IMMUCELL CORP /DE/ 10-K

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 - Results of Operations - Critical Accounting Policies Liquidity and Capital Resources Net cash used for operating activities was $4.7 million during the year ended December 31, 2023 in comparison to net cash used for operating activities of $1.5 million during the year ended December 31, 2022. The $3.1 million increase in cash used for operating activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was largely caused by the $3.3 million increase in the net loss which was, in turn, largely the result of $3.8 million less gross margin being earned during 2023, due to the production contamination events discussed below. Approximately $1.4 million less cash was received from the collection of accounts receivable, which was largely offset by $1.2 million less cash being invested in inventory during the year ended December 31, 2023 compared to the prior year. Our inventory balance increased by $1.8 million to $7.8 million as of December 31, 2023 from $6 million as of December 31, 2022. Our total depreciation and amortization expense was approximately $2.7 million and $2.5 million during the years December 31, 2023 and 2022, respectively. We anticipate that depreciation expense, 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. Net cash used for investing activities was $1.9 million during the year ended December 31, 2023 in comparison to net cash used for investing activities of $4 million during the year ended December 31, 2022 consisting primarily of cash spent to fund the purchase of property, plant and equipment. Net cash provided by financing activities increased to $1.8 million during the year ended December 31, 2023 in comparison to net cash provided by financing activities of $1.1 million during the year ended December 31, 2022. We received gross debt proceeds of $3 million and $2 million during the years ended December 31, 2023 and 2022, respectively. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $12 million and $10.2 million as of December 31, 2023 and 2022, respectively. This debt bears interest at fixed rates. The blended interest rate on the debt outstanding as of December 31, 2023 and 2022 is 4.51% and 3.65% per annum, respectively. Debt principal repayments aggregated $1.2 million and $897,000 during the years ended December 31, 2023 and 2022, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million during both of the years ending December 31, 2024 and 2025. Interest expense (including amortization of debt issuance and debt discount costs) was $476,000 and $349,000 during the years ended December 31, 2023 and 2022, respectively. We anticipate that interest expense (including amortization of debt issuance and debt discount costs) will be $563,000 and $492,000 during the years ending December 31, 2024 and 2025, respectively. During the first quarter of 2024, the availability of our $1.0 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. There was no outstanding balance under this line of credit as of December 31, 2023 or 2022. See Note 10 to the accompanying audited financial statements for more information about our bank debt. 23 ImmuCell Corporation From the first quarter of 2016 through the second quarter of 2021, we raised gross proceeds of $26.7 million (net proceeds were $24.8 million) from six different common equity transactions priced between $5.25 and $8.25 per share with a weighted average price of $5.87 per share. No warrants were issued in connection with any of these transactions, and no convertible or preferred securities were issued. This capital, together with our bank debt and gross margin from product sales, has allowed us to transform the Company. Based on our best estimates and projections, we believe that our 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 12 months (which is the period of time required to be addressed for such purposes by accounting disclosure standards) from the date of this filing. The table below summarizes the changes in selected, key accounts (in thousands, except for percentages): As of December 31, As of December 31, (Decrease) Increase 2023 2022 Amount % Cash and cash equivalents $ 979 $ 5,792 $ (4,813 ) (83 )% Net working capital $ 7,272 $ 10,923 $ (3,650 ) (33 )% Total assets $ 43,808 $ 44,861 $ (1,053 ) (2 )% Stockholders’ equity $ 24,993 $ 30,380 $ (5,387 ) (18 )% Common shares outstanding (1) 7,751 7,747 4 <1 % ( 1) There were 618,500 and 605,000 shares of common stock reserved for issuance for stock options that were outstanding as of December 31, 2023, and 2022, respectively. We have invested and continue to invest in several different capital expenditure projects to increase our estimated annual full production capacity for the First Defense ® product line from approximately $16.5 million to approximately $40 million and to complete the development of Re-Tain ® . 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 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 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. 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 our First Defense ® production facility at 56 Evergreen Drive. After construction of the DS production facility for Re-Tain ® at 33 Caddie Lane (described in the next paragraph) was completed, this space was converted for use in the production of the gel tube formats of the First Defense ® product line. After construction of Building 175A (described below) was completed, 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 33 Caddie Lane. 