Good day and welcome to the ImmuCell Corporation Third Quarter Fiscal Year 2019 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, this event is being recorded. I would now like to turn the conference over to Mr. Joe Diaz. Please go ahead.

Thank you, Shaun, and good afternoon and welcome to everyone on today's call. This is Joe Diaz, with Lytham Partners. We are the Investor Relations consultant firm for ImmuCell. I thank all of you for joining us today. I'd like to preface this discussion today 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 of the safe harbor statements in the company's press release that was issued just about 30 minutes ago, as well as in the company's periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC by visiting the Investors section of the company's website at immucell.com. 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?

Okay, great. We have a very good roster assembled here. And I thank you all for taking the time to join today's call. I do appreciate that. I'm excited to update you on our results for the third quarter. And as always, we have spent a fair amount of time preparing our quarterly report on Form 10-Q, it's worth a read. It will be filed with the SEC tomorrow morning. I'm not going to repeat a lot of those important details on this call. I do want to highlight what I see as the two most important financial results and then update on three important milestones to watch going forward. So I'll start with the two important financial disclosures. Let's talk about the sales results. The very strong increase in total sales, sales are up 38% in the third quarter, compared to third quarter of 2018. They were up 25% for the first nine months of the year compared to the same period ended September 30, 2018. This brings sales for the trailing 12 month period to just over $13 million. So Tri-Shield is creating most of this growth, Tri-Shield has created a new market opportunity for us. It's about quality over quantity in the dairy industry these days and we are encouraging customers to go beyond vaccination. We are back with distribution and a mass market selling effort to both the dairy and beef producers. It's exciting to see what our sales team can do now that they are spending their time selling and accessing new customers rather than allocating scarce product. So great work by the sales team. This is a strong achievement for us in this difficult dairy economy. I say difficult dairy economy because it is hard -- it has been hard with low milk prices…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Kevin Ellich with Craig Hallum. Please go ahead.

Good afternoon, Michael. Good updates. I have a number of questions for you if that's okay. I guess, before we get into the regulatory comments you made on Re-Tain. First thing that jumped out to me with the financial results, gross margin this quarter extended pretty nicely on a year-over-year basis, even sequentially. I guess, talk about what drove that improvement?

Yes, I mean, we're moving to a strategy away from focused on percentage and more focused on total dollars. So given that gross margin close to 50% just under 50%, it's not like the old days of the bolus only business that set at a higher than 50% margin, but we'll take the cash. So the goal is total cash, we'll grow this top line, we have a lot of fixed costs that just get amortized over more volume. I think you're right to point to that gross margin, I look at it closely that's money. We didn't have three months period of 2018, the nine month period of 2018 that is really going to help us.

Sure, that makes sense. And then going back to your comment that the -- I guess $3 million investment to increase capacity from $18 million to $27 million. You said that should be done by mid-2020. Are you actually seeing demand in the marketplace for that amount is that way you guys expanded the capacity?

Well, we’ve spent some time with sales being ahead of production, and we’ve suffered through product allocation during that period through 2018 and beginning of 2019, we don't want to go back there. So seeing demand, hoping to see demand, we look forward, we see what people are saying about Tri-Shield and want to be ready for it. So what that means the numbers is our current facility, it's just lessening status quo didn't put the $3 million into growth, we can probably push about $18 million worth of product out of our current facility, trailing 12 months or 13. So we've got a little bit of room today. So we are investing for the future that investment will bring about $18 million capacity up to about $27 million.

Got it. Okay. And then going to your comments about the -- actually really good update there on the FDA CMC Technical Section in the comment that you got back hoping to have that the second stage plan submission in Q3 of 2020. Was there anything unusual or anything that you really didn't expect that came back to you in those first set of comments?

No, I think it's all very manageable, I think both of the responses to the inspection and to the first round submission of the drug substance, both are normal, both are achievable, we can get a full response to them without a delay and without spending a lot more money. And what I look forward at this point is some kind of roadblock, a huge new requirement for a new investment, or something that would delay adds a significant amount of time. I don't see either I think there's no big money spend, no big time, no time delay at all. So I really think routine, we can handle. There's good feedback from the FDA and we can handle our response to them.

Okay, that's great. And then, again, good catching up for you at World Dairy Expo early October, just wondering if you could comment about how the show went for you and how Bobbi and the team did? Did you see the type of business pick up that we should see here in Q4? Do you think that we'll see a sequential increase similar to what we saw last year?

Yes, what’s was good to see you there, Kevin. I always think that that we can Madison, Wisconsin first week of October is just one of the most exciting times of the year for us. You were able to see that real time at our booth I mean, we just have great traffic. It's always busy sales team is just always on their A game, but it comes in a big public display World Dairy Expo. The customer feedback is great and people just come by to chat, new customers learn about the product, old customers want to say, thank you. So it gives me great confidence for the future. I mean, we're going into the peak season. First quarter is always our best quarter, sales are a bit seasonal that way and this first quarter we're going into it with inventory, which we can't say about the first quarter of 2019.

