# Immucell Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Immucell Corp](/companies/iccc.md) (CIK 811641)
- Form: 10-Q
- Filed: 2023-11-13
- Accepted by EDGAR: Nov 13, 2023, 21:05 ET
- Period: 2023-09-30
- Accession: 0001213900-23-086092
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/811641/000121390023086092/f10q0923_immucell.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/811641/000121390023086092/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $5.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $12.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $4.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $1.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $2.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $3.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$4.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $144.6k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $323.2k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $229 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $3.3k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$940.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$4.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.60 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 7,746,864 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 7,746,864 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$4.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $1.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $12.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $44.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $3.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $18.5m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $12.3m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $26.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 96,963 characters.

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly 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 below 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.

### Cautionary Note Regarding Forward-Looking Statements (Safe Harbor Statement):

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and will often include words such as “expects”, “may”, “anticipates”, “aims”, “intends”, “would”, “could”, “should”, “will”, “plans”, “believes”, “estimates”, “targets”, “projects”, “forecasts”, “seeks” and similar words and expressions. Such statements include, but are not limited to, any forward-looking statements relating to: our plans and strategies for our business; projections of future financial or operational performance; the timing and outcome of pending or anticipated applications for regulatory approvals; future demand for our products; the extent, nature and duration of the COVID-19 pandemic and its consequences, and their direct and indirect impacts on our production activities, operating results and financial condition and on the customers and markets that we serve; the impact of Russia’s unprovoked military invasion of Ukraine (and attack on its people) and the war in the Middle East on the world economy including inflation and the price and availability of grain and oil; the impact of the global supply-chain disruptions on our ability to obtain, in a timely and cost-effective fashion, all the supplies and components we need to produce our products; the impact of inflation and rising interest rates on our operating expenses and financial results; the scope and timing of ongoing and future product development work and commercialization of our products; future costs of product development efforts; the estimated prevalence rate of subclinical mastitis and producers’ level of interest in treating subclinical mastitis given the current economic and market conditions; the expected efficacy of new products; estimates about the market size for our products; future market share of and revenue generated by current products and products still in development; our ability to increase production output and reduce costs of goods sold per unit; the adequacy of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for our products on a timely basis; the impacts of backlogs on customer relationships; the efficacy or timeline to complete our contamination remediation efforts; the likelihood, severity or impact of future contamination events; the anticipated costs of (or time to complete) planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the robustness of our manufacturing processes and related technical issues; estimates about our production capacity, efficiency and yield; future regulatory requirements relating to our products; future expense ratios and margins; the efficacy of our investments in our business; future compliance with bank debt covenants; anticipated changes in our manufacturing capabilities and efficiencies; our effectiveness in competing against competitors within both our existing and our anticipated product markets; projections about depreciation expense and its impact on income for book and tax return purposes; and any other statements that are not historical facts. These statements are intended to provide management’s current expectation of future events as of the date of this earnings release, are based on management’s estimates, projections, beliefs and assumptions as of the date hereof; and are not guarantees of future performance. Such statements involve known and unknown risks and uncertainties that may cause the Company’s actual results, financial or operational performance or achievements to be materially different from those expressed or implied by these forward-looking statements, including, but not limited to, those risks and uncertainties relating to: difficulties or delays in development, testing, regulatory approval, production and marketing of our products (including the **First Defense®** product line and **Re-Tain®**), competition within our anticipated product markets, customer acceptance of our new and existing products, product performance, alignment between our manufacturing resources and product demand (including the consequences of backlogs), uncertainty associated with the timing and volume of customer orders as we come out of a prolonged backlog, adverse impacts of supply chain disruptions on our operations and customer and supplier relationships, commercial and operational risks relating to our current and planned expansion of production capacity, and other risks and uncertainties detailed from time to time in filings we make with the Securities and Exchange Commission (SEC), including our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K and our Current Reports on Form 8-K. Such statements involve risks and uncertainties and are based on our current expectations, but actual results may differ materially due to various factors, including the risk factors summarized under **PART II: OTHER INFORMATION, ITEM 1A – RISK FACTORS** and uncertainties otherwise referred to in this Quarterly Report on Form 10-Q. In addition, there can be no assurance that future risks, uncertainties or developments affecting us will be those that we anticipate. We undertake no obligation to update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

### Liquidity and Capital Resources

Net cash (used for) operating activities was ($4.1) million during the nine-month period ended September 30, 2023 in comparison to net cash (used for) operating activities of ($246,000) during the nine-month period ended September 30, 2022. The $3.8 million increase in cash (used for) operating activities during the nine-month period ended September 30, 2023 compared to the nine-month period ended September 30, 2022 was largely caused by the $3.8 million increase in the net loss which was largely the result of $4 million less gross margin earned during the first nine months of 2023, due to the production contamination events discussed below. Approximately $1.1 million less cash was received from the collection of accounts receivable, which was largely offset by $900,000 less cash being invested in inventory during the nine-month period ended September 30, 2023 compared to the same period during the prior year. Our inventory balance increased by $1.3 million to almost $7.4 million as of September 30, 2023 from $6 million as of December 31, 2022. Our total depreciation and amortization expense was approximately $2.1 million and $1.9 million during the nine-month periods ended September 30, 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 ($1.8) million during the nine-month period ended September 30, 2023 in comparison to net cash (used for) investing activities of ($2.5) million during the nine-month period ended September 30, 2022. Net cash provided by financing activities increased to $2.1 million during the nine-month period ended September 30, 2023 in comparison to net cash provided by financing activities of $1.4 million during the nine-month period ended September 30, 2022. During the first nine months of 2023, we received $3 million in debt proceeds (not including proceeds from our line of credit) compared to a $2 million during the first nine months of 2022. The 2023 proceeds were comprised of a $2 million note from Gorham Savings Bank (GSB) and a $1 million note from the Finance Authority of Maine (FAME). See Note 10 to the accompanying unaudited financial statements for more detail. Debt principal repayments will continue to reduce our cash flows.