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, which will be used for packing, shipping and cold storage of Re-Tain ® and other warehousing needs. During 2019, we initiated several additional capital expenditure investments in First Defense ® and Re-Tain ® as detailed in the following table (in thousands): Paid During 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 3,513 415 47 3,975 Year Ended December 31, 2023 1,097 796 - 1,893 Total Paid through December 31, 2023 9,460 3,306 1,175 13,941 Estimate to Complete (1) 3,500 2,000 900 6,400 Total Project Cost $ 12,960 $ 5,306 $ 2,075 $ 20,341 (1) The investment of approximately $5.5 million of these funds for First Defense ® and Re-Tain ® projects has been deferred for the time being. These figures are rough estimates for the work to be completed that have not been put out to bid for firm cost quotations or contracts at this time. 24 ImmuCell Corporation The primary purpose of the additional investment in First Defense ® is to fulfill the current backlog 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, and to have redundancy in place for when equipment failures occur. In addition to running without significant product contaminations or equipment failures, we need to meet or exceed our production yield assumptions to succeed. The first phase of the additional investments in First Defense ® included significant renovations to a 14,300 square foot leased facility at 175 Industrial Way ( Building 175A ), some facility modifications at 56 Evergreen Drive and the necessary production equipment (including Freeze-Dryer #3) to increase our freeze-drying capacity by 50% and our liquid processing capacity by 100%. 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 services from 56 Evergreen Drive into this new space, we created space at 56 Evergreen Drive for the installation of the expanded freeze-drying capacity. The new facilities are built to contemporary current Good Manufacturing Practices (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 56 Evergreen Drive to Building 175A , which created the space necessary to double our liquid processing capacity at 56 Evergreen Drive. We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) at 56 Evergreen Drive from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity at 56 Evergreen Drive from the USDA during the third quarter of 2022. This investment also included equipment and vehicle investments 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. Due to supply disruptions affecting key components and equipment, this investment was not completed until the end of 2022. This investment also includes equipment and facility modifications to scale-up and upgrade our vaccine manufacturing capacity, improve our quality laboratories and install new equipment for our gel filling operations for First Defense ® at 56 Evergreen Drive and Building 175A . This phase included the automation of our gel filling operations. The third phase of the additional investments in First Defense ® involves the initiation of a new investment in building modifications and 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 15,400 square foot building shell connected to Building 175A 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 56 Evergreen Drive from our clean downstream processes (milling, formulation, filling and packaging) and iii) much needed additional warehouse space. 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 to 24 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. 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. 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. During the third quarter of 2023, we initiated the initial steps of this project with a budget of approximately $700,000. We completed this work during the first quarter of 2024, which will provide additional warehousing space and allow us to move all shipping and receiving functions out of 56 Evergreen Drive to create more space for liquid processing. In consideration for our landlord agreeing to pay for the cost of those certain tenant improvements, we are obligated to make additional rent payments of $20,000 per month from November 2023 through June 2024 and a one-time additional rent payment of $488,743 in July 2024. 25 ImmuCell Corporation The 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 to end our reliance on third-party DP manufacturing services as well as to build out warehouse space at 14 Wedge Way for packing and shipping facilities for Re-Tain ® . We began initial installation of the filling equipment during the first quarter of 2022. Then we paused this installation work pending concurrence with the FDA pertaining to our third submission of the Chemistry, Manufacturing and Controls (CMC) Technical Section, which is discussed in greater detail below. 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 the spending of approximately $2 million of these funds, for the time being. At the same time, we are investigating other potential relationships with contract manufacturers that might do this work for us so that we can avoid this use of funds. If we decide to resume the in-house strategy, we would anticipate FDA approval of this facility (which is a requirement for commercial manufacturing) at least two years after we resume spending on this project. 