IMMUCELL CORP /DE/ 10-K

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We focus on the two most critical stages of dairy productivity, those being the first 30 days of life and the first 30 days of lactation. Our concentrated colostrum and purified Nisin technologies offer unique animal health solutions during these periods when immunity is at its most vulnerable. Both of our product lines present growth opportunities and, in the future, may potentially be applied to other species or potentially the human health sector, alongside the animal health sector that we currently serve. The First Defense ® production capacity expansion that we initially thought might have been completed in a year to a year and a half ended up taking about three years to complete, but our fourth quarter sales results do demonstrate that we have increased our production capacity to, or above, $30 million per year. The increased capacity is enabling us to address our order backlog that was equal to approximately $4.4 million and $4.7 million, as of December 31, 2024 and March 21, 2025, respectively. The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and the related notes and other financial information included in Part II: ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. One should review the Cautionary Note under Part I: ITEM 1 — BUSINESS and Part I: ITEM 1A — RISK FACTORS of this Annual Report for a discussion of some of the important factors that could cause actual results to differ materially from the results, objectives or expectations described in, or implied by, the forward-looking statements contained in the following discussion and analysis. OUTLINE TO ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTES OF OPERATIONS - Liquidity and Capital Resources - Capital Expenditure Investments - Production Contamination Events - Results of Operations (Subsections a through i) - Critical Accounting Policies and Estimates Liquidity and Capital Resources We are fortunate to be experiencing strong customer demand for the First Defense ® product line, but the significant investments in facilities, equipment and staffing necessary to double our production capacity have been challenging. Despite delays in the installation of certain equipment, we completed these capacity-expanding investments around the end of 2022. In late 2022, we began experiencing production contamination events that became more frequent during 2023 and continued through April of 2024. With newly implemented controls in place, we now believe that we have successfully remediated the issues underlying these contamination events. Our next challenge is to resume our past production yields and achieve our gross margin goals in excess of 40%. By both remediating the contamination events and optimizing the operation of the new equipment installed to increase production output, we began to improve process yields beginning during the fourth quarter of 2024, as demonstrated by the 37% gross margin we achieved during the fourth quarter of 2024. We did not find one “smoking gun” as the root cause to the contamination and yield losses. We think the solution is more about optimizing and controlling critical process parameters and multiple production inputs and process steps. 21 ImmuCell Corporation Concurrently, we are reducing product development expenses as we await approval of Re-Tain ® by the FDA. After an investment of about 25 years and approximately $50 million in the development of this technology, we are committed to seeing this product through to regulatory approval and our previously disclosed limited distribution, controlled launch strategy (Controlled Launch). At the same time, we are also in the very early stages of exploring potential strategic options that could offset some of our product development expenses and enhance a mass-market launch of Re-Tain ® . In order to help fund these gross margin losses and production capacity expansions, we raised some new debt during 2023 and equity during 2024. Net cash provided by operating activities was $358,000 during the year ended December 31, 2024 in contrast to net cash (used for) operating activities of ($4.7 million) during the year ended December 31, 2023. This $5 million improvement in net cash provided by operating activities between the years was largely due to a $3.6 million decrease in the net loss and a $2.5 million swing from cash used for inventory during 2023 to cash generated by reductions in inventory during 2024, which sources of cash were net against $1.2 million more cash being used for accounts receivable during 2024 than during 2023. Our inventory balance decreased by $699,000 to $7.1 million as of December 31, 2024 from $7.8 million as of December 31, 2023. Interest expense (excluding amortization of debt issuance and debt discount costs) was $526,000 and $453,000 during the years ended December 31, 2024 and 2023, respectively. Our debt bears interest at fixed rates, which on a blended basis amounts to 4.51% per annum. We anticipate that interest expense (excluding amortization of debt issuance and debt discount costs) will be $452,000 and $322,000 during the years ending December 31, 2025 and 2026, respectively. Our total non-cash depreciation, amortization and stock-based compensation expense was approximately $3.1 million during both of the years ended December 31, 2024 and 2023. We anticipate that depreciation expense (largely pertaining to Re-Tain ® ), while not affecting our cash flows from operations, will be a significant factor in creating annual net operating losses until and unless product sales increase sufficiently to offset these non-cash expenses. Further, as we fill the order backlog for First Defense ® , we will require additional capital to fund an anticipated increase in inventory levels. Net cash used for investing activities was ($461,000) during the year ended December 31, 2024 versus ($1.9 million) during the prior year consisting primarily of cash spent to fund the purchase of property, plant and equipment. To conserve cash at this time, we have deferred all large dollar capital expenditure projects. Net cash provided by financing activities was $2.9 million during the year ended December 31, 2024 versus of $1.8 million during the prior year. During the third quarter of 2023, we received $3 million in new debt proceeds. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $10.5 million and $12 million as of December 31, 2024 and 2023, respectively. Debt principal repayments (excluding the line of credit) aggregated $1.5 million and $1.2 million during the years ended December 31, 2024 and 2023, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million and $3.3 million during the years ending December 31, 2025 and 2026, respectively. During the first quarter of 2024, the availability of our $1 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. No draw on our line of credit was outstanding as of December 31, 2024 or December 31, 2023. See Note 9 to the accompanying audited financial statements for more information about our bank debt. During the second quarter of 2024, we entered into an At-The-Market (ATM) Agreement with Craig-Hallum Capital Group LLC, under which we may offer and sell up to $11 million of shares of our common stock. As of December 31, 2024, we had sold 1,228,227 shares under this ATM Offering conducted pursuant to the ATM Agreement. Net proceeds through December 31, 2024 (net of approximately $152,000 in upfront legal, accounting and other fees and approximately $140,000 in sales commissions) were approximately $4.4 million. The ATM Agreement gives our board the flexibility to evaluate the potential uses of the proceeds while considering the cost of dilution in real time. This funding has provided a very productive financial bridge for us to fund our operations, while we work to improve our gross margin and reduce product development expenses. While the capital raised is not enough to fund larger capital expenditure investments, such as further increasing First Defense ® production capacity or building our own facility for the aseptic filling services for Re-Tain ® , it has allowed us to release funding for certain smaller and necessary capital expenditures. 22 ImmuCell Corporation We project (based on our best estimates) that our existing cash and cash equivalents, together with gross margin anticipated to be earned from ongoing product sales will be sufficient to meet our currently planned working capital and capital expenditure requirements and to finance our ongoing business operations for at least the next 12 months (the period of time required to be addressed for such purposes by accounting disclosure standards). The table below summarizes the changes in selected key accounts (in thousands, except for percentages): As of As of Increase December 31, 2024 December 31, 2023 Amount % Cash and cash equivalents $ 3,758 $ 979 $ 2,779 284 % Net working capital $ 10,631 $ 7,272 $ 3,358 46 % Total assets $ 45,100 $ 43,808 $ 1,292 3 % Stockholders’ equity $ 27,518 $ 24,993 $ 2,525 10 % Common shares outstanding (1) 8,979 7,751 1,228 16 % (1) There were 664,000 and 618,500 shares of common stock reserved for issuance for stock options that were outstanding as of December 31, 2024 and 2023, respectively. Capital Expenditure Investments During the three-year period ended December 31, 2016, we invested the aggregate of $4.2 million to construct a 7,100 square foot facility addition at 56 Evergreen Drive ( Building 56 ) and related equipment (primarily Freeze-Dryer #2) and cold storage capacity increasing our freeze-drying capacity by 100% and making other improvements to our liquid processing capacity, which increased our annual production capacity (in terms of annual sales dollars) to approximately $16.5 million. When we describe the production capacity for the First Defense ® product line in this Annual Report, it should be noted that the actual value of this capacity varies based on biological and process yields, product format mix, selling price and other factors. During the first quarter of 2016, we completed this investment, which also included the construction and equipping of a pilot plant for small-scale DS production for Re-Tain ® within Building 56 . After construction of the DS production facility for Re-Tain ® at 33 Caddie Lane ( Building 33) was completed, this space was converted for use in the production of the gel tube formats of the First Defense ® product line. After renovations of our leased facility at 175 Industrial Way ( Building 175A) were completed during the second quarter of 2020, this space was converted to double our liquid processing capacity. During the four-year period ended December 31, 2018, we invested the aggregate of $21.6 million to construct a DS production facility for Re-Tain ® at Building 33 . During the fourth quarter of 2017, we completed construction of the DS production facility. We began equipment installation during the third quarter of 2017, and we completed this installation during the third quarter of 2018. The total cost of this investment for the DS production facility and related processing equipment was $20.8 million plus $331,000 for the land and $472,000 for the acquisition of an