We entered into several bank debt financings, refinancings and amendments with GSB from the first quarter of 2020 to the third quarter of 2023 that have improved our liquidity by spreading our principal payments out over a longer period of time and pushing out balloon principal payment obligations that existed under some of the repaid debt. These credit facilities are secured by substantially all of our assets and are subject to certain restrictions and financial covenants. We are required to meet a minimum debt service coverage (DSC) ratio set by GSB of 1.35. Our actual DSC ratio was equal to 0.44, 2.68, 2.03 and 1.57 during the years ended December 31, 2022, 2021, 2020 and 2019, respectively. By negotiation with GSB in connection with a 2022 financing, the required minimum DSC ratio was reduced to 1.0 for the year ended December 31, 2022. By subsequent negotiation with GSB, this compliance requirement was waived for the year ended December 31, 2022. During the first quarter of 2023, GSB waived the DSC ratio covenant for the year ending December 31, 2023. Instead, we are required to meet a minimum DSC ratio covenant of 1.35 for the twelve-month periods ending June 30, 2024, September 30, 2024 and December 31, 2024 and then again annually after that. Also during the third quarter of 2023, FAME provided us with a $1 million loan and also provided GSB with insurance covering $1 million of the GSB debt described above. The FAME debt is secured by substantially all of our assets, is subordinated to the GSB debt and is subject to certain restrictions and financial covenants similar to the GSB debt. From the second quarter of 2020 to the second quarter of 2021, we also entered into two loans aggregating $900,000 from the Maine Technology Institute (MTI). The MTI loans are unsecured and subordinated to all other bank debt from GSB and FAME and may be prepaid without penalty at any time. This support from the State of Maine through the MTI helped us move forward with some of our investments while increasing our total employee count. Because all of this debt bears interest at fixed rates, we are avoiding the adverse effects of rising interest rates on our debt service costs. The blended interest rate on all of this debt is 4.52% per annum. As of September 30, 2023, we had total bank debt outstanding of $12.3 million as compared to $10.2 million as of December 31, 2022. Debt principal repayments aggregated $897,000 and $768,000 during the years ended December 31, 2022 and 2021, respectively, and $829,000 and $649,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. We anticipate that debt principal repayments will aggregate $1.2 million and $1.5 million during the years ending December 31, 2023 and 2024, respectively. Interest expense (including amortization of debt issuance and debt discount costs) was $349,000 and $314,000 during the years ended December 31, 2022 and 2021, respectively, and $323,000 and $255,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. We anticipate that interest expense (including amortization of debt issuance and debt discount costs) will be $466,000 and $563,000 during the years ending December 31, 2023 and 2024, respectively. During the first quarter of 2022, the availability of our $1.0 million line of credit, which bears interest at the National Prime Rate per annum, was extended until March 11, 2024. There was no outstanding balance under this line of credit as of September 30, 2023 or December 31, 2022.

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 September 30, 2023 | As of December 31, 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $1,989 | $5,792 | $(3,802) | (66%) |
| Net working capital | $8,634 | $10,923 | $(2,289) | (21%) |
| Total assets | $44,545 | $44,861 | $(316) | (1%) |
| Stockholders’ equity | $26,013 | $30,380 | $(4,367) | (14%) |
| Common shares outstanding(1) | 7,747 | 7,747 | — | — |

(1) There were 616,500 and 605,000 shares of common stock reserved for issuance for stock options that were outstanding as of September 30, 2023 and December 31, 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 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 Drug Substance production for **Re-Tain®** within our **First Defense®** production facility at 56 Evergreen Drive. After construction of the Drug Substance 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 the facility at 175 Industrial Way (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 Drug Substance production facility for **Re-Tain®** at 33 Caddie Lane. During the fourth quarter of 2017, we completed construction of the Drug Substance 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 Drug Substance 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):

| Year Paid | First Defense® |  | Re-Tain® |  | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Year Ended December 31, 2019 | $279 |  | $538 |  | $817 |
| Year Ended December 31, 2020 | 2,938 |  | 581 |  | 3,519 |
| Year Ended December 31, 2021 | 1,462 |  | 886 |  | 2,348 |
| Year Ended December 31, 2022 | 2,779 |  | 344 |  | 3,123 |
| Nine-Month Period Ended September 30, 2023 | 487 |  | 672 |  | 1,159 |
| Total Paid through September 30, 2023 | 7,945 |  | 3,021 |  | 10,966 |
| Estimate to Complete | 4,425 | (1) | 1,687 | (2) | 6,112 |
| Total Project Cost | $12,370 |  | $4,708 |  | $17,078 |

(1) The investment of approximately $3.5 million of these funds has been deferred for the time being.

(2) The investment of these funds has been deferred for the time being.

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. We have been operating at very close to 100% of available capacity recently, which is not efficient or sustainable. Our objective is to be in position to operate 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.

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, 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 to our leased facility at 175 Industrial Way 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 at 175 Industrial Way, 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 at 175 Industrial Way 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 175 Industrial Way, 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 175 Industrial Way. 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 at 165 Industrial Way 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 at 175 Industrial Way 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 over the last couple of years 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 the first nine months of 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, 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.