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 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 Total $ 488,000 $ 312,000 $ 176,000 Results of Operations Business Segments As detailed in Note 17, “Segment Information”, to the accompanying audited financial statements, we operate in two business segments. The Scours segment is dedicated to manufacturing and selling First Defense ® , a product used to prevent scours in newborn calves, which is regulated by the United States Department of Agriculture (USDA). The Mastitis segment is focused on developing and commercializing Re-Tain ® , a product to treat subclinical mastitis in lactating dairy cows, which is regulated by the United States Food and Drug Administration (FDA). Production Capacity Increase, Product Contamination and Related Events 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 to an estimate of approximately $30 million per year. Over recent years, we have invested more than $12.4 million to increase our production capacity to meet the still-growing demand. This investment in equipment and facilities represents approximately 50% of our stockholders’ equity as of December 31, 2023. Although we have not yet been able to achieve our production output goals, we remain deeply committed to continuing to supply First Defense ® to the market over the long term, despite the current short supply. Our production process is a very complicated one, which makes it difficult to scale-up quickly. We can’t just flip a switch and pump out more widgets. 26 ImmuCell Corporation The past year or so has been considerably challenging for us. As of July 2022, we had completed almost all of the facility expansion work and new equipment installations needed to significantly increase our production capacity. However, the most critical piece of new equipment (being Freeze-Dryer #4) was delivered six months late by the fabricator. As this increased production capacity was coming online, a product contamination event was detected by standard in-process quality control testing around the end of the third quarter of 2022. Scrapped product from contamination events and other production process losses during 2022 (largely due to the contamination event around the end of the third quarter) resulted in a total charge to costs of goods sold of $589,000 during 2022. We took immediate steps to address the contamination, and production ran without issue during the balance of the fourth quarter of 2022. By the end of 2022, we had Freeze-Dryer #4 approved for use by the USDA. Just as we began to operate at this higher level of capacity at the beginning of 2023, we were forced to slow down production to remediate a second contamination event related to our incoming raw material. In response to this contamination event, we slowed down our production output as we took the necessary steps to assess and remediate the issues to ensure that any product that is released to market continues to meet all quality standards. At the same time, Freeze-Dryer #2 stopped operating requiring a six-month repair, netting us back to three operating freeze dryers. As of early July 2023, we were back to four operating freeze dryers, and we believed that the contamination events were largely behind us. We subsequently experienced a third contamination event in September 2023 impacting two lots of work-in-progress inventory. 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. The production pause necessary to remediate the problem reduced our production output during September and October of 2023. Scrapped product from contamination events and other production process losses during 2023 resulted in a total charge to costs of goods sold of $527,000 during 2023. The production slowdown during the first ten months of 2023, has, in part, caused an increase in the amount of our order backlog from approximately $2.5 million as of December 31, 2022 to approximately $9.4 million as of December 31, 2023. This backlog increased further to $10.3 million as of March 8, 2024. We cannot be certain that this backlog will be converted to sales because it includes orders that were placed months ago, redundancy in demand and orders that may be cancelled. We believe that the ongoing implementation of our capacity expansion plans and the corrective actions being taken in response to these contamination events should allow us to operate without further significant contaminations going forward with estimated annual production capacity of approximately $30 million during the latter part of the fourth quarter of 2023 and into 2024. While we produced far less than we needed during 2023, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. With the positive trend in our quality control test results described above, we are building back production. As we resume full production, our goal is to be able to produce at least $6 million or more worth of product per quarter, which would annualize to about 80% or more of our estimated $30 million annual production capacity. Finished goods produced increased steadily from approximately $3.3 million to $4 million and further to $5.3 million during the first, second and third quarters of 2023, respectively, before dropping modestly to $5.1 million during the fourth quarter of 2023. The output levels achieved during the months of November and December of 2023 annualize to approximately $26.8 million, which equates to an average quarterly production of approximately $6.7 million. Since February of 2023, we have been pursuing an insurance claim under our business interruption policy to offset a small portion of the losses that we have incurred related to at least three different product contamination events. While our financial losses