adjacent 4,080 square foot warehouse facility at 14 Wedge Way ( Building 14) , which will be used for packing, shipping and cold storage of Re-Tain ® and other warehousing needs. During 2018, it became clear that demand for Tri-Shield First Defense ® was outpacing production. In response to this increasing demand, we began a series of investments during 2019 to increase our production capacity for the First Defense ® product line from approximately $16.5 million to approximately $30 million or more per year (with an option to increase further to approximately $40 million in the future). The additional investment in First Defense ® should allow us to fulfill the current backlog of First Defense ® orders and materially reduce the risk of another order backlog. Operating at very close to 100% of available capacity is not efficient or sustainable. Our objective is to be in position to operate without significant contaminations at the capacity level we choose to cover sales with adequate buffer stock, which would allow more time for necessary preventative maintenance. We also need to meet or exceed our production yield assumptions to succeed. Our production process is complex and difficult to scale-up quickly. We remain deeply committed to meeting demand for First Defense ® and overcoming the current short supply that we have been experiencing. The primary purpose of the additional investments in Re-Tain ® is to bring the formulation and aseptic filling capabilities for Re-Tain ® DP into available space in our DS facility in order to lessen or eliminate our reliance on third-party DP manufacturing services as well as the build out of warehouse space at Building 14 for packing and shipping facilities for Re-Tain ® . We began initial installation of the filling equipment during the first quarter of 2022 and then paused this installation work due to the lack of adequate cash. 23 ImmuCell Corporation The amount and timing of these additional investments in First Defense ® and Re-Tain ® that were initiated beginning in 2019 are detailed in the following table (in thousands): Paid During the First Defense ® Re-Tain ® Other Total Year Ended December 31, 2019 $ 279 $ 538 $ 574 $ 1,391 Year Ended December 31, 2020 2,938 581 554 4,073 Year Ended December 31, 2021 1,633 976 - 2,609 Year Ended December 31, 2022 3,498 430 47 3,975 Year Ended December 31, 2023 1,097 796 - 1,893 Year Ended December 31, 2024 410 54 2 466 Total Paid through December 31, 2024 9,855 3,375 1,177 14,407 Estimate to Complete (1) 4,246 2,000 - 6,246 Total Project Cost $ 14,101 $ 5,375 $ 1,177 $ 20,653 (1) The investments of approximately $3 million of these funds to increase First Defense ® production capacity from approximately $30 million to $40 million per year and approximately $2 million to build an in-house aseptic filling facility for Re-Tain ® have been deferred for the time being, due to cash constraints caused by production slowdowns implemented during 2023 to remediate certain contamination events. These estimated costs to complete are based on historic quotations and have not been updated or adjusted to account for inflation, project scope change and other factors. The first phase of the additional investments in First Defense ® beginning in 2019 included significant renovations to a 14,300 square foot leased facility at Building 175A , some facility modifications at Building 56 and the necessary production equipment (including Freeze-Dryer #3) to increase our liquid processing capacity by 100% and our freeze-drying capacity by 50%. This resulted in increasing the annual production capacity of the First Defense ® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. Renovations of Building 175A to enable this expansion were completed during the second quarter of 2020. By moving our powder and gel filling and assembly operations from Building 56 into this new space, we created space at Building 56 for the installation of the expanded freeze-drying capacity. The new facilities are built to contemporary cGMP standards with efficient material and people flows. A site license approval for this new facility was issued by the USDA during the third quarter of 2020. During the second quarter of 2021, we completed the relocation of our gel formulation equipment from Building 56 to Building 175A , which created the space necessary to double our liquid processing capacity at Building 56 . We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) at Building 56 from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity at Building 56 from the USDA during the third quarter of 2022. This investment also included equipment and vehicle purchases necessary to expand and improve our colostrum collection capabilities and logistics. The second phase of the additional investments in First Defense ® included the installation of Freeze-Dryer #4 to further increase the estimated annual production capacity of the First Defense ® product line (in terms of annual sales dollars) by an additional 33% from approximately $23 million to approximately $30 million or more. As of July of 2022, we had completed almost all of the facility expansion work and new equipment installations needed to increase our production capacity to approximately $30 million or more per year. However, the most critical piece of new equipment (being Freeze-Dryer #4) was delivered six months late by the fabricator. Regardless, by the end of 2022, we had Freeze-Dryer #4 installed and approved for use by the USDA. At the same time, Freeze-Dryer #2 stopped operating requiring a six-month repair and netting us back to three operating freeze dryers during the first half of 2023. As of July of 2023, we were back to four operating freeze dryers. This investment also included equipment and facility modifications to scale-up and upgrade our vaccine manufacturing capacity and improve our quality laboratories at Building 56 as well as the installation of new equipment to increase the throughput of our gel filling operations at Building 175A . The third phase of the additional investments in First Defense ® involved the construction of an additional 15,400 square feet of space adjacent to and connected to Building 175A at 175 Industrial Way ( Building 175B ) and new equipment to further increase our estimated annual First Defense ® production capacity from approximately $30 million to approximately $40 million with options for further expansion. Given the long lead time required for investments like this, we initiated this project by entering into a lease amendment during the third quarter of 2022 covering a to-be-constructed building shell for approximately $250,000 per year. Construction of the building shell by our landlord was substantially complete as of April 1, 2023, and rent payments commenced as of August 1, 2023. We made this lease commitment because of the unique proximity of the land adjacent to our currently leased space and the high level of demand for properties of this type in the Portland market. We did not want to risk losing this opportunity to others. The anticipated benefits to us from this new lease include: i) space for the potential to install Freeze-Dryers #5, #6, #7 and #8 if justified by market demand in the future, ii) improved space and quality for our powder milling operations by separating our upstream processes (liquid processing) at Building 56 from our clean downstream processes (milling, formulation, filling and packaging) at Building 175A and iii) much needed additional warehouse space. We have been running our equipment and staff close to 100% of capacity in order to fill the backlog of orders. One of our objectives is to create a more sustainable production schedule. Freeze-Dryer #5 is the key piece of equipment required to allow us to increase our estimated annual production capacity to above $30 million. Based on past experience, we are planning for approximately 18 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. However, due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer most of this investment, for the time being. Instead, we initiated the initial steps on a portion of this project with a reduced budget of approximately $700,000 at Building 175B during the third quarter of 2023. This work was completed during the first quarter of 2024, which provided additional warehousing space and allowed us to move all shipping and receiving functions out of Building 56 to create more space for liquid processing at Building 56 . 24 ImmuCell Corporation Production Contamination Events As our increased production capacity was coming online around the end of the third quarter of 2022, our standard in-process quality control testing detected a product contamination event likely related to our incoming raw material (which is sourced from many different cows at many different farms). We took immediate steps to address the contamination, and production ran without issue during the balance of the fourth quarter of 2022. Subsequently, as we began to operate at a higher level of capacity at the beginning of 2023, we were forced to slow down production again to remediate a second contamination event also likely related to our incoming raw material. We then ran for approximately six months without contamination and then experienced a smaller third contamination event in September of 2023 impacting two lots of Work-in-Progress inventory, likely related to process changes implemented to run our increased level of liquid processing. Although all of the incoming material utilized in this production phase had passed quality control testing, the product failed the quality control tests later in the production process. We experienced a fourth contamination event impacting three lots of Work-in-Process inventory during the first three and a half months of 2024. New remediation steps implemented in response to this fourth event during the second half of April of 2024 appear to have been successful so far because we have run without contamination since then. Throughout these contamination events, all product that was sold to market met all in-process and final release testing to meet USDA-required quality standards. As we look back at these production contamination events, we believe that the root cause of the initial contaminations was associated with rapid growth in our purchases from the farms where we acquire our raw material. Having largely remediated that problem, we then experienced additional contaminations that we believe were largely caused by rapidly increasing our production capacity. Our proprietary production process does allow us to create an effective product out of a non-aseptic starting raw material. This requires a careful monitoring, however, of the tradeoff between the benefit of adding more heat for longer periods of time to reduce bacterial load against the alternative benefit of less heat for shorter periods of time to preserve more antibody content. Although using more heat could potentially reduce bacterial load, our yield is higher when we use less heat. We know that putting our Work-in-Process inventory through freeze/thaw cycles is not beneficial to yield and increases the risk of contamination. One effective improvement we have implemented, where