The purpose of the additional investments in **Re-Tain®** is to bring the formulation and aseptic filling capabilities for **Re-Tain®** Drug Product into available space in our Drug Substance facility to end our reliance on third-party Drug Product 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 the first nine months of 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer, for the time being, the spending of approximately $1.7 million of these funds. At the same time, we are investigating a possible extension with Norbrook and 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.

In addition to the specific projects listed above, we have budgeted approximately $1,000,000 for routine and miscellaneous capital expenditures for the year ending December 31, 2023. These routine and miscellaneous capital expenditures amounted to $859,000, $260,000, $554,000 and $574,000 during the years ended December 31, 2022, 2021, 2020 and 2019, respectively. Due to the loss in gross margin during the first nine months of 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to reduce spending on these routine and miscellaneous capital expenditures by approximately 25% during 2023. Through September 30, 2023, we had spent $652,000 (of which $63,000 was incurred during 2022), and we expect to invest approximately an additional $171,000 during the balance of 2023.

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 Drug Substance 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 is being paid by ImmuCell:

| 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 unaudited 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 more than 47% of our stockholders’ equity as of September 30, 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.

The past year or so has been extremely difficult 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 and contamination events during 2022 (largely the contamination event around the end of the third quarter) resulted in a total charge to costs of goods sold of $588,000 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. The related charge to costs of goods sold during the first half of 2023 was $305,000. 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. During the second week of July 2023, the USDA arrived on site to conduct a routine, unannounced inspection, and we were required to divert much of our Quality and Manufacturing personnel to support this inspection. We promptly submitted our detailed responses to the USDA with respect to the inspectional observations. As we were preparing these responses in July under a timeline agreed with the USDA, the USDA imposed a Voluntary Stop Distribution and Sale (VSDS) order and a Hold Release on **First Defense®**. This meant that we were prohibited from shipping product until the two inspectional observations were resolved, although we were not prohibited from continuing to produce inventory during this period. In early August, the USDA rescinded the VSDS and the Hold Release allowing us to resume normal shipping. Despite this significant diversion of our resources, we made our third submission of the CMC Technical Section for **Re-Tain®** to the FDA in August 2023. We subsequently experienced a third contamination event in September 2023 impacting two lots of work-in-progress inventory with a scrap cost aggregating approximately $155,000. 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 is expected to reduce our production output during the fourth quarter of 2023 by approximately $750,000 in terms of sales dollar value. We are considering alternatives to potentially salvage about half of the inventory impacted by this contamination.

The production slowdown during the first half 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 $8.8 million as of October 27, 2023. 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 the first nine months of 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 worth of product per quarter, which would annualize to about 80% 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.

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®.**

### 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 $19 million achieved during both of the years ended December 31, 2022 and 2021 as soon as possible. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the five-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.

While sales during the nine-month and trailing twelve-month periods ended September 30, 2023 were below the comparable periods ended September 30, 2022 in large part because of the production slowdown implemented during the first half of 2023 to remediate the contamination events discussed above, sales during the three-month period ended September 30, 2023 were 13% higher than sales during the three-month period ended September 30, 2022. Sales during the third quarter of 2023 of $5.4 million increased over sales during the second quarter of 2023 of $3.53 million, which increased modestly over the $3.45 million of sales recorded during the first quarter of 2023.

Sales increased by 13%, or $600,000, to $5.4 million during the three-month period ended September 30, 2023, in comparison to $4.8 million during the three-month period ended September 30, 2022. Domestic sales during the three-month period ended September 30, 2023 increased by 16%, and international sales decreased by 13%, in comparison to the three-month period ended September 30, 2022. International sales aggregated 9% and 11% of total sales during the three-month periods ended September 30, 2023 and 2022, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

|  | During the Three-Month Periods Ended September 30, 2023 | 2022 | Increase Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Total product sales | $5,397 | $4,796 | $600 | 13% |

Our lack of product supply drove a sales decrease of 16%, or $2.3 million, to $12.4 million during the nine-month period ended September 30, 2023, in comparison to $14.7 million during the nine-month period ended September 30, 2022. Domestic sales during the nine-month period ended September 30, 2023 decreased by 16%, and international sales decreased by 9%, in comparison to the nine-month period ended September 30, 2022. International sales aggregated 10% and 9% of total sales during the nine-month periods ended September 30, 2023 and 2022, respectively. The nine-month sales results are summarized in the following table (in thousands except for percentages):

|  | During the Nine-Month Periods Ended September 30, 2023 | 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Total product sales | $12,376 | $14,657 | $(2,281) | (16%) |

Our lack of product supply drove a sales decrease of 19%, or $3.8 million, to $16.3 million during the trailing twelve-month period ended September 30, 2023, in comparison to $20.1 million during the trailing twelve-month period ended September 30, 2022. Domestic sales during the trailing twelve-month period ended September 30, 2023 decreased by 16%, and international sales decreased by 38%, in comparison to the trailing twelve-month period ended September 30, 2022. International sales aggregated 9% and 12% of total sales during the trailing twelve-month periods ended September 30, 2023 and 2022, respectively. The sales results for the trailing twelve-month periods are summarized in the following table (in thousands, except for percentages):

|  | During the Trailing Twelve-Month Periods Ended September 30, 2023 | 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Total product sales | $16,287 | $20,101 | $(3,814) | (19%) |

Sales of the **First Defense®** product line aggregated 99% of our total sales during the three, nine and trailing twelve-month periods ended September 30, 2023 and 2022. Our sales are generally seasonal with highest demand expected during the first quarter of each year. However, presently as we fulfill our large backlog of orders, we do not expect to see 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 12.4%, 14.0% and 10.6% during the eleven-year, four-year, and three-year periods ended December 31, 2022, respectively.