are far larger, we are seeking a $750,000 insurance benefit. To date, we have received $250,000. The balance of this claim is under review by our underwriter. We cannot estimate the likelihood of our success with this claim. The increase in sales demand for First Defense ® is both exciting and challenging for us. The learnings 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 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 the complete quality control test results are known. While this does add time to the production cycle, we believe that it has helped us reduce further contaminations. Notwithstanding the challenges that contamination events have posed for us, we are excited to be approaching both our estimated full capacity of approximately $30 million per year for First Defense ® (with a flex option to increase our estimated full capacity to approximately $40 million per year in the future) while, at the same time, advancing to the final stages of a very significant FDA product development initiative with Re-Tain ® . 27 ImmuCell Corporation Product Sales Our near-term goal is to increase and stabilize supply, regain lost business and re-establish our growth curve. However, the 2023 production shortage caused largely by certain contamination events may prove to be more detrimental to our growth curve than any prior production shortage because it impacted more customers for a longer period of time. Through continued growth in sales of the First Defense ® product line, and the dedication of additional resources to production, sales, marketing and technical services, it is our objective to exceed our total product sales of approximately $17.5 million and $18.6 million achieved during the years ended December 31, 2023 and 2022, respectively, as soon as possible. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the four-year period after the market launch of Re-Tain ® . 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. The production slowdown necessary to remediate the contamination events described above resulted in significantly reduced sales during the first ten months of 2023. During this period of short supply when we have been selling product as soon as it is produced, our sales are less impacted by the historically high seasonality during the first quarter of each year. Sales during the three-month period ended March 31, 2023 were $3.45 million, representing a 12%, or $464,000, decrease from sales of $3.9 million during the fourth quarter of 2022. Sales during the three-month period ended June 30, 2023 were $3.53 million, representing a 2%, or $86,000, increase over sales during the first quarter of 2023. Sales during the three-month period ended September 30, 2023 were $5.4 million, representing a 53%, or $1.9 million, increase over sales during the second quarter of 2023. Sales during the three-month period ended December 31, 2023 were $5.1 million, representing a 6%, or $301,000, decrease from sales during the third quarter of 2023. Sales during the second half of the year were stronger as we were able to increase production. Sales during the six-month period ended December 31, 2023 were $10.5 million, representing a 50%, or $3.5 million, increase over sales of $7 million during the six-month period ended June 30, 2023. Quarter to quarter sales over the past two years are displayed in the following table: 28 ImmuCell Corporation Sales increased by 30%, or $1.2 million, to $5.1 million during the three-month period ended December 31, 2023, in comparison to $3.9 million during the three-month period ended December 31, 2022. Domestic sales during the three-month period ended December 31, 2023 increased by 29%, and international sales increased by 46%, in comparison to the three-month period ended December 31, 2022. International sales aggregated 6% of total sales during both of the three-month periods ended December 31, 2023 and 2022. The quarterly sales results are summarized in the following table (in thousands, except for percentages): During the Three-Month Periods Ended December 31, Increase 2023 2022 Amount % Total product sales $ 5,096 $ 3,911 $ 1,185 30 % Our lack of product supply drove a sales decrease of 6%, or $1.1 million, to $17.5 million during the year ended December 31, 2023, in comparison to $18.6 million during the year ended December 31, 2022. Domestic sales during the year ended December 31, 2023 decreased by 6%, and international sales decreased by 2%, in comparison to the year ended December 31, 2022. International sales aggregated 9% and 8% of total sales during the years ended December 31, 2023 and 2022, respectively. The sales results for the annual periods are summarized in the following table (in thousands, except for percentages): During the Years Ended December 31, (Decrease) 2023 2022 Amount % Total product sales $ 17,472 $ 18,568 $ (1,096 ) (6 )% Sales of the First Defense ® product line aggregated 99% of our total sales during both of the years ended December 31, 2023 and 2022. Our sales are generally seasonal with highest demand expected during the first quarter of each year. However, as we fulfill our large backlog of orders, we do not expect to see as much of this seasonal demand swing in our product sales. Most of our growth (when not limited by backlog) is being realized through increased demand and a deliberate strategy to prioritize production capacity towards Tri-Shield First Defense ® (the trivalent format of our product delivered via a gel tube), which provides broader protection to calves. The compound annual growth rate (CAGR) of our total product sales was 10.8%, 9.7% and 6.2% during the twelve-year, five-year, and four-year periods ended December 31, 2023, respectively. We likely lost some business during 2022 and 2023 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. 