets started now into the end of this year and the beginning of next year. But ultimately, some of this equipment has 12 to 15-month lead times on it. So I don’t expect to have it complete until the second half of 2020 and that’s good. That’s fine. That’s we – as I mentioned, the current capacity at about $18 million moving it up to $27 million by the end of next year will work well for us.

Got it. And just two last ones for me. Well, in the Q, I saw – looks like company C in your concentration section, it’s now less than 10% of revenue. I guess that was just down from 11%. It’s less than 10%, down from 11% from a year ago. Wondering what’s the dynamic there, I see customer A shot up to 43% so a big increase.

Right. So, the way I look at significant customers is A and B are our two big distributors. Yes, they’re unnamed in the Q, but I have no issue naming them. It’s going to be the same for all animal health manufacturers. Most of our sales go through Animal Health International, MWI. So I group those two together and they are consistently our largest two distributors. Again, they are consistently almost everybody’s largest two distributors. They’re just big and getting bigger, very effective, good people to work with. C, D and E, the next level, is smaller and a bit random. They’re more regional and they’ll jump up and down, but always a little smaller than the top two.

Got it. That’s helpful. I appreciate the time. Thank you, Mike. Wait.

Thank you. Yes.

Gross margin, really saw a nice improvement both sequentially and on a year-over-year basis. Is that just leverage and the significant acceleration in revenue growth or anything else going on with the gross margin improvement?

Yes. Sort of two things going on. The – all of the gel formulas so we have a Dual-Force bivalent in a gel and the Tri-Shield trivalent in a gel. The gel formulas are more expensive to make and we’re selling more and more of them. So that’s sort of working against the gross margin percentage. But at the same time, we have a lot of fixed costs. It’s even – some of our – a good chunk of our labor is fixed and a good chunk of our overhead is fixed. So as the volume increases, we’re seeing that benefit. So the two kind of net out. Just the throughput really helps us. I think the bottom line is percentage is important, but what we’re looking at is accepting a little bit lower percentage, so that we can grow – a percentage of sales so that we can grow the total dollar and that’s how we pay the bills.

Got it, okay. Thanks again.

Thanks, Kevin.

And our next question comes from Irwin Goldberg with Irwin Investments. Please go ahead.

Yes, congratulations on a record quarter. Can you retain that pure clinical mastitis? Is that possible?

The answer is yes, it’s possible. Our label claim is going to be subclinical mastitis. And I think post-approval, we don’t want to put any confusion into the regulatory submission with a new look or a new twist. But post-approval, I think we’d come back and look at clinical and run that study and hope to get that claim. But right out of the chute and the label claim is going to be subclinical. In a sense, what you’re doing is preventing some clinical, but not letting that cow get clinically infected. So we have sort of that approach of prevention to clinical and then we come back and I think some people will use the product. It’s not going to hurt the clinically infected cow, but we’d come back post-approval and seek that claim.

Right. Can you talk a little about your foreign markets, when do you plan to try and go into those foreign markets?

Yes. Irwin, we’re trying to – with First Offense here?

Yes.

Yes. So, right now, we are just really North America. We do get a little bit of product into Japan and South Korea, but Canada and U.S. is our market today. Part of the thinking behind this capacity expansion is right now getting some foreign – international territories really wouldn’t help us. It would just put us in a tighter supply situation. So we’re trying to time the two out. As we increase this capacity expansion, we are now starting – currently starting the regulatory work to look at these new territories, get into these new territories, but be ready to supply them with the increased production capacity. So I think the short answer to your question is it’s not going to happen in 2019. We’re making progress on those regulatory efforts in 2020 to hit some markets in 2021 and 2022. I think that would work really good to match up production and supply with a new demand.

Right. Well, thank you.

Thanks, Irwin.

Sure.

[Operator Instructions] And our next question comes from Tom Fox, Private Investor. Please go ahead.

Hello and thank you for taking my question. It’s about the third-party manufacturer. As I understand, that this is the first time a drug like this has been manufactured on this scale, it says on your Form 10-Q that Norbrook Laboratories covers the product formulation, aseptic filling and packaging services. Does this mean they had to learn how to do all this and manufacture for you? Or did you learn how to do this and you scaled down the pilot facility and they are just the ones responsible for carrying out the process? In general, how dependent are you on them to manufacture this drug on a commercial scale? Thank you.

Right. It’s a great question. I think the best way to answer is just to maybe step back and I’ll clarify the difference between drug substance and drug products. So what ImmuCell does uniquely is make the drug substance and that is the $21 million investment we made in the facility. That’s where we’ve made the registration batches for the FDA submission. The first submission of that drug substance has been made to the FDA and it does not include the drug product. So the drug product is then simply taking the drug substance and filling it into a syringe. I’d say simply, it’s not that simple. It has to be done aseptically and Norbrook is a world-class leader in this. There are others. We have been with Norbrook for many years. They do it for many products, so they can plug our product into their existing line with an existing FDA approval and really simplify and accelerate the approval process. So what we’re looking at is that idea of we need them under our product, but we want to over time get control of that process and not be dependent on any CMO and be able to do that aseptic filling on our own. So it’s a two-step process, agreeing to this short-term like approval and launch, agreement with the current CMO and then longer term in making that investment to not be reliant, as you suggested, on a CMO.

Okay. Thank you.

Thanks, Tom.

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Joe Diaz for any closing remarks.

Joe, I don’t know if we lost you there, but Joe is just going to wrap and I’ll join him in thanking you for participating in today’s call, and we look forward to talking to you again to review the results for the second quarter of 2019 around the middle of August. So again, I encourage you all to review our SEC filings with the full unaudited first quarter details. Unless, Joe, you wanted to add anything?

Other than have a great week. Thank you for being on the call.

Great, joe. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time, and have a nice day.