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. 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 to approximately $7.9 million as of June 30, 2023 and to approximately $8.9 million as of September 30, 2023. We are reporting this figure because it reflects the orders on our books presently that we cannot ship. However, we do not believe this backlog amount is 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. 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.

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) decreased by 19%, or $9,000, to $36,000 during the three-month period ended September 30, 2023, in comparison to the three-month period ended September 30, 2022. Sales of these other products aggregated 1% of our total product sales during both of the three-month periods ended September 30, 2023 and 2022. Sales of these products increased by 3%, or $4,000, to $122,000 during the nine-month period ended September 30, 2023, in comparison to the nine-month period ended September 30, 2022. Sales of these other products aggregated 1% of our total product sales during both of the nine-month periods ended September 30, 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%.

### 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, nine-month and trailing twelve-month periods ended September 30, 2023 and 2022 are summarized in the following tables (in thousands, except for percentages):

|  | During the Three-Month Periods Ended September 30, 2023 | 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $1,267 | $1,846 | $(579) | (31%) |
| Percent of product sales | 23% | 38% | (15%) | (39%) |

|  | During the Nine-Month Periods Ended September 30, 2023 | 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $2,612 | $6,657 | $(4,045) | (61%) |
| Percent of product sales | 21% | 45% | (24%) | (54%) |

|  | During the Trailing Twelve-Month Periods Ended September 30, 2023 | 2022 | (Decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $3,604 | $9,217 | $(5,614) | (61%) |
| Percent of product sales | 22% | 46% | (24%) | (52%) |

The very significantly reduced gross margin (on both a dollar and percentage of sales basis) during the three-month, nine-month and trailing twelve-month periods ended September 30, 2023 was largely the result of the significant decrease in sales during the first nine 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 event, while not yet operating at our anticipated increased production output level. Costs of goods sold during the first nine months of 2023 included write-offs aggregating $461,000 related to scrapped inventory. During the first nine months of 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, 2022 was significantly less than what we have experienced historically and significantly less than what we anticipate going forward. The product contamination event experienced during 2022 resulted in scrapped inventory valued at $588,000. Absent this contamination write-off, our gross margin as a percentage of product sales would have been approximately 44% during the year ended December 31, 2022. 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 into 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 are acquiring more raw material (colostrum) from many more cows at many 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%.

### 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 September 30, 2023, product development expenses decreased by 12%, or $151,000, to $1.12 million in comparison to the $1.3 million during the three-month period ended September 30, 2022. Product development expenses aggregated 21% and 26% of product sales during the three-month periods ended September 30, 2023 and 2022, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $391,000 and $360,000 during the three-month periods ended September 30, 2023 and 2022, respectively. During the nine-month period ended September 30, 2023, product development expenses decreased by 3%, or $116,000, to $3.3 million in comparison to $3.4 million during the nine-month period ended September 30, 2022. Product development expenses aggregated 27% and 24% of product sales during the nine-month periods ended September 30, 2023 and 2022, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $1.1 million during both of the nine-month periods ended September 30, 2023 and 2022. Approximately $223,000 of these non-cash expenses were comprised of depreciation expenses pertaining to our Drug Substance facility for **Re-Tain®** during both of the nine-month periods ended September 30, 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. While the amount of product development expenses remained relatively similar from quarter to quarter and from nine-month period to nine-month period, the increase in this expense as a percentage of sales was largely the result of the decrease in sales recorded during the first nine months of 2023, discussed above. We expect our product development expenses to decrease after **Re-Tain®** is commercialized and some of the costs incurred to maintain and run our Drug Substance 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 a milk discard or meat withhold requirement. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $46.00 (for 3.5 days of milk at 60 pounds per day at the Class III milk price average of $21.96 per hundredweight during 2022) to approximately $193.00 (for 11 days of milk at 80 pounds per day at the Class III milk price average of $21.96 per hundredweight during 2022) 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 scale-up and 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.

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 Drug Substance (the active pharmaceutical ingredient, or DS) 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 $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 the DS and the formulated Drug Product (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. Subject to the discussion in the next paragraph, we expect a response from the FDA to this submission after the statutory six-month review period. If the FDA issues a Technical Section Complete Letter in response to this third submission, we believe that we could commence commercial sales approximately eight months from the submission date, allowing for the six-month CMC review period followed by a two-month administrative review period.

However, in late October 2023 the FDA notified us that it is not reviewing our current 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 first two years of projected commercial sales under our Controlled Launch strategy. As a result, no change to Norbrook being the DP manufacturer was made. In fact, Norbrook has recently initiated production of the launch goods, and this work is expected to extend into 2024 with labeling and final packaging occurring post-approval. We believe that our August submission clearly stated the Supply Chain roles of ImmuCell being the DS manufacturer and Norbrook being the DP manufacturer with the relevant supporting stability and manufacturing documentation. We re-filed the CMC Technical Section in November 2023 in response to the FDA notification and are seeking to have the six-month review period commence from our original August 2023 submission date (as first contemplated) rather than the November re-submission date. We are in discussions with the FDA to resolve this miscommunication.