appropriate, is to lengthen the time of a heat treatment step instead of running two shorter heat treatment steps separated by a freeze/thaw. As we continue to optimize these critical process parameters, we believe we can significantly reduce the risk of further contaminations and improve our gross margin. Although these types of losses are expected to happen from time to time in the production of a biological product such as ours, we believe that the sudden and large contamination events were related in several different ways to our efforts to increase production output. We also believe we have mitigated the risk of large-scale reoccurrence of such losses by implementing various new quality control steps and manufacturing process and facility improvements. To meet our goals, we must run without significant equipment failures or contamination losses, and we must continue to improve our production yields. The production contamination events and other production process losses experienced resulted in scrapped inventory valued as shown in the following table (in thousands): Approximate Cost of Work-in-Process Scrap Approximate Retail Value of Finished Goods (1) Year Ended December 31, 2022 $ 589 $ 2,193 Year Ended December 31, 2023 $ 527 $ 2,487 Year Ended December 31, 2024 $ 407 $ 1,766 (1) This estimate approximates the retail value of this work-in-process inventory in the event that additional costs had been incurred to complete the production process to prepare it for sale utilizing the approximate product format mix and selling prices effective during the period. We still have more work to do to catch up to product demand for First Defense ® . We continue to optimize our investments to increase production capacity and to implement the corrective actions being taken in response to these contamination events. Although we produced far less than we needed during 2023 and 2024, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. Our current goal is to exceed $30 million in annual production output, while also allowing for essential preventative maintenance. We believe that the $7.8 million in sales recorded during the fourth quarter of 2024 suggests that during the quarter we achieved, even exceeded, this goal. 25 ImmuCell Corporation The lessons from the remediation of the contamination events have improved our production processes going forward. We have implemented several important improvements at the source farm level including more product and environmental testing, more training of farm staff and better enforcement of our protocols. While we never release product to the market that does not pass our in-process and final quality control release tests, we had allowed product to advance in the production process at risk, while the in-process quality control tests were being performed. We no longer advance product to the next stage before complete in-process quality control test results for the current stage are reviewed. Although this adds time to the overall production cycle, we believe that it has helped us reduce the chance of further contaminations. Notwithstanding the challenges that contamination events have posed for us, we are excited to have reached both our estimated full capacity of at least $30 million per year for First Defense ® (with an option to increase our estimated full capacity to approximately $40 million per year in the future with the additional capital investments, as discussed above) while, at the same time, advancing to the final stages of a very significant FDA product development initiative with Re-Tain ® . We pursued an insurance claim under our business interruption policy to offset at least some portion of the losses that we incurred from the contamination events discussed above. Although not a total recovery of our financial losses, we did settle our insurance claim during the first quarter of 2025 and received an insurance payout of approximately $427,000, which is in addition to the $250,000 that we previously received during the third quarter of 2023 under this claim. Results of Operations a) Product Sales Our near-term goal is to increase and stabilize supply of First Defense ® , regain lost business and continue our growth curve. This goal not only aims to meet end-user demand but also to replenish our distributors with the necessary buffer stock. The significant increase in sales recognized during the fourth quarter of 2024 results from our higher production output, but also from the comparison to 2023 when our sales were limited due to a production slowdown necessary to remediate certain contamination events. We do not anticipate being able to repeat this high level of year-over-year sales growth when we compare 2025 to 2024. We do not solely benchmark our sales expectations off trailing twelve-month sales results. Instead, we look at the sales of competitive products to assess the size of the addressable market and plan for growth when projecting our future production capacity needs. Sales during the three-month period ended December 31, 2024 were $7.8 million, representing a 52%, or $2.7 million, increase over sales of $5.1 million during the fourth quarter of 2023. Sales during the year ended December 31, 2024 were $26.5 million, representing a 52%, or $9 million, increase over sales of $17.5 million during the year ended December 31, 2023. By increasing production capacity and mitigating contamination events, we were able to significantly increase sales during the most recent periods compared to the year prior. Quarter to quarter sales since the beginning of 2022 are displayed in the following table: 26 ImmuCell Corporation We captured a 52% increase in sales revenue during the fourth quarter of 2024 compared to the fourth quarter of 2023. Domestic sales during the three-month period ended December 31, 2024 increased by 35%, and international sales increased by 308%, in comparison to the three-month period ended December 31, 2023. International sales aggregated 17% and 6% of total sales during the three-month periods ended December 31, 2024 and 2023, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages): During the Three-Month Periods Ended December 31, Increase 2024 2023 Amount % Total Product Sales $ 7,751 $ 5,096 $ 2,655 52% We captured a 52% increase in sales revenue during the year ended December 31, 2024 compared to the year ended December 31, 2023. Domestic sales during the year ended December 31, 2024 increased by 44%, and international sales increased by 136%, in comparison to the year ended December 31, 2023. International sales aggregated 14% and 9% of total sales during the years ended December 31, 2024 and 2023, respectively. The sales results for the years are summarized in the following table (in thousands, except for percentages): During the Years Ended December 31, Increase 2024 2023 Amount % Total Product Sales $ 26,493 $ 17,472 $ 9,021 52% Sales of the First Defense ® product line made up 99% of our total sales during both of the three-month periods ended December 31, 2024 and 2023 and during both of the years ended December 31, 2024 and 2023. Our sales are generally seasonal with highest demand expected during the first quarter of each year. The compound annual growth rate (CAGR) of our total product sales was 52%, 14% and 16% during the year, five-year and six-year periods ended December 31, 2024, respectively. We obtained USDA approval of Tri-Shield First Defense ® (the trivalent format of our product delivered via a gel tube, which provides broader protection to calves) near the end of 2017. Around the time of this new product format launch, total product sales during the years ended December 31, 2017 and 2018 were $10.4 million and $11 million, respectively. Tri-Shield ® requires two separate liquid production processes for each dose manufactured and sold (in contrast to the bivalent product formats that require just one) making it more expensive to produce. This new product format has become the highest revenue contributor, as demonstrated in the table below (in thousands, except for percentages): During the Three-Month Periods Ended December 31, During the Years Ended December 31, 2024 % of Total 2023 % of Total 2024 % of Total 2023 % of Total Tri-Shield ® $ 4,227 55% $ 3,768 74% $ 15,762 59% $ 10,316 59% Other 3,524 45 1,328 26 10,731 41 7,156 41 Total Product Sales $ 7,751 100% $ 5,096 100% $ 26,493 100% $ 17,472 100% We likely lost some business beginning in late 2022 and through the first half of 2024 as a result of the backlog. During the first half of 2023, the impact of tight supplies hit even harder, leaving our customers without product during their busiest calving season. The 2023 production shortage caused largely by the contamination events discussed above may prove to be more detrimental to our growth curve than any prior production shortage because it depleted distributor inventories and impacted more customers for a longer period of time. Our inability to timely meet the needs of our customers could result in the loss of some customers who seek alternative scours management products during this period of short supply, and some of these customers may not resume purchasing our product when we have eliminated the backlog. While we worked to allocate product directly to certain large customers during this period of short supply, we likely lost some customers that could not procure product. While backlog is a better problem to have than seeing product expiring on our shelves, it is nonetheless a significant challenge when we do not get our customers everything that they want. Our sales team has resumed more normal sales growth initiatives now, in anticipation of increasing product supply. We will work to regain end-user customers that we may have lost while we were short on product and will aggressively compete for new business. As we emerge from an extended period of time on backlog, we anticipate higher than normal sales fluctuations quarter to quarter. What is most important to us at this time is that we achieve sales growth over the longer periods of time, even if we experience some quarter-to-quarter fluctuations. The production slowdown during the first ten months of 2023 helped cause an increase in the amount of our order backlog. Valuation of the backlog is a non-GAAP estimate that is based on purchase orders on hand at the time that could not be met because of a lack of available inventory. We are reporting this figure because it reflects the orders on our books presently that we cannot ship. Quantification of the backlog during the current periods has become far less comparable to prior periods. At times, customers have placed orders for more than a month’s worth of their demand, perhaps in reaction to our ongoing backlog situation, whereas in the past they ordered more closely in line with their current demand. We are concerned that this backlog amount may not be highly relevant at this time as it includes very old orders, redundancy in demand and orders that may be cancelled given the time that has passed since they were originally placed. 