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 access 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 is preparing to resume more normal sales growth initiatives as we expect inventory to become available. 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. 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. 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 reporting this figure because it reflects the orders on our books presently that we cannot ship. 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. However, when we required all distributors to replace their orders around November 15, 2023 to reflect an 8% price increase, the amount of the backlog, in fact, increased rather than decreased. We believe this reflects strong demand for our product. 29 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 increased further to approximately $7.5 million as of March 31, 2023 and increased to approximately $8 million as of June 30, 2023 and increased to approximately $8.9 million as of September 30, 2023 and increased to approximately $9.4 million as of December 31, 2023 (as demonstrated in the table below). As of March 8, 2024, the backlog of orders was approximately $10.3 million. 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 believe that we are on the right track to increase production output, but we still have more work to do to catch up to product demand. We anticipate that we are in good position to move past the contamination events that materially affected our output during late 2022 and through the first ten months of 2023 and are positioned to execute on our plan to resume sales growth in 2024. Finished goods produced increased steadily from approximately $3.3 million to $4 million and further to $5.3 million during the first, second and third quarters of 2023, respectively, but then dropped off slightly to $5.1 million during the fourth quarter of 2023. Our objective is to produce finished goods with an approximate sales value of $6 million or more per quarter, as we implement and optimize recent investments to increase its production capacity. Fourth quarter 2023 production was limited by lower output during the month of October, which was caused by a contamination event in September 2023. After remediating this event, we achieved full production during the balance of the quarter. The output levels achieved during the months of November and December 2023 annualize to approximately $26.8 million, which equates to an average quarterly production of approximately $6.7 million. We implemented an average price increase of approximately 8% on the First Defense ® product line effective November 15, 2023. The backlog of orders was worth approximately $9 million just before this price change. We had some concern that the value of the backlog might decrease materially if customers chose not to replace all orders at the new price given that many of those orders were dated. However, we did not see a decrease in the backlog after the price increase which validated the strength of the order demand. We acquired a private label product in connection with our January 2016 acquisition of certain gel formulation technology. This product was discontinued during the first quarter of 2022 because it was not a significant contributor to our total sales and it competed for valuable time and space in our production schedule. We sell our own CMT , which is used to detect somatic cell counts in milk. Sales of these products (other than the First Defense ® product line) increased by 53%, or $19,000, to $56,000 during the three-month period ended December 31, 2023, in comparison to the three-month period ended December 31, 2022. Sales of these other products aggregated 1% of our total product sales during both of the three-month periods ended December 31, 2023 and 2022. Sales of these products increased by 14%, or $22,000, to $178,000 during the year ended December 31, 2023, in comparison to the year ended December 31, 2022. Sales of these other products aggregated 1% of our total product sales during both of the years ended December 31, 2023 and 2022. 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% (range of 2% to 8%) and CMT by approximately 5%. Effective November 15, 2023, we increased our selling price for the First Defense ® product line by an average of 8% and for CMT by approximately 12%. 30 ImmuCell Corporation 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, 2023 and 2022 are summarized in the following tables (in thousands, except for percentages): During the Three-Month Periods Ended December 31, Increase (Decrease) 2023 2022 Amount % Gross margin $ 1,258 $ 992 $ 266 27 % Percent of product sales 25 % 25 % (1 )% (3 )% During the Years Ended December 31, (Decrease) 2023 2022 Amount % Gross margin $ 3,869 $ 7,649 $ (3,779 ) (49 )% Percent of product sales 22 % 41 % (19 )% (46 )% The very significantly reduced gross margin (on both a dollar and percentage of sales basis) during the year ended December 31, 2023 was largely the result of the significant decrease in sales during the first ten months of 2023, which was caused by a reduction in production output, not by a reduction in demand. The reduction in production output was, in turn, the result of our decision to slow down our production rate while remediating the production contamination events, while not yet operating at our anticipated increased production output level. 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. The gross margin as a percentage of product sales was 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The gross margin during the year ended December 31, 2023 was significantly less than what we have experienced historically and significantly less than what we anticipate going forward. The product contamination events and other production process losses experienced during 2023 and 2022 resulted in scrapped inventory valued at approximately $527,000 and $589,000, respectively. Absent these write-offs, our gross margin as a percentage of product sales would have been approximately 25% and 44% during the years ended December 31, 2023 and 2022, respectively. 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 we have mitigated the risk of reoccurrence of such losses through the implementation of certain new quality control steps and manufacturing processes and facility improvements. The significant global supply-chain disruptions that almost all industries are experiencing presently are a challenge to us. The costs of our supplies, components, raw materials, and services increased significantly during 2021 and that trend continued during 2022 and 2023. Prices for raw materials and critical supplies are increasing significantly, and it is becoming increasingly more difficult to obtain timely delivery of the orders that we place. Therefore, 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. While our biological and process yields can be variable, we have seen a favorable improvement to our finished goods yield recently, but these yields continue to be variable. 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 current Good Manufacturing Practices (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. During this expansion phase, colostrum quality can be more variable. Additionally, the biological yields from our raw material are always variable, which impacts 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, the commercial value 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. Over time, we have been able to reduce the impact of cost increases by implementing yield improvements. We believe that gross margin results going forward should be viewed over longer periods of time than just one quarter. As we fully integrate and utilize our increased capacity and evaluate our product costs and selling price, one of our goals is to achieve a gross margin (before related depreciation and amortization expenses) as a percentage of total sales approaching 48%. 31 ImmuCell Corporation Product Development Expenses and Strategy Overview: The majority of our product development expenses pertain to the development of Re-Tain ® . During the year ended December 31, 2023, product development expenses decreased by 2%, or $99,000, to $4.4 million in comparison to $4.5 million during the year ended December 31, 2022. Product development expenses aggregated 25% and 24% of product sales during the years ended December 31, 2023 and 2022, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $1.5 million and $1.4 million during the years ended December 31, 2023 and 2022, respectively. Approximately $1.3 million of these non-cash expenses were comprised of depreciation expenses pertaining to our DS facility for Re-Tain ® during both of the years ended December 31, 2023 and 2022. 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. We expect our product development expenses to decrease modestly during 2024 as we produce less product for commercial launch and somewhat further after Re-Tain ® is commercialized and some of the costs incurred to maintain and run our DS production facility become part of our costs of goods sold. Development objective: 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 meat withhold. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $36.00 (for 3.5 days of milk at 60 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) to approximately $150.00 (for 11 days of milk at 80 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) 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. The final and most critical development objective for Re-Tain ® is to achieve regulatory approval of our manufacturing operations. Development status : Approval by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA) of the New Animal Drug Application (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 third quarter of 2012, 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 . 32 ImmuCell Corporation 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 meat withhold 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. 5) Chemistry, Manufacturing and Controls (CMC): The CMC Technical Section is very 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 Nisin DS (the active pharmaceutical ingredient) production, which is a required component of the CMC Technical Section, has been the most lengthy 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 small-scale at our 56 Evergreen Drive facility. 