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 bridge the transition between DP supply from our contract manufacturer to our own in-house production. 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. This inventory must support the market needs and have sufficient dating to bridge the transition from our contract manufacturing agreement to when our in-house DP production is approved by the FDA. We must consider short expiry dating in the event that our NADA approval is delayed as well as manage the number of new customers we obtain at launch in order to minimize potential supply disruptions.

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 since responded to all of the queries and anticipate a re-inspection during the six-month review period for our third submission of the CMC Technical Section.

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 first two years of market 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 nine 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. This new facility will be subject to FDA inspection and approval and will have enough formulation and aseptic filling capacity to exceed the expected production capacity of our DS facility, which is at least $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 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, 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®** will 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®** will 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.

### Sales and Marketing Expenses and Selling Strategy

During the three-month period ended September 30, 2023, sales and marketing expenses increased by 12%, or $91,000, to $817,000 in comparison to $727,000 during the three-month period ended September 30, 2022, amounting to 15% of product sales during both of the three-month periods ended September 30, 2023 and 2022. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $35,000 and $44,000 during the three-month periods ended September 30, 2023 and 2022, respectively. During the nine-month period ended September 30, 2023, sales and marketing expenses increased by 10%, or $219,000, to $2.4 million in comparison to $2.2 million during the nine-month period ended September 30, 2022, amounting to 20% and 15% of product sales during the nine-month periods ended September 30, 2023 and 2022, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $121,000 and $123,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. Our budgetary guideline for 2023 and after is to keep these expenses under 20% of total sales. While the amount of sales and marketing expenses has remained relatively similar from quarter to quarter and from nine-month period to nine-month period, the increase in this expense as a percentage of sales was largely the result of the decrease in sales recorded during the first nine months of 2023, discussed above. We continue to leverage the efforts of our small sales force by using animal health distributors.

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.

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 September 30, 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.

Our expanded sales and marketing team has proven to be a worthy investment, validating that our message resonates well with customers. Now that our increased production capacity is in place, we anticipate being able to escalate our growth curve after we recover from the brand damage that can come with an extended duration of short supply. Unfortunately, just after we largely eliminated the backlog of orders, we experienced three contamination events in our production process - the first around the end of the third quarter of 2022, the second during the first quarter of 2023 and a smaller one that is still under evaluation during September 2023. This loss of inventory has returned us to a backlog situation until we fill the pipeline with new inventory from our expanded production capacity.

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.

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 the great NHL hockey player, Wayne Gretzky, is known to have said, “I skate to where the puck is going to be, not where it has been.” This is motivational to us.

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 eighteen to twenty-four 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. This controlled launch strategy is also intended to reduce the amount of inventory that we would need to build at risk before regulatory approval is achieved, as well as reduce the amount of cash we would need to spend to purchase inventory from our contract manufacturer before our in-house aseptic filling services are approved by the FDA. 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 II: OTHER INFORMATION, ITEM 1A – RISK FACTORS, “**Product Risks”, to this Quarterly 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®.**

It is difficult to accurately estimate the potential size of the subclinical mastitis market because presently this disease is largely left untreated. We believe that approximately 20% to 40% of the U.S. dairy herd is infected with subclinical mastitis at any given time. This compares to approximately 2% of the U.S. herd that is thought to be infected with clinical mastitis, where approximately $60 million per year is spent on drug treatments. Rarely is an industry revolutionized overnight. Getting producers to change protocols to make subclinical mastitis treatment a standard and routine procedure is going to take initiative, but we believe producers are eager for something new and better since the FDA has not approved an intramammary treatment within the last 20 years. Similar market opportunities are likely to exist outside the United States. We believe the use of **Re-Tain®** could be expanded, with additional data and regulatory approval, to support treatment late in lactation and possibly for clinical stage mastitis. We also believe there may be a market for **Re-Tain®** in small ruminants, where the majority of mastitis cases are caused by strep-like organisms aligned with our effectiveness data.

We expect the Drug Substance production facility that we constructed for $20.8 million to have initial annual production capacity sufficient to meet at least $10 million in sales of **Re-Tain®** at current production yields. This production capacity estimate does not yet reflect any inventory build strategies or ongoing yield improvement initiatives. Expansion of the estimated annual capacity of the Drug Substance facility beyond approximately $10 million (without factoring in potential yield improvements) would require relocation of the Drug Product formulation and aseptic filling module to another facility, or the acquisition and equipping of other Drug Substance production facilities or adopting alternative manufacturing strategies.

In an effort to provide greater visibility into the launch of **Re-Tain®**, we have expanded Note 17, “Segment Information”, to the accompanying unaudited financial statements to now display a break-out of our financial results among the following three components of our business: i) Scours, ii) Mastitis and iii) Other, in order to allow investors to see our progress with both products. We generally do not provide financial projections, as we know such projections can prove to be materially inaccurate. However, in this case, we are providing a high-level projection for **Re-Tain®** under our controlled launch plan strategy in which we estimate that we can achieve sales of approximately $1 million during the first year after market launch and then achieve approximately twice that during the second year after market launch. If we are successful with this launch strategy, we would aim to grow this curve in 2026 and after. Although these projections are subject to many risks and uncertainties (some of which are detailed in this Quarterly Report), if executed correctly, we believe this strategy will lend itself to a more gradual adoption curve but higher and more sustainable sales over the long-term. Actual sales results will vary from these projections up or down.