27 ImmuCell Corporation The backlog was reduced from approximately $2.4 million as of December 31, 2021 to approximately $205,000 as of September 30, 2022. In part because of a first contamination event experienced around the end of the third quarter of 2022, our backlog increased to approximately $2.5 million as of December 31, 2022. In part because of a second contamination event experienced during the first quarter of 2023, the backlog continued to increase to approximately $7.5 million as of March 31, 2023, to approximately $8 million as of June 30, 2023, to approximately $8.9 million as of September 30, 2023 and to approximately $9.4 million as of December 31, 2023. We were able to reduce this backlog modestly to approximately $9.1 million as of March 31, 2024 and then reduce it further to approximately $8.9 million as of June 30, 2024. We were able to reduce this backlog further to approximately $7.3 million as of September 30, 2024 and then further to $4.4 million as of December 31, 2024. The backlog of orders was worth approximately $4.7 million as of March 21, 2025. As sales demand increased while our production output was reduced, the value of our order backlog has fluctuated as demonstrated in the following table: We also sell our own CMT , which is used to detect somatic cell counts in milk. Sales of CMT aggregated approximately 1% of our total product sales during the periods reported. Sales of CMT decreased by 30%, or $17,000, to $39,000 during the three-month period ended December 31, 2024, in comparison to the three-month period ended December 31, 2023. Sales of CMT increased by 1%, or $1,000, to $179,000 during the year ended December 31, 2024 in comparison to the year ended December 31, 2023. Effective January 1, 2022, we increased our selling price of the First Defense ® product line by approximately 5% and CMT by approximately 7%. Effective January 1, 2023, we increased our selling price of the First Defense ® product line by approximately 4% (a range of 2% to 8%) and CMT by approximately 5%. Effective November 15, 2023, we increased our selling price of the First Defense ® product line by approximately 8%. Also, effective November 15, 2023, we increased our selling price for CMT by approximately 12%. Effective January 1, 2025, we increased our selling price of the First Defense ® product line by approximately 6% (a range of 5% to 7.5%). At the same time, we also increased our selling price for CMT by approximately 7%. b) Gross Margin The change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales during the three-month periods and years ended December 31, 2024 and 2023 are summarized in the following tables (in thousands, except for percentages): During the Three-Month Periods Ended December 31, Increase 2024 2023 Amount % Gross margin $ 2,832 $ 1,258 $ 1,574 125 % Percent of product sales 37 % 25 % 12 % 48 % During the Years Ended December 31, Increase 2024 2023 Amount % Gross margin $ 7,941 $ 3,869 $ 4,072 105 % Percent of product sales 30 % 22 % 8 % 35 % 28 ImmuCell Corporation The gross margin during recent periods was significantly less than what we anticipate going forward. The 2023 reduction in production output was largely the result of our decision to slow down our production rate while remediating the production contamination events discussed above. During 2023, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. As we build back sales, we are increasing the amount of gross margin earned compared to prior periods and improving the gross margin as a percentage of sales compared to 2023. The gross margin as a percentage of product sales was 30%, 22%, 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2024, 2023, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The 22% gross margin percentage during the year ended December 31, 2023 (including even lower gross margin percentages during the three-month period ended March 31, 2023 and the six-month period ended June 30, 2023) was our lowest ever. Achieving process yield improvements (in addition to running without significant equipment failures or product contaminations) will be essential to increasing our gross margin in future periods. Some of the critical process parameters that we are investigating include optimizing: 1) the time and temperature for pasteurization steps, 2) a critical filtration step and 3) the antibody content of incoming Work-in-Process inventory. As we fully integrate and utilize our increased capacity and evaluate our product costs and selling price, we believe we could increase our gross margin by approximately 3 to 8 percentage points over the 37% gross margin reported for the three-month period ended December 31, 2024. Our immediate goal is to resume a 40% gross margin. This goal has been reduced from prior projections given the lower rates experienced during 2023. While our biological and process yields continue to be variable, we have seen a favorable improvement to our finished goods yield recently. The Tri-Shield ® product format is more complex (i.e., three antibodies versus two antibodies for Dual-Force ® ) making it more costly to produce, and both the bivalent and trivalent gel product formats are more expensive to produce than the bolus format. These new formats are creating sales growth for us, and we are focused on increasing total gross margin dollars, even if that is accomplished with a lower gross margin as a percentage of sales. A number of other factors contribute to the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter and from year to year. We also invest to sustain compliance with cGMP in our production processes. Increasing production can be more expensive in the initial stages. To achieve our inventory production growth objectives, we continue to acquire more raw material (colostrum) from many more cows at several new farms. Additionally, the biological yields from our raw material are always variable, which affects our costs of goods sold in a similar way. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on the time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. As is the case with any vaccine program, animals respond less effectively to their first exposure to a new vaccine, and thereafter the effectiveness of their immune response improves in response to subsequent immunizations. While this variability impacts our costs of producing inventory, one of the key commercial benefits of our First Defense ® product line is that we compensate for the variability in a cow’s immune response by standardizing each dose of finished product. This ensures that every calf is equally protected, which is something that dam-level commercial scours vaccines cannot offer. We continue to work on processing and yield improvements and other opportunities to reduce costs, while enhancing process knowledge and robustness. Additionally, the significant global supply-chain disruptions that almost all industries are experiencing presently are a challenge to us. The costs of our critical supplies, components, raw materials, utilities and services increased significantly during 2021 and that trend has continued since then. We have little choice but to pay the higher prices and try to take on more months of supply than we would have held previously if we could get our orders fulfilled timely. We believe that gross margin trends going forward should be viewed over longer periods of time than just one quarter. The following table displays the relationship between sales and gross margin during recent periods (in thousands except for percentages): Product Sales Gross Margin Dollars Gross Margin Percentage Year Ended December 31, 2021 $ 19,243 $ 8,656 45% Year Ended December 31, 2023 $ 17,472 $ 3,869 22% Year Ended December 31, 2022 18,568 7,649 41% Decrease during 2023 under 2022 $ ( 1,096 ) $ ( 3,780 ) (1) (19%) Three-Month Period Ended March 31, 2023 $ 3,447 $ 301 9% Three-Month Period Ended June 30, 2023 3,533 1,044 30% Three-Month Period Ended September 30, 2023 5,396 1,267 23% Three-Month Period Ended December 31, 2023 5,096 1,257 25% Year Ended December 31, 2023 $ 17,472 $ 3,869 22% Three-Month Period Ended March 31, 2024 $ 7,258 $ 2,295 32% Three-Month Period Ended June 30, 2024 5,473 1,230 22% Three-Month Period Ended September 30, 2024 6,011 1,584 26% Three-Month Period Ended December 31, 2024 7,751 2,832 37% Year Ended December 31, 2024 $ 26,493 $ 7,941 30% (1) This $3.8 million decrease in gross margin earned resulted in a very sudden, material and unexpected decrease in our available cash. 29 ImmuCell Corporation As demonstrated in the table below, Work-in-Process inventory as a percentage of total inventory has ranged from 57% to 81%, and the dollar value of Work-in-Process inventory has increased significantly since December 31, 2021. The hyper-immunized colostrum we purchase for use in the production of First Defense ® is the largest component of Work-in-Process inventory. As we began to increase our production capacity, we also increased the supplier base that we work with in order to increase the availability of this critical ingredient. As certain contamination events discussed above slowed the implementation of our increased capacity, we accumulated more colostrum than originally planned. While this is a good safety measure to have in place to ensure that we do not run short of colostrum, we do expect to reduce this use of cash as we move forward with our increased production rate. Also, we are developing what could potentially be a spray-dried alternative format of First Defense Technology ® that would not require the liquid processing and freeze-drying production steps used to produce First Defense ® in a capsule or gel tube. If successful, this effort could expand our product portfolio with a bulk product designed to meet the needs of large dairy and calf-ranch customers at a lower cost. This would help us turn some of this inventory to cash sooner. In a frozen state, this colostrum has a 30-month useable shelf life. The increase in Work-in-Process inventory is demonstrated in the following table (in thousands, except for percentages): As of Frozen Colostrum Other Work-in-Process Inventory % of Total Inventory December 31, 2021 $ 1,032 $ 870 $ 1,902 62 % December 31, 2022 $ 2,418 $ 1,051 $ 3,469 57 % December 31, 2023 $ 3,811 $ 2,004 $ 5,815 74 % December 31, 2024 $ 3,591 $ 2,156 $ 5,747 81 % c) Product Development Expenses and Strategy Overview: The majority of our product development expenses pertain to the development of Re-Tain ® . During the three-month period ended December 31, 2024, product development expenses decreased by 23%, or $247,000, to $819,000 in comparison to $1.1 million during the three-month period ended December 31, 2023. Product development expenses aggregated 11% and 21% of product sales during the three-month periods ended December 31, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $371,000 and $369,000 during the three-month periods ended December 31, 2024 and 2023, respectively. Approximately $341,000 of these non-cash expenses were comprised of depreciation expenses pertaining largely to our DS facility and equipment for Re-Tain ® during both of the three-month periods ended December 31, 2024 and 2023. During the year ended December 31, 2024, product development expenses decreased by 11%, or $496,000, to $3.9 million in comparison to $4.4 million during the year ended December 31, 