Yes, that that was good. You gave away a lot of capes, but…

Yes, we had some superheroes -- some cast superheroes flying around the expo.

Yes, that's always good, good marketing. Two last ones for me, first product development costs just have been very, very modestly higher the last couple quarters. Is about $1 million a good quarterly run rate going forward when you think about product development costs will that increase with the extended production?

Yes, the production will not impact PD, so that production is going to be capitalized as CapEx. The PD is really driven by depreciation. So we're in a situation where that facility is in place for its intended purpose which is to produce Nisin the active ingredient in Re-Tain, but we're not selling any. So we've got no revenue, and we've got the expenses. You'll see in the Q in the morning, Kevin detail out precisely what -- how much of PD expenses depreciation. Cash and versus non-cash PD, it's a big driver to the PD expense.

Got you. We’ll take a look at that. And then lastly, just updated thoughts on the overall dairy market, it seems like we've suffered in the last couple years, but been hearing that some pockets and parts of the market, especially in the Midwest are seeing some stabilization. Is that what you'd say?

Well, what's encouraging is and we've got a milk tariff as I talk here, I'll get the number of the slide. Right in our slide deck because I think one of the most relevant indexes to follow is the price of milk, just to get a feel for where the industry is, it's slide 40 of the slide deck that just got updated and posted this afternoon. But the swing there is from a very, very high back in 2014 of around $22 to a low just under $15 and 2016, 2017, 2018 struggling around that $15, $16, $15 level. And so just recently we're seeing a much -- well not I shouldn't say much higher, but a reasonably higher milk price, it seen some forecasters pushing a projection that that could stick for six months out, 12 months out. So milk prices in the $16, $17 range really helps our customer that $14 levels did not.

No, I see the slide now. That's helpful. That's all I had sorry for taking up so much time.

No, no. I appreciate the questions, Kevin. Thanks.

Our next question will come from Sam Rebotsky with SCR Asset Management. Please go ahead.

Good afternoon, Michael. And considering that the last third quarter had $700,000 profit, I mean, this is pretty good. As far as the -- our sales are $10 million. What -- how much of this would be the Tri-Shield and the First Defense? And what we could expect the ratio eventually between Tri-Shield and First Defense? And the $18 million to $20 million is your capacity. Could you sort of relate all the numbers together on that?

Sure. Yes. Thanks, Sam. Hi. Generally what we're seeing is the what we call a dual force line that’s the bivalent product to the original capsule, the relatively new gel tube bivalent has been pretty flat and the majority of our growth is coming off Tri-Shield and that's just fine with us. I think that's strategically our plan. If we can gain as many new bolus or dual force customers as we lose as we convert some of them to Tri-Shield keep that business flat and just grow with this new opportunity to trivalent and Tri-Shield. That's the plan going forward. We have a plant that's growing production facility that purifies antibodies out of milk and we put them out there in several different formats. Let the customer choose which way they want to deliver the product, but same antibodies, either bivalent or trivalent, the E. coli, the coronavirus, the rotavirus.

So at this point in time, when we get our order, we could ship it right away. What kind of -- there's no time lag and we're able to ship overseas also? In other words our ability to take advantage of any of the orders, domestic or internationally, all we have to do we ship it we have the product available?

That's true. Yes, no, that's right, Sam. The only detail I add is, the bolus ships rooms temp everyday, the gel tubes ship mostly on Monday, sometimes on Tuesday just because of the cold chain requirement on that product.

Okay. So now the least of the 14,300 square feet of building is that's what you're going to work on and get approval for 2020 and you're going to put more equipments in that building to do the manufacturing also and processing?

Yes, so we were leasing as an open warehouse. So we've got equip it to our requirements. This is USDA not FDA, the USDA is going to hold us to a higher standard, but it's a bit easier to get a facility site licensed on the USDA side. FDA is just a bigger challenge. So what we need to do over the next six, seven months or so to get this done in mid-2020 is build out these rooms essentially what the project is taking all of the final assembly. So whether you put the powder into a capsule or into a gel tube, all that assembly final assembly and formulation work, take that out of our current facility put that into the new facility that stays vacated will allow us to do the expansion of the liquid 100% and the freeze dry by 50%. We just need -- there is no room to do that in the current facility today. So we basically going to split the operation in two, the all the liquid process, which is relatively dirty process of farm buckets of milk and cheese and all that, bring that up to a powder and take that clean powder over to the new facility for assembly.

And I presume we expect this to save on costs, expect to extend that to structure it with both processes done separately?

Yes, I mean, the long-term goal for me is just to keep right around that 50% range. I don't want to get too greedy on the top line, I don't want to get too sloppy on the cost. If we can mix all these things, the new investments, the new sales and keep that gross margin as we’ve reported here in the third quarter, I call that a success.

Okay. One more and I'll come back in the queue, Michael. The Norbrook, they have another additional problem with the FDA. Now they've resolved all their problems and they could do whatever we need to do when we're ready to submit the syringe to the FDA.

Right. So just to be clear, there never was any problem with the FDA. And in fact, that's why we work so hard to get this short-term agreement with Norbrook as they are an FDA approved facility. So with the agreement signed with Norbrook does is just outline the terms which work with us for this short-term period through December of 2021.

All right, sounds exciting. Good luck, Michael.

Hey, Sam. Appreciate it. Thank you.

[Operator instructions]

Hey, Shaun, let me just jump in one second before the next question. I don't know, if we lost Kevin. That's okay. Just to update a data point on Kevin's question about milk price. If you look at page 36 on the Q in the morning, you're going to see what's publicly available. The milk price posted, but what's important that trend is averaging at $16 for nine months, but the July to September average is $17.82. So that is a very positive trend for us on the milk price. But thanks, Shaun, go right ahead with number three.

Our next question will come from Ben Andrews with Andrews Capital Management. Please go ahead.

Hi, Michael.

Hey there, Ben.

How much Tri-Shield did you make in Q3?

We've achieved our goal which we stated was being close to $1.5 million worth of product per quarter. So, looking at where we think sales are going in all it’s a $6 million run rate production at $1.2 million to $1.5 million per quarter. That's going to be steady until we see next the next level.

Have you sold in Canada yet or no?

We have not. We do have approval up there. We're just being very cautious. We do not want to get back on allocation. So I think that's -- I know that's a decision for 2020. But I think we're going to be careful how we get through this first quarter, the peak season in the U.S. and just be careful on that growth step. So we don't again -- so we don't get back into an allocation. I want to make sure this U.S. market is 100% taken care of through peak season. And then Canada becomes the next upside force.

And a question on the PD expense, I know you had one earlier. But looking at the Re-Tain piece, there's no actual expenses on a quarterly basis for the Re-Tain piece except the depreciation coming from that facility and that line items.

No, right, thanks for asking that question to make sure I clarify. I was just pointing out that depreciation is a huge component of that PD expense, but almost all of our PD expense right now is going to Re-Tain. So, we're not producing commercial inventory. We're not building inventory. So we're not capitalizing inventory costs, all of the facility plant operating costs are going through PD expenses. So there's a lot of cash expense in there too. I'm just highlighting the large component of which -- of total PDs is not cast depreciation. Does that make sense, Ben?

Yes, kind of so. So help me understand that line item then when we're in steady state with Re-Tain and with First Defense. Is that line item then pretty much depreciation unless you're coming out with a new version of one of the products or how does that work?

Right. I wouldn't ever want to PD to go to zero, but it does come down to a more manageable. I mean the operating expenses that I'm referring to, move from PD expense into cost of goods. And then PD becomes largely just what we continue to do is this line extensions other developments of the same core technologies whether it be a new formulation for First Defense and new claims or First Defense or we’ll continue to do process improvement work on Re-Tain. But there's going to be the steady state on non-cash depreciation, and then there's going to be a swing from the operating costs going to, from PD to cost of goods to inventory.

Okay. So what I heard you say is, correct me if I'm wrong, of the 985 in the quarter, The majority of that expense is either Re-Tain development or Re-Tain depreciation, correct?

Yes, that's definitely true. I mean, we continue to do things with a very small PD staff, but we continue to do things to support First Defense, but the majority is towards Re-Tain.

So you're carrying a nearly a million a quarter of excess expanse, you're getting no benefit for at least as of yet?

Yes, it’s great concept of matching expenses with revenues. Now we're taking the expenses and not getting the revenues. And Ben, by the time I see you tomorrow, we'll have the Q filed and we can look at the exact number it’s filed right out in the queue. I want people to know how much of that PD is depreciation.

Okay. Thank you, Michael. Look forward to meeting you and seeing you tomorrow.

Yes, me too. Thanks.

[Operator Instructions] At this time, there are no further questions in the question queue. This will conclude today's Q&A session and I would like to turn the conference back over to Mr. Joe Diaz for any closing remarks.

Thank you, Shaun, and thanks to all of you for participating in today's call. We look forward to talking with you again to review the results of the full year of 2019 around the beginning of February 2020. Again, I encourage you to review in yourselves SEC filing for the full unaudited third quarter results. Thanks again for your time. Have a great week. We'll talk to you soon.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.