### Administrative Expenses

Administrative expenses increased by 10%, or $49,000, to $515,000 during the three-month period ended September 30, 2023 compared to $466,000 during the three-month period ended September 30, 2022. Administrative expenses amounted to 10% of product sales during both of the three-month periods ended September 30, 2023 and 2022. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $63,000 and $44,000 during the three-month periods ended September 30, 2023 and 2022, respectively. During the nine-month period ended September 30, 2023, administrative expenses decreased by 4%, or $69,000, to $1.61 million in comparison to $1.68 million during the nine-month period ended September 30, 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. Administrative expenses amounted to 13% and 11% of product sales during the nine-month periods ended September 30, 2023 and 2022, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $160,000 and $110,000 during the nine-month periods ended September 30, 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 qualified colleagues 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.

### Net Operating Loss

During the three-month period ended September 30, 2023, our net operating loss of $1.2 million was in comparison to net operating loss of $617,000 during the three-month period ended September 30, 2022. The $579,000 decrease in gross margin caused most of the $567,000 increase in the net operating loss during the three-month period ended September 30, 2023. During the nine-month period ended September 30, 2023, our net operating loss of $4.7 million was significantly larger than our net operating loss of $665,000 during the nine-month period ended September 30, 2022. The $4.05 million decrease in gross margin caused most of the $4.08 million increase in our net operating loss during the nine-month period ended September 30, 2023.

### Other (Income) Expenses, net

During the three-month period ended September 30, 2023, other (income) expenses, net, aggregated ($244,000) in contrast to other expenses, net, of $34,000 during the three-month period ended September 30, 2022. Interest expense was $145,000 and $89,000 during three-month periods ended September 30, 2023 and 2022, respectively. Non-cash amortization of debt issuance and debt discount costs (which is included as a component of interest expense) was $9,000 and $2,000 during the three-month periods ended September 30, 2023 and 2022, respectively. Interest income was $24,000 and $55,000 during the three-month periods ended September 30, 2023 and 2022, respectively. During the three-month period ended September 30, 2023, other income included insurance benefit proceeds 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.

During the nine-month period ended September 30, 2023, other (income) expenses, net, aggregated ($113,000) in contrast to other expenses, net, of $155,000 during the nine-month period ended September 30, 2022. Interest expense increased to $323,000 during the nine-month period ended September 30, 2023 from $255,000 during the nine-month period ended September 30, 2022. Non-cash amortization of debt issuance and debt discount costs (which is included as a component of interest expense) was $13,000 and $6,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. Interest income was $79,000 and $88,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. The loss (gain) on disposal of property, plant and equipment was $8,000 and ($11,000) during the nine-month periods ended September 30, 2023 and 2022, respectively. The third quarter insurance benefits described above also benefited us during the nine-month period ended September 30, 2023.

We anticipate that our interest expense will be $466,000, $563,000 and $492,000 during the years ending December 31, 2023, 2024 and 2025, respectively.

### Loss Before Income Taxes

During the three-month period ended September 30, 2023, our loss before income taxes was $940,000 in comparison to a loss before income taxes of $651,000 during the three-month period ended September 30, 2022. During the nine-month period ended September 30, 2023, our loss before income taxes was $4.6 million in contrast to our loss before income taxes of $820,000 during the nine-month period ended September 30, 2022.

### Income Taxes and Net Loss

During the three-month periods ended September 30, 2023 and 2022, we recorded income tax expense of less than $1,000 and approximately $4,000 respectively, which is comprised of minimum state tax liabilities. Our net loss of $940,000, or $0.12 per basic share, during the three-month period ended September 30, 2023 was in comparison to net loss of $655,000, or $0.08 per basic share, during the three-month period ended September 30, 2022. During the nine-month periods ended September 30, 2023 and 2022, we recorded income tax expense of approximately $3,000 and $6,000, respectively, which is comprised of minimum state tax liabilities. Our net loss of $4.6 million, or $0.60 per basic share, during the nine-month period ended September 30, 2023 was in comparison to net loss of $826,000, or $0.11 per basic share, during the nine-month period ended September 30, 2022.

We have substantial net operating loss carryforwards that largely offset our income tax expense. For tax return purposes only, our depreciation expense for the Nisin Drug Substance production facility and equipment was $425,000, $492,000, $464,000, $639,000, $9.2 million and $1.5 million for the years ended December 31, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The significant increase during 2018 was largely related to accelerated depreciation allowed for tax purposes. As of December 31, 2022, our federal net operating loss carryforward was $15.5 million, which will be available to offset future taxable income, subject to possible annual limitations based on ownership changes. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This legislation makes 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 unaudited financial statements to assess the cash generating ability of our operations.

### Critical Accounting Policies

The financial statements are presented on the basis of accounting principles that are generally accepted in the United States. All professional accounting standards that were material, effective and applicable to us as of September 30, 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, including those related to revenue recognition, income taxes, contingencies and the useful lives and carrying values of intangible and long-lived assets. 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.

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.

## Controls and procedures

As filed, 3,377 characters.

*Disclosure Controls and Procedures:* Our management, with the participation of the individual who serves as our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of September 30, 2023. Based on this evaluation, that officer concluded that our disclosure controls and procedures were effective as of that date. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

*Material Weaknesses in Internal Controls Over Financial Reporting:* Management assesses the effectiveness of the Company’s internal control over financial reporting at the end of each quarter. During our assessment for the second quarter of 2023, we identified one material weakness where we did not properly capitalize non-cash depreciation expense as a component of inventory, which would have understated the value of our inventory as of June 30, 2023 by approximately $387,000 if the error had not been detected before we issued our Quarterly Report on Form 10-Q. This error had no impact on our product sales or cash position. We do believe that the design of our internal controls is effective, but those internal controls were not effectively operating. We have implemented some changes to our internal controls over financial reporting, including seeking additional consulting with subject matter experts on this matter. We remediated this material weakness in internal controls during the third quarter of 2023. Based on our assessment for the third quarter of 2023, we have concluded that our internal controls over financial reporting were effective as of September 30, 2023.

*Changes in Internal Controls over Financial Reporting:* Our principal executive and principal financial officer and our Director of Finance and Administration periodically evaluate any change in internal control over financial reporting which has occurred during the prior fiscal quarter. With the exception of the improvements to our internal controls described in the previous paragraph, we have concluded that there was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 55,290 characters.

### Financial Risks

*Gross margin on product sales:* One of our goals is to achieve a gross margin (before related depreciation expenses) as a percentage of total sales approaching 50% after the initial launch of new products. Depreciation expense will be a larger component of costs of goods sold for **Re-Tain®** than it is for the **First Defense®** product line. Gross margins generally improve over time, but this anticipated improvement may not be realized for **Re-Tain®**. Many factors discussed in this report (including inflation, cost increases, supply-chain disruptions and the rising price of oil and other commodities and supplies) impact our costs of goods sold. There is a risk (which was experienced during 2022 and more materially during the first nine months of 2023) that we are not able to achieve our gross margin goals, which would adversely affect our operating results and could impact our future operating plans. There is a risk that our plans to maintain or improve our gross margin may not be realized due to cost increases, additional manufacturing contamination events, production equipment failures, the inability to raise our selling prices, or any combination of these factors. In addition, such negative events, depending on their severity, could deplete our cash resulting in an inability to fund our business.

*Exposure to interest rates and debt service obligations:* Rising interest rates could negatively affect the operating costs of dairy and beef producers and thus put further financial pressure on an already stressed business sector, which could indirectly, but materially and adversely, affect our business. During the first quarter of 2020, we removed the direct aspect of this particular exposure to our business by refinancing our bank debt (with the exception of our line of credit) with fixed rate notes. Our mortgage debt outstanding as of September 30, 2023 was $5.9 million bearing interest at the fixed rate of 3.53% per annum. Our equipment loans outstanding as of September 30, 2023 were $2.8 million bearing interest at the fixed rate of 3.5% per annum. The two State of Maine loans aggregating $794,000 as of September 30, 2023 bear interest at the fixed rate of 5% per annum. The $3 million in debt that we secured during the third quarter of 2023 bears interest at the blended fixed rate of 7.33% per annum. Our outstanding debt as of September 30, 2023 aggregating $12.45 million bears interest at the blended fixed rate of 4.52% per annum. Increasing interest rates would negatively impact the cost of any future borrowings. This was experienced on the new debt facilities aggregating $3 million that we closed during the third quarter of 2023 at the blended rate of approximately 7.33% per annum. A decline in sales or gross margin, coupled with this debt service burden, could impair our ability to fund our capital and operating needs and objectives. The additional debt we incurred to fund our growth objectives has significantly increased our total debt service costs. We are obligated to make principal and interest payments aggregating approximately $1.6 million and $2.0 million during the years ending December 31, 2023 and 2024, respectively. See Note 10 to the accompanying unaudited financial statements for more details about our debt.

*Debt covenants:* Our bank debt is subject to certain financial covenants. We are required to meet a minimum debt service coverage (DSC) ratio of 1.35, which is measured annually. Our actual DSC ratios were 0.44, 2.68 and 2.03 for the years ended December 31, 2022, 2021 and 2020, respectively. There can be no assurance that we can exceed that required level in subsequent years. By negotiation with the bank in connection with a mortgage debt financing during the first quarter of 2022, the required minimum DSC ratio was reduced to 1.0 for the year ending December 31, 2022. Subsequently, our bank waived the required compliance with this rate for the year ended December 31, 2022. During the first quarter of 2023, the DSC ratio covenant for the year ending December 31, 2023 was waived by our bank. Instead, we are required to meet a minimum DSC ratio requirement of 1.35 for the twelve-month periods ending June 30, 2024, September 30, 2024 and December 31, 2024 and then again annually after that. If we are unable to achieve the required DSC ratio going forward or reach a favorable agreement with our bank regarding that requirement (including an amendment to or waiver of such requirement), we would be in violation of that covenant, which could result in unfavorable amendments to the terms of our bank debt or have other adverse impacts on our business and results of operations.

*Currency exchange fluctuation:* We do not believe that currency exchange rates have had a significant effect on our revenues and expenses. However, future increases in the value of the U.S. dollar could affect our customers and the demand for our products. We hope to increase the level of our future sales of products outside the United States. The cost of our products to international customers could be affected by currency fluctuations. The decline of the U.S. dollar against other currencies could make our products less expensive to international customers. Conversely, a stronger U.S. dollar could make our products more costly for international customers. The current devaluation of the dollar makes Euro-based purchases more expensive for us.

*Inflation:* Inflation is having a material and adverse impact on almost all supplies we purchase and labor we hire and retain. Continuing or increasing inflationary trends could materially reduce our gross margin on product sales if we are unable or unwilling to impose offsetting price increases on our customers. According to the Consumer Price Index for All Urban Consumers (CPI-U) during the year ended December 31, 2022, the all items index increased 6.5% before seasonal adjustment.

*Projection of net (loss) income:* Generally speaking, our financial performance can differ significantly from management projections, due to numerous factors that are difficult to predict or that are beyond our control. Weaker than expected sales of the **First Defense®** product line could lead to less profits or deeper operating losses. The timing of FDA approval of **Re-Tain®** will have a material impact on our net (loss) income until sufficient commercial sales are generated and sustained.

*Risks associated with our funding strategy for* ***Re-Tain®:*** The inability to maintain adequate cash and liquidity to support the commercialization of **Re-Tain®** is a risk to our business. Achieving FDA approval of our pharmaceutical-grade Nisin produced at commercial-scale is the most critical action remaining in front of us on our path to U.S. regulatory approval of **Re-Tain®**. Having completed the construction and equipping of the Drug Substance production facility described elsewhere in this report at a cost of $20.8 million, we will continue to incur product development expenses to operate and maintain this facility until commercialization. Absent sufficient sales of **Re-Tain®** at a profitable gross margin, we would be required to fund all debt service costs from available cash and sales of the **First Defense®** product line, which would reduce, and could eliminate, our expected profitability going forward and significantly reduce our cash flows.

*Uncertainty of market size and product sales estimates:* Estimating the size of the total addressable market and future sales growth potential for our **First Defense®** product line is based on our experience and understanding of market dynamics but is inherently subjective. Estimating the size of the market for any new product, such as **Re-Tain®**, involves more uncertainties than do projections for established products. We do not know whether, or to what extent, our products will achieve, maintain or increase market acceptance and profitability. Some of the uncertainties surrounding **Re-Tain®** include the product’s effectiveness against currently prevalent pathogens, market acceptance, the effect of a premium selling price on market penetration, cost of manufacture, competition from new and existing products sold by substantially larger competitors with greater market reach and promotional resources and other risks described under “Product Risks” – “Sales risks pertaining to **Re-Tain®”** below. Since **Re-Tain®** is a novel approach to treating mastitis, there are many uncertainties with regards to how quickly and to what extent we can develop the subclinical mastitis treatment market. We believe that polypeptide antimicrobial technology may be viewed positively (relative to traditional antibiotics). If realized, this may offset some of these risks and result in better overall market acceptance.

*Net deferred tax assets:* The realizability of our net deferred tax assets is a subjective estimate that is contingent upon many variables. During the second quarter of 2018, we recorded a full valuation allowance against our net deferred tax assets that significantly increased our net loss in comparison to other periods. This non-cash expense could be reversed, and this valuation allowance could be reduced or eliminated, if warranted by our actual and projected profitability in the future. We will continue to assess the need for the valuation allowance each quarter.

### Product Risks

*Product risks generally:* We set objectives for our products that we believe we can achieve, but the achievement of such goals is not a certainty. The sale of our products is subject to production, financial, efficacy, regulatory, competitive and other market risks. Elevated standards to achieve and maintain regulatory compliance required to sell our products continue to evolve. Failure to achieve acceptable biological yields from our production processes can materially increase our costs of goods sold and reduce our production output, leading to lower margins and/or an order backlog that could adversely affect our customer relationships and operating results. **First Defense®** is sold, and we expect **Re-Tain®** to be sold, at significant price premiums relative to competitive products. There is no assurance that we will continue to achieve market acceptance of the **First Defense®** product line, or achieve and sustain market acceptance of **Re-Tain®**, at a profitable price level or that we can continue to manufacture our products at a low enough cost to result in a sufficient gross margin to justify their continued manufacture and sale. As we bring **Re-Tain®** to market, these risks could be heightened by the additional uncertainties associated with introducing a new product requiring a shift in customer behavior.

*Contamination events and equipment failures in our production process:* Around the end of the third quarter of 2022 and during the first quarter of 2023 and to a smaller degree during the third quarter of 2023, we experienced certain contamination events and equipment failures in our production process that had a significant impact on our operating results. We are at risk of further such production contaminations or equipment failures resulting in more scrapped inventory if we do not continue to improve our farm operations and implement other necessary improvements from farms to finished goods. This risk did result in a slowdown of our production output during the first half of 2023 to remediate this problem, which led to the recognition of less sales and gross margin during the current periods. Additional contamination events or equipment failures causing significantly less production output, depending on their severity, could deplete our cash resulting in an inability to fund our business operations.

*Sales risks pertaining to* ***Re-Tain®:*** Actual or prospective **Re-Tain®** customers may decide to discontinue, reduce or avoid usage of **Re-Tain®** due to the following risks:

1\) A rejection of a tank of milk by a positive milk inhibitor test because too much of the milk in a bulk tank is comprised of milk from cows being treated with **Re-Tain®**, when tested randomly for inhibitors by a milk hauler.

2\) A failed or stalled cheese tank occurs when a Nisin susceptible cheese starter culture is impacted by residues in milk that exceed our on-farm treatment recommendations, which aims to limit concentrations of bulk tanks or tankers to 1% of milk from cows treated with **Re-Tain®** or is not effectively diluted through the milk collection and transportation system. After we study this potential impact during our Controlled Launch of **Re-Tain®**, we may decide to seek a post-approval label change requiring a short discard of milk, which may be limited to just the treated quarter of the cow.

3\) Producers’ current practice generally is to treat only clinical mastitis, which has the visual indicator of abnormal milk. In order to gain market penetration for **Re-Tain®**, we will need to change that practice and increase awareness of the importance of treating subclinical disease. This will require the producers’ ability and willingness to diagnose without visual indicators. Users of **Re-Tain®** could have unsatisfactory treatment outcomes if they lack the equipment needed to measure and monitor somatic cell counts (SCC) of the herd or individual cows (for which data is needed