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 submission covering just the DS during the first quarter of 2019. The first-phased DS submission 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 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 submission of the DS and DP Technical Section during the first quarter of 2022. During the third quarter of 2022, we received a Technical Section Incomplete Letter from the FDA with regards to this second DS and DP submission of the CMC Technical Section. The submission required that internal and external laboratories re-develop and qualify several analytical tests and associated controls. We made this third DS and DP submission of the CMC Technical Section during the third quarter of 2023. In late October of 2023, the FDA notified us that it was refusing to review our submission because Norbrook was identified as the DP manufacturer in our submission, but the FDA was expecting that we would identify our own in-house services as the DP manufacturer (instead of Norbrook). This miscommunication was due to a statement in our April 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, which 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. In fact, Norbrook has recently initiated production of the launch goods, and this work has been extended into 2024 with labeling and final packaging occurring post-approval. As a result of this miscommunication, we were required to re-submit the CMC Technical Section. If the FDA issues a Technical Section Complete Letter in response to this re-submission, we believe that we could commence commercial sales approximately ten months from the November of 2023 re-submission date, allowing for the re-setting of the six-month CMC review period by the FDA followed by a two-month administrative review period and approximately two additional months for labeling, packaging and shipping. 33 ImmuCell Corporation While being prudent with how much cash we invest into inventory that would have short expiry dating if market launch is delayed, we have built and are building more DS inventory during 2022 and 2023 to support the initial commercial sales of Re-Tain ® . As discussed above, our contract manufacturer has agreed to convert this DS to DP during the fourth quarter of 2023 and into 2024 with associated product expirations of 18 to 24 months from the date of manufacture. We anticipate a pause in the supply of product to market after the initial launch 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 by an alternative contractor that we have not identified to date. Our DS manufacturing facility and that of our DP contract manufacturer (and our potential future DP manufacturing facility) are 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. Since then, we have fully responded to this inspectional observation. The facility of our DP contract manufacturer is subject to similar inspectional compliance obligations. We have always believed that the fastest route to FDA approval and market launch is with the services of Norbrook (an FDA-approved DP manufacturer), 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. Under our current agreement, Norbrook will provide DP for the Controlled Launch with production in the fourth quarter of 2023 and into 2024. We believe this will enable us to commence sales of Re-Tain ® without delay upon receipt of the anticipated FDA approval. 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 33 Caddie Lane. 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, we have decided to defer the completion of this investment for the time being. Subject to the timing of our installation and validation work, we anticipate FDA approval of this facility (which is a requirement for commercial manufacturing) at least two years from when this project is restarted allowing for two six-month review cycles. This will be a post-approval submission. If we decide to complete our potential future DP manufacturing facility, such facility will, upon completion, be subject to FDA inspection and approval. We anticipate it would have enough formulation and aseptic filling capacity to exceed the expected production capacity of our DS facility, which is approximately $7 million to $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 provides 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 second most important product development initiative has been focused on other improvements, line extensions or additions to our First Defense ® product line. We are currently working to establish USDA claims for our bivalent bulk powder formulation of First Defense Technology ® . 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. 34 ImmuCell Corporation 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 first years of the commercial launch of Re-Tain ® . We anticipate that these category developing innovations will drive greater value for the livestock industry and, in turn, for our stockholders. During the year ended December 31, 2023, sales and marketing expenses decreased by 3%, or $102,000, to $3.1 million in comparison to $3.2 million during the year ended December 31, 2022, amounting to 18% and 17% of product sales during the years ended December 31, 2023 and 2022, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $182,000 and $158,000 during the years ended December 31, 2023 and 2022, respectively. Our budgetary guideline for 2023 and after is to keep these expenses under 20% of total sales. By decreasing sales and marketing expenses by $321,000 during the fourth quarter of 2023 in comparison to the fourth quarter of 2022, we were able to reduce sales and marketing expenses by $102,000 for the year ended December 31, 2023. We continue to leverage the efforts of our small sales force by using animal health distributors. 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, vaccine results 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 twelve-month period ended December 31, 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 by not requiring a milk discard or a meat withhold 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 meat withhold 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. 35 ImmuCell Corporation 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 “super-bugs”. 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. As with all new products, the market determines the 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 over the first 18 to 24 months after FDA approval, 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 must consider 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 continue to develop detailed launch plans, focusing on the readiness of dairy operators to successfully introduce Re-Tain ® to their herds. 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 the potential problems described under PART I: ITEM 1A – RISK FACTORS , to this Annual Report will not be so burdensome as to 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 ® . Administrative Expenses During the year ended December 31, 2023, administrative expenses decreased by 6%, or $130,000, to $2.1 million in comparison to $2.3 million during the year ended December 31, 2022. Administrative expenses included the accrual of $222,000 in deferred compensation expense (consisting of earned and unused paid time off) during the first quarter of 2022. This accrual was increased by $8,000 during 2023 reflecting current wage rates. Administrative expenses amounted to 12% of product sales during both of the years ended December 31, 2023 and 2022. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $210,000 and $148,000 during the years ended December 31, 2023 and 2022, 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. Given the growth in our business, our administrative staff has increased to four employees reporting to our CEO. 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. Given travel restrictions related to the COVID-19 pandemic, 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 as travel restrictions have been largely 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 inflation and all the necessary support services that fit into this category, we believe that approximately $2 million to $2.5 million per year is an efficient budget goal to fund the administrative expenses of a publicly-held company. 36 ImmuCell Corporation Net Operating Loss During the year ended December 31, 2023, our net operating loss of $5.7 million was significantly larger than our net operating loss of $2.3 million during the year ended December 31, 2022. The $3.4 million increase in our net operating loss during the year ended December 31, 2023 was caused by the $3.8 million decrease in gross margin, offset, in part, by a $330,000 reduction in operating expenses. Other Expenses, net During the year ended December 31, 2023, other expenses, net, aggregated $22,000 in comparison to other expenses, net, of $187,000 during the year ended December 31, 2022. During the year ended December 31, 2023, other income included insurance recovery income of $365,000 paid under our business interruption policy related to the product contamination losses previously described and a recovery from a vendor’s insurance policy related to an equipment malfunction that were received during the third quarter of 2023. No such insurance recoveries were received during 2022. Interest expense increased to $476,000 during the year ended December 31, 2023 from $349,000 during the year ended December 31, 2022. Non-cash amortization of debt issuance and debt discount costs (which is included as a component of interest expense) was $23,000 and $8,000 during the years ended December 31, 2023 and 2022, respectively. We anticipate that our interest expense will be $563,000 and $492,000 during the years ending December 31, 2024 and 2025, respectively. Interest income was $97,000 and $153,000 during the years ended December 31, 2023 and 2022, respectively. The loss (gain) on disposal of property, plant and equipment was $8,000 and ($7,000) during the years ended December 31, 2023 and 2022, respectively. Loss Before Income Taxes During the year ended December 31, 2023, our loss before income taxes was $5.8 million in comparison to our loss before income taxes of $2.5 million during the year ended December 31, 2022. Income Taxes and Net Loss During the years ended December 31, 2023 and 2022, we recorded income tax expense of $5,000 and $8,000, respectively, which is comprised of minimum state tax liabilities. Our net loss of $5.8 million, or $0.75 per basic share, during the year ended December 31, 2023 was in comparison to net loss of $2.5 million, or $0.32 per basic share, during the year ended December 31, 2022. We have substantial net operating loss carryforwards that largely offset future income tax expense. As of December 31, 2023, our federal net operating loss carryforward was $17.8 million. As of December 31, 2023, our state net operating loss carryforward was $4.7 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 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, 2023 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, long-lived assets, 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. 37 ImmuCell Corporation 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. 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 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 None