2023. Product development expenses aggregated 15% and 25% of product sales during the years ended December 31, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of approximately $1.5 million during both of the years ended December 31, 2024 and 2023. Approximately $1.4 million of these non-cash expenses consisted of depreciation expenses pertaining largely to our DS facility and equipment for Re-Tain ® during both of the years ended December 31, 2024 and 2023. We began depreciating this asset when the Certificate of Occupancy for the new construction was issued during the fourth quarter of 2017, but sales of our new product cannot be realized until we achieve FDA approval. Product development expenses (excluding depreciation expense of $1.4 million) were $3 million during the year ended December 31, 2023, when we were in production mode. Beginning during the second half of 2024, we implemented an aggressive idle of product development expenses pertaining to Re-Tain ® after the production of inventory intended for our Controlled Launch was completed. It was our goal to reduce product development expenses (excluding depreciation) to approximately $2.5 million during the year ended December 31, 2024. The actual expense incurred was $2,532,000, representing a 16%, or $477,000, reduction from the 2023 expense (excluding depreciation). Product development expenses (excluding depreciation) were $1.6 million during the six-month period ended June 30, 2024. This means that we reduced product development expenses (excluding depreciation) by approximately 43%, or approximately $689,000, during the second half of 2024 in comparison to the first half of 2024. It is our further objective to reduce product development expenses (excluding depreciation) to approximately $2.1 million during the year ending December 31, 2025, which would be an 18%, or approximately $462,000, decrease from the 2024 level. This aggressive idle strategy (as opposed to a complete shut down) allows us to continue our pursuit of FDA approval while reducing our cash spend and ensuring no adverse impact to critical equipment. We have a plan to bring the DS plant back to full production mode in approximately two to three months, subject to available funding. 30 ImmuCell Corporation During the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces the real estate taxes on Building 33 (our DS production facility for Re-Tain ® ) by 65% over the eleven-year period beginning on July 1, 2017 and ending June 30, 2028 and by 30% during the year ending June 30, 2029, at which time the rebate expires. During the second quarter of 2017, the TIF was approved by the Maine Department of Economic and Community Development. The value of the tax savings will increase (decrease) in proportion to any increases (decreases) in the assessment of the building for city real estate tax purposes or the City’s tax rate. The following table discloses how much of the new taxes we have generated is being relieved by the TIF and how much we are paying: Assessed Value Twelve-Month Period Ended Total New Taxes Generated by the Project Less: TIF Credit Net Amount Paid by ImmuCell $1.7 million @ April 1, 2017 June 30, 2018 $ 36,000 $ 22,000 $ 13,000 $4.0 million @ April 1, 2018 June 30, 2019 90,000 58,000 32,000 $4.0 million @ April 1, 2019 June 30, 2020 94,000 60,000 34,000 $4.0 million @ April 1, 2020 June 30, 2021 94,000 60,000 34,000 $4.3 million @ April 1, 2021 June 30, 2022 55,000 36,000 20,000 $4.3 million @ April 1, 2022 June 30, 2023 58,000 37,000 21,000 $4.3 million @ April 1, 2023 June 30, 2024 61,000 39,000 22,000 $4.3 million @ April 1, 2024 June 30, 2025 64,000 41,000 23,000 Total $ 552,000 $ 353,000 $ 199,000 Re-Tain ® Development objective: Our product, Re-Tain ® , could be the first mastitis product to be marketed without FDA-required milk discard or pre-slaughter withdrawal period label restrictions. As we work to change the way that mastitis is managed in the dairy industry, we aim to demonstrate that our bacteriocin, Nisin A, which is designed specifically for subclinical mastitis, can provide producers the freedom to change when and how mastitis is treated. Re-Tain ® is not a broad-spectrum antibiotic used in human health. Rather, it consists of a highly targeted active ingredient without an FDA-required milk discard or pre-slaughter withdrawal period. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $53.00 (for 4 days of milk at 70 pounds per day at the Class III milk price average of $18.89 per hundredweight during 2024) to approximately $145.00 (for 11 days of milk at 70 pounds per day at the Class III milk price average of $18.89 per hundredweight during 2024) per treated animal. These high milk discard costs associated with traditional antibiotic treatments lead producers to only treat mastitis after clinical signs develop. We expect that Re-Tain ® will be a first-of-its-kind product that can be used to economically treat at the earliest stage of infection, giving producers the ability to get ahead of mastitis before clinical signs develop so the best cows stay at their best performance level and in the herd longer. 31 ImmuCell Corporation The active ingredient, Nisin A, is an antibacterial peptide that was designated as Generally Regarded as Safe (GRAS) over 40 years ago for use in many foods to prevent the growth of pathogens. Nisin degrades in the gastrointestinal tract to amino acids, which further supports its safety. The Nisin we produce is more than 96% pure, which is purer than any nisin used in food preservation applications. Our product has been subject to the FDA’s phased review process since 2004. We received our first major Technical Section Complete Letter from the FDA during the third quarter of 2008, and we received our fourth major Technical Section Complete Letter from the FDA during the third quarter of 2018. The remaining fifth major Technical Section (CMC) is related to commercial manufacturing. We made our first submission of the CMC Technical Section during the first quarter of 2019, and our most recent fourth submission of this Technical Section was made as part of our Non-Administrative NADA submission during January of 2025. As part of this process, we have produced over 50,000 treatments (150,000 doses) worth of product that are now quickly approaching their expiration dating. More specifically, approximately 16,000 treatments would expire between April to May of 2025 if the FDA approves only 18-months of shelf life (or between October to November of 2025 if 24-months of shelf life is approved), and approximately 34,000 treatments would expire between July to August of 2025 if the FDA approves only 18-months of shelf life (or between January to February of 2026 if 24-months of shelf life is approved). We may not be able to utilize all available inventory prior to its expiration dating. The following chart displays the approximate timeline associated with the issuance of the five major Technical Section Complete Letters: * TS=Technical Section Re-Tain ® Development status : Approval by the FDA of our NADA for Re-Tain ® is required before any sales of the product can be initiated. The NADA is comprised of five principal Technical Sections plus a sixty-day administrative review at the end. Each Technical Section can be reviewed and approved separately. By statute, each Technical Section submission is generally subject to one or more six-month review cycles by the FDA. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows: 1) Environmental Impact: During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter from the FDA. During the second quarter of 2021, we received further clarification through a new Environmental Impact Technical Section Complete Letter covering the current dosage regimen and labeling. 2) Target Animal Safety: During the second quarter of 2012, we received the Target Animal Safety Technical Section Complete Letter from the FDA. 3) Effectiveness: During the first quarter of 2013, we received the Effectiveness Technical Section Complete Letter from the FDA. The anticipated product label (which remains subject to FDA approval) carries claims for the treatment of subclinical mastitis associated with Streptococcus agalactiae , Streptococcus dysgalactiae , Streptococcus uberis , and coagulase-negative staphylococci in lactating dairy cattle. Subclinical mastitis, and the study required to achieve an effectiveness claim for it, is defined under the FDA/Center for Veterinary Medicine Guidance #49: Target Animal Safety and Drug Effectiveness Studies for Anti-Microbial Bovine Mastitis Products (Lactating and Non-Lactating Cow Products). Trial eligibility requires both pretreatment samples to be positive for the mastitis pathogen (except for Staphylococcus aureus and Streptococcus agalactiae , where a single pretreatment sample qualifies a cow for enrollment). For all pathogens, both samples taken between 14 and 28 days post treatment (and at least 5 days apart) must be negative to be judged a cure. These conservative criteria generally result in enrolling cows with chronic subclinical disease, which rarely self-resolves . 4) Human Food Safety: During the third quarter of 2018, we received the Human Food Safety Technical Section Complete Letter from the FDA confirming, among other things, a zero milk discard period and a zero pre-slaughter withdrawal period during and after treatment with our product. Achieving this critical differentiating feature for our product encouraged us to continue the significant product development investment necessary to bring Re-Tain ® to market. It would have been hard to justify an ongoing investment of this nature in a product without this significant competitive advantage. During the second quarter of 2021, we updated this Technical Section Complete Letter with FDA approval of the official analytical method to measure Nisin in milk. At this point (almost 6.5 years ago), the remaining hurdle to market launch was focused on the commercial manufacture of the Drug Substance. Details of this effort are described in the next eight paragraphs. 32 ImmuCell Corporation 5) Chemistry, Manufacturing and Controls (CMC): The CMC Technical Section is complex and comprehensive. Having previously achieved the four different Technical Section Complete Letters from the FDA discussed above, approval of the CMC Technical Section is the fifth and final significant step required before Re-Tain ® product sales can be initiated in the United States. Implementing DS production, which is a required component of the CMC Technical Section, has been the lengthiest part of this project. We previously entered into an agreement with a multi-national pharmaceutical ingredient manufacturer for our commercial-scale supplies of DS. However, we determined during 2014 that the agreement did not offer us the most advantageous supply arrangement in terms of either cost or long-term dependability. As a result, we presented this product development opportunity to a variety of large and small animal health companies. While such a corporate partnership could have provided access to a much larger sales and marketing team and allowed us to avoid the large investment in a commercial-scale production facility, we concluded that a partner would have taken an unduly large share of the gross margin from all future product sales of Re-Tain ® . However, the regulatory and marketing feedback that we received from prospective partners, following their due diligence, was positive. During the third quarter of 2014, we completed an investment in facility modifications and processing equipment necessary to produce our DS at pilot-scale at Building 56 . This small-scale facility was used to: i) expand our process knowledge and controls, ii) establish operating ranges for critical process parameters, iii) conduct product stability studies, iv) optimize process yields and v) determine the cost of production. We believe these efforts have reduced the risks associated with our investment in the commercial-scale DS production facility. Having raised equity during 2016 and 2017, we were able to move away from these earlier partnering strategies and assume control over the commercial-scale manufacturing process in our own facility. During the fourth quarter of 2015, we acquired land near our existing Portland facility for the construction of a new commercial-scale DS production facility. We commenced construction of this facility during the third quarter of 2016 and completed construction during the fourth quarter of 2017. Equipment installation and qualification was initiated during the third quarter of 2017 and completed during the third quarter of 2018. Total construction and equipment costs aggregated approximately $20.8 million. With construction of the facility complete, we continue to work with outside parties to investigate improvements to our DS production yields as well as potential efficacy enhancements. Under the FDA’s phased submission process, we made a first-phased DS submission (without the DP submission) during the first quarter of 2019 that included data from the DS Registration Batches produced at commercial scale in our new DS manufacturing facility. This first-phased submission was followed by a second-phased submission covering both DS and DP, during the first quarter of 2021. The second-phased DS and DP submission responded to comments raised by the FDA regarding the first-phased DS submission and included detailed information about the manufacturing process and controls for DP. One of the key components of the second-phased DS and DP submission was also demonstrating stability of the product through expiry. During the third quarter of 2021, the FDA issued a Technical Section Incomplete Letter (Incomplete Letter) with regard to this second-phased DS and DP submission. This response was not unexpected as it is common for the FDA to issue queries and comments, especially related to an aseptic DP submission. We made a second DS and DP submission of the CMC Technical Section during the first quarter of 2022. During the third quarter of 2022, we received an Incomplete Letter from the FDA with regards to this second DS and DP submission of the CMC Technical Section. The Incomplete Letter required that internal and external laboratories re-develop and qualify several analytical tests and associated controls. We made a third DS and DP submission of the CMC Technical Section during the third quarter of 2023. During the fourth quarter of 2023, the FDA notified us that it was refusing to review our third submission because Norbrook was identified as the DP manufacturer in our submission, but the FDA had been expecting that we would identify our own in-house services as the DP manufacturer (instead of Norbrook). This miscommunication arose from our April of 2022 response to an FDA 483 inspectional observation in which we noted that Norbrook was expected to exit the DP manufacturing agreement with us at the end of 2022. Termination of the Norbrook arrangement at that time would have required us to procure and install some long lead time equipment (filler and labeler) in our DS suite in late 2022. Instead, we were able to extend the agreement with Norbrook to complete the manufacture of DP inventory for the initial commercial sales under our Controlled Launch strategy. As a result, we continued to identify Norbrook as our DP manufacturer. As a result of this miscommunication, we were required to re-submit our third submission the CMC Technical Section in November of 2023. In May of 2024, the FDA issued another Incomplete Letter to us. In that letter, the FDA raised some minor questions about our third submission that required a fourth submission of the CMC Technical Section. The FDA also advised that all inspectional observations at our DS facility and at the DP facility of our contract manufacturer must be cleared before this fourth submission could be made. Subsequently, the FDA notified us during the second quarter of 2024 that the inspectional observation at our DS facility had been cleared. 33 ImmuCell Corporation In early January of 2025, we made a Non-Administrative NADA submission that included our fourth submission of the CMC Technical Section, together with the minor technical sections covering All Other Information and Product Labeling. We implemented this filing strategy to eliminate the need for an Administrative NADA submission covering All Other Information and Product Labeling at the end of the application process, which would then be subject to an additional 60-day review at that time. By statute, this CMC Technical Section submission would be subject to a review period of up to 180 days, but because these latest responses to the CMC Incomplete Letter are not complex, we are hopeful for a shorter review period. We expect the FDA to complete its review only after it clears the inspectional observations at the DP facility of our contract manufacturer. This now appears to be the critical path constraint. Although the FDA could have refused our Non-Administrative NADA submission because of the open inspection, it did not do so and has used this filing to schedule the on-site re-inspection at Norbrook to be completed by early April. If the inspectional observations are cleared and our contract manufacturer resumes “No Action Indicated” or “Voluntary Action Indicated” status, we anticipate that the path to NADA approval could be expedited. Reflecting the innovative nature of our product and considering the short expiry dating of the inventory on hand, we may now be able to move forward with Investigational Product use with inventory on hand that has a relatively short shelf life. This would allow us to begin to test market acceptance of this novel product. While mindful of being prudent with how much cash we invested in inventory that would have short expiry dating if market launch were delayed, we did build DS inventory during 2022 and 2023 to support potential initial commercial sales of Re-Tain ® . Upon FDA approval, we intend to implement our Controlled Launch with relatively short product expiration dating, subject to confirmation of final product shelf-life disposition by the FDA. We presently have no agreement in place to aseptically fill additional DP inventory. We do not anticipate the Controlled Launch to be a significant source of new sales, nor do we anticipate the initial sales to generate gross margin in excess of the associated product development expenses. During the second half of 2024, we began to reduce operating costs at our DS production facility until initial market acceptance (and perhaps the interest of a marketing partner) justifies a new agreement for aseptic filling and the production of additional inventory. We do anticipate a pause in the supply of product to market after the initial goods are sold and before the product is re-launched with DP produced by our in-house aseptic filling operations if that investment is re-funded (or, if not, then by an alternative contractor that has not been identified yet). While we do not expect Re-Tain ® to make a significant contribution to our sales growth in the early years after market launch, we do see value in achieving regulatory approval and testing market acceptance of the product. Our DS manufacturing facility and our potential future DP manufacturing facility (or that of a DP contract manufacturer for us) would be subject to ongoing FDA inspections. During the third quarter of 2019, the FDA conducted a pre-approval inspection of our DS facility. This resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We submitted responses and data summaries in a phased manner over the fourth quarter of 2019 and first quarter of 2020. During the first quarter of 2022, the FDA conducted another pre-approval inspection of our DS facility. This also resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We have responded to all of the queries. Early during the first quarter of 2024, the FDA conducted another pre-approval inspection of our DS facility. This resulted in the issuance of one deficiency as identified on the FDA’s Form 483. During the first quarter of 2024, we successfully responded to this inspectional observation and achieved “Voluntary Action Indicated” status. The remaining critical path milestone is for Norbrook to successfully complete closure of deficiencies at their DP facility, which is currently underway. 34 ImmuCell Corporation We had concluded that the fastest route to FDA approval and market launch is with the services of Norbrook, reducing our risk by benefiting from their demonstrated expertise in aseptic filling. From 2010 to the present, we have worked with Norbrook under several amended contract manufacturing agreements covering the DP formulation, aseptic filling and final packaging services. Norbrook filled DP for our Controlled Launch before the filling contract expired during the fourth quarter of 2024. This contract continues through March of 2026 with regards to labeling and packaging services. Our potential alternative third-party options for the formulation and aseptic filling services that are presently being performed by Norbrook are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). During the first quarter of 2022, we initiated an investment in the installation of equipment to produce DP at our own facility at Building 33 . Given the loss in gross margin during the first ten months of 2023 caused by the slowdown in production output that was necessary to remediate the production contamination events discussed above and after weighing feedback from the FDA during their 2022 inspection, we decided to defer the completion of our potential DP manufacturing facility for the time being. If we decide to resume our in-house strategy, we would anticipate FDA approval of this facility (which is a requirement for commercial manufacturing) would take at least two years after we resume spending on this project, allowing for two six-month review cycles, subject to the timing of our installation and validation work. This would be a post-approval submission. If we decide to complete our potential future DP manufacturing facility, we anticipate it would have enough formulation and aseptic filling capacity to exceed the expected production capacity of our DS facility, which is approximately $10 million in annual sales. This production capacity estimate is based on our assumptions as to product pricing and does not yet reflect inventory build strategies in advance of product approval or ongoing yield improvement initiatives. Establishing our own DP formulation and aseptic filling capability would provide us with the longer-term advantage of controlling the manufacturing process for Re-Tain ® in one facility, thereby potentially reducing our manufacturing costs and eliminating international cold chain shipping logistics and costs. The DP formulation and aseptic filling operation, if completed, will be located in existing facility space that we had intended to utilize to double our DS production capacity if warranted by sales volumes following market launch. As a result, if we decide to complete this DP facility (rather than utilizing a third party for these services), we would need to explore alternative strategies (in parallel with ongoing DS yield improvement initiatives) to expand our DS production capacity. This integrated manufacturing capability for Re-Tain ® would substantially reduce our dependence on third parties. Upon completion of our formulation and aseptic filling facility, the only significant third-party input for Re-Tain ® would be the DP syringes. It is anticipated that Hubert De Backer of Belgium (HDB) will supply these syringes in accordance with purchase orders that we submit. HDB is a syringe supplier for many of the largest participants in the human and veterinary medical industries, and with whom Norbrook presently works. Based on HDB’s performance history and reputation in the industry, we are confident that HDB will be a dependable supplier of syringes in the quantity and of the quality needed for Re-Tain ® . Other product development initiatives: Our next most important product development initiative has been focused on other improvements, line extensions or additions to our First Defense ® product line. The bolus format of First Defense ® and Tri-Shield First Defense ® have been listed with the Organic Materials Research Institute (OMRI) since 2013 and 2019, respectively. This means they can be used on organic farms. During the third quarter of 2024, the gel tube format of First Defense ® also became OMRI listed. As discussed above, we are developing a potential spray-dried, bulk powder format of our First Defense Technology ® . During the third quarter of 2024, we entered into a research agreement with the Mayo Clinic, a non-profit, educational, research and healthcare institution, to explore potential applications of Nisin in certain human surgical situations. This data may be published in the future, but we do not see a clear commercial path forward at this time. Subject to the availability of resources, we intend to begin new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring, on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries, subject to the availability of the needed funding. d) Sales and Marketing Expenses and Selling Strategy We see ourselves as the “non-Pharma” pharma company. Rather than offering variations of “copy-cat” technology like vaccines and antibiotics, we have taken the path less traveled by developing first-of-their kind products fueled by novel active ingredients such as polyclonal antibodies (for First Defense ® ) and bacteriocins (for Re-Tain ® ). While we expect that Re-Tain ® could be a significant market disrupter, we project the First Defense ® market could be larger, especially during the next five years. We anticipate that these category developing innovations will drive greater value for the livestock industry and, in turn, for our stockholders. During the three-month period ended December 31, 2024, sales and marketing expenses increased by 25%, or $165,000, to $836,000 in comparison to $672,000 during the three-month period ended December 31, 2023, amounting to 11% and 13% of product sales during the three-month periods ended December 31, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $27,000 and $61,000 during the three-month periods ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, sales and marketing expenses increased by 12%, or $378,000, to $3.5 million in comparison to $3.1 million during the year ended December 31, 2023, amounting to 13% and 18% of product sales during the years ended December 31, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $158,000 and $182,000 during the years ended December 31, 2024 and 2023, respectively. Our current budgetary guideline is to keep sales and marketing expenses under 20% of total sales. We continue to leverage the efforts of our small sales force by using animal health distributors. 35 ImmuCell Corporation The First Defense ® product line serves dairy and beef producers by protecting their calf crop from scours, the leading cause of pre-weaning mortality and morbidity. When calves are healthy during this crucial development period, they mature into more productive milking cows and more efficient beef generators. Our primary competition in this category is vaccines that are also regulated for effectiveness and safety by the USDA. However, animal responses to vaccines are inherently variable. COVID breakthrough infections in humans have reminded us that a vaccine does not guarantee immunity. That is true for our competitors as well. In the most controlled research settings, only 80% of animals respond to a vaccine. This leaves 20% of the calf crop unprotected when the scour prevention program relies on scour vaccines. Those unprotected calves can be disease carriers. Not only are they more susceptible to death or likely to require life-saving treatment (sometimes with antibiotics), but they also shed pathogens into the environment creating a greater disease pressure for their herd mates. The First Defense ® product line removes the inconsistency inherent with vaccine protection. We sell the only USDA-licensed products in the scour prevention category that are therapeutic multi-valent polyclonal antibodies. This technology eliminates a producer’s reliance on a variable vaccine response to generate antibodies and, instead, can protect every calf equally with a measured dose of antibody-driven immunity against both bacterial and viral scour pathogens. During the years ended December 31, 2024 and 2023, we treated more calves than our next largest calf-level competitive product, which is a vaccine administered to the newborn at birth. Compared to the dam-level competitive products (which are vaccines given to the cow pre-calving), we are second in sales dollars to the market leader. Despite these successes, there remains significant opportunity to displace more competition within North America. There is also opportunity to grow our sales by expanding into international markets. We are being strategic in how we invest in international market development in order not to divert our limited resources away from achieving domestic growth, which is often more efficient to obtain. We believe that Re-Tain ® could revolutionize the way that mastitis is managed by making earlier treatment of subclinical infections (while these cows are still producing saleable milk) economically feasible without an FDA-required milk discard or pre-slaughter withdrawal period during, or for a period of time after, treatment. No other FDA-approved mastitis treatment product on the market can offer this value proposition. We believe we can demonstrate a return on investment to the dairy producer and the milk processor that will justify a premium over other mastitis treatments on the market today, which are all sold subject to milk discard and pre-slaughter withdrawal period requirements. By creating this value for our customers, we believe we can, in turn, create value for our stockholders. Re-Tain ® could increase the lifetime profitability of a cow and reduce disease transfer to herd mates. It is common practice to move sick cows from their regular herd group to a sick cow group for treatment and the related milk discard. This movement causes stress on the cow and a reduction in milk production. While practices may vary farm-to-farm, there would be no requirement to move cows treated with our product, allowing this costly drop in production to be avoided. It is generally current practice to treat mastitis only when the disease has progressed to the clinical stage where the milk from an infected cow cannot be sold, leaving most subclinically infected cows untreated. Without a milk discard cost, we expect producers to be more motivated to identify and treat cows at the subclinical stage. This creates a substantial animal welfare benefit. By treating mastitis early at the subclinical level, producers could preserve optimal milk yields. We also know that animals infected with subclinical mastitis have higher abortion rates and often progress to the clinical disease state requiring antibiotic treatment and milk discard. We believe that societal animal welfare objectives will put more and more pressure on the industry to treat cows with subclinical infections. The over-use of antibiotics that are medically important to human healthcare is a growing public health concern of our society and an active issue with the FDA, largely because of the growing evidence that this over-use contributes to antibiotic resistance and the rise of “superbugs”. Sustainability objectives require that less antibiotics be used in food producing animals, yet a new FDA-approved drug to treat mastitis has not been developed in years. Our product improves sustainability by utilizing a bacteriocin as an alternative to traditional antibiotics that are used in human medicine. In the big picture, we are introducing an entirely new class of antimicrobial as an animal drug, a bacteriocin, that does not promote resistance against antibiotics used in human medicine making it more socially responsible. The industry could keep treating this very significant disease with traditional antibiotics, but it takes innovation to bring a bacteriocin like Nisin to market. Re-Tain ® would, when introduced, offer a needed alternative to these traditional antibiotics, while at the same time improving milk quality and the quantity of milk produced by treated cows. We believe our product fits very well with where the industry is going to be in the coming years. 36 ImmuCell Corporation As with all new products, the market determines value. Our objective is to gain market acceptance of this new product concept as we develop a new product category. Despite our product’s exciting benefits, it will take time to change this longstanding treatment paradigm and develop this new market. It will take time for the market to understand, evaluate, implement and adapt to the use and benefits of Re-Tain ® . Based on consultations with industry experts and key opinion leaders, we have opted to carefully control the launch of this novel product into the first quarter of 2026 or so, as we seek to transform the way that mastitis is treated in the dairy industry over the long term. Our goal is to help early adopters select treatment candidates, develop easy to use protocols, optimize treatment results and realize a positive return on their investment. We intend to limit initial distribution of Re-Tain ® to a level that enables our sales team to select the optimal dairy farms at which to introduce Re-Tain ® and to limit the initial number of participating farms so that the desired levels of support and guidance relating to effective usage of Re-Tain ® can be provided with our available resources. We recognize that it will be important to manage expectations from the producer to the milk processor because it is possible that processors may express reservations with regards to the zero milk discard claim. Our Controlled Launch strategy reduces the amount of inventory that we would need to build at risk before regulatory approval is achieved. This strategic choice means that we have elected not to pursue an alternative strategy that might have maximized short-term, initial sales quickly through a mass market approach where we provide product to distribution and let them sell it to as many farms as possible. While we are dedicated to increasing our sales revenue, we considered available product supply and the damage a mass market strategy could cause to the long-term value of the product. We have seen products sold by much larger companies that were substantially damaged by such failed market launch strategies. We believe that these prudent steps, while potentially leading to lower initial Re-Tain ® revenues, may create a smooth and successful launch and could safeguard the longer term performance of our investment in Re-Tain ® . We also believe that the operational adjustments and accommodations that dairy farmers will need to make to effectively use Re-Tain ® and avoid potential problems that would deter its adoption and usage. Our overarching objective is to minimize the risk of early-stage unsatisfactory outcomes that could harm the longer-term prospects and market acceptance of Re-Tain ® . e) Administrative Expenses During the three-month period ended December 31, 2024, administrative expenses increased by 6%, or $31,000, to $555,000 in comparison to $523,000 during the three-month period ended December 31, 2023. Administrative expenses amounted to 7% and 10% of product sales during the three-month periods ended December 31, 2024 and 2023, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $51,000 and $50,000 during the three-month periods ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, administrative expenses increased by 4%, or $82,000, to $2.2 million in comparison to $2.1 million during the year ended December 31, 2023. Administrative expenses amounted to 8% and 12% of product sales during the years ended December 31, 2024 and 2023, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $198,000 and $210,000 during the years ended December 31, 2024 and 2023, respectively. We strive to be efficient with these expenses while funding all the legal, audit and other costs associated with being a publicly-held company with a team of four employees. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more active investor relations program. Recently, this initiative has pivoted to a virtual meeting format, which is less expensive. Having experienced this efficiency, it is our intent to continue with the same strategy, for the most part, even though travel restrictions have been eliminated. At the same time, we continue to provide full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year, as well as in Current Reports on Form 8-K when legally required or deemed appropriate by management. We believe these efforts have helped us access the capital markets to fund our growth objectives. Considering our objective to hire a Chief Financial Officer during the first half of 2025 as well as inflation and all the necessary support services that fit into this category, we believe that approximately $2.7 million per year is an efficient budget goal to fund the administrative expenses of a publicly-held company. f) Net Operating Income (Loss) During the three-month period ended December 31, 2024, our net operating income was $621,000 in contrast to a net operating loss of $1 million during the three-month period ended December 31, 2023. The $1.6 million swing from net operating loss to net operating income was largely caused by a $1.6 million increase in gross margin. During the year ended December 31, 2024, our net operating loss of $1.6 million was significantly less than our net operating loss of $5.7 million during the year ended December 31, 2023. The $4.1 million decrease in our net operating loss during the year ended December 31, 2024 compared to the year ended December 31, 2023 was largely caused by the $4.1 million increase in gross margin. g) Other Expenses, net During the three-month period ended December 31, 2024, other expenses, net, aggregated $101,000 in comparison $135,000 during the three-month period ended December 31, 2023. Interest expense decreased to $136,000 during the three-month period ended December 31, 2024 from $152,000 during the three-month period ended December 31, 2023. Non-cash amortization of debt issuance and debt discount costs (which is included as a component of interest expense) was $11,000 and $10,000 during the three-month periods ended December 31, 2024 and 2023, respectively. Interest income was $36,000 and $17,000 during the three-month periods ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, other expenses, net, aggregated $506,000 in comparison to $22,000 during the year ended December 31, 2023. During the year ended December 31, 2023, we benefited from $365,000 of insurance recoveries, compared to no such benefit during the year ended December 31, 2024. Interest expense increased to $569,000 during the year ended December 31, 2024 from $476,000 during the year ended December 31, 2023 due to the additional debt taken out during the third quarter of 2023. Non-cash amortization of debt issuance and debt discount costs (which is included as a component of interest expense) was $43,000 and $23,000 during the years ended December 31, 2024 and 2023, respectively. We anticipate that our interest expense (excluding non-cash amortization of debt issuance and debt discount costs) will be approximately $452,000 and $322,000 during the years ending December 31, 2025 and 2026, respectively. Interest income was $78,000 and $97,000 during the years ended December 31, 2024 and 2023, respectively. We incurred a $15,000 loss on disposal of property, plant and equipment during the year ended December 31, 2024 compared to an $8,000 loss during the year ended December 31, 2023. 37 ImmuCell Corporation h) Income (Loss) Before Income Taxes During the three-month period ended December 31, 2024, our income before income taxes was $521,000 in contrast to a loss before income taxes of $1.1 million during the three-month period ended December 31, 2023. The $1.7 million reduction in our loss before income taxes during the three-month period ended December 31, 2024 compared to the three-month period ended December 31, 2023 was largely the result of a $1.6 million improvement in gross margin and a $247,000 decrease in product development expenses that were offset, in part, by a $165,000 increase in sales and marketing expenses. During the year ended December 31, 2024, our loss before income taxes was $2.1 million in comparison to a loss before income taxes of $5.8 million during the year ended December 31, 2023. The $3.6 million decrease in our net loss during the year ended December 31, 2024 compared to the year ended December 31, 2023 was largely the result of the $4.1 million increase in gross margin that was reduced by an increase of $485,000 in other expenses. i) Income Taxes and Net Income (Loss) During the three-month periods ended December 31, 2024 and 2023, we recorded income tax expense of $6,000 and $1,000, respectively, which is comprised of minimum state tax liabilities. Our net income of $515,000, or $0.06 per diluted share, during the three-month period ended December 31, 2024 was in contrast to net (loss) of ($1.1 million), or ($0.15) per basic share, during the three-month period ended December 31, 2023. During the years ended December 31, 2024 and 2023, we recorded income tax expense of $10,000 and $5,000, respectively, which is comprised of minimum state tax liabilities. Our net (loss) of ($2.2 million), or ($0.26) per basic share, during the year ended December 31, 2024 was in comparison to net (loss) of ($5.8 million), or ($0.75) per basic share, during the year ended December 31, 2023. We have substantial net operating loss carryforwards that will largely offset future income tax liabilities. As of December 31, 2024, our federal net operating loss carryforward was $17.6 million. As of December 31, 2024, our state net operating loss carryforward was $5.2 million. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This legislation made significant changes in the U.S. tax laws, including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 34% to 21%. Our income tax rate differs from this statutory tax rate primarily because we are currently providing for a full valuation allowance against our deferred tax assets. While we are recording this full valuation allowance, we are not recognizing the benefit of our tax losses. In addition to the results discussed above from our Statements of Operations, we believe it is important to consider our Statements of Cash Flows in the accompanying audited financial statements and the discussion under Liquidity and Capital Resources above to assess the cash generating ability of our operations. Critical Accounting Policies and Estimates The audited financial statements are presented on the basis of accounting principles that are generally accepted in the United States. All professional accounting standards that were effective and applicable to us as of December 31, 2024 have been taken into consideration in preparing the financial statements. The preparation of financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. Significant estimates include our valuation of inventory, deferred tax assets and costs of goods sold. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have chosen to highlight certain policies that we consider critical to the operations of our business and understanding of our financial statements. These critical accounting estimates have been consistently applied. We sell products that provide Immediate Immunity™ to newborn dairy and beef cattle. We recognize revenue in accordance with the five step model in ASC 606. These include the following: i) identification of the contract with the customer, ii) identification of the performance obligations in the contract, iii) determination of the transaction price, iv) allocation of the transaction price to the separate performance obligations in the contract and v) recognition of revenue associated with performance obligations as they are satisfied. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns. 38 ImmuCell Corporation Inventory includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method, or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead. Inventory valuations is a critical accounting policy because of the estimates and assumptions used by management to determine its cost accounting and because of the variability of the cost per dose due to fluctuations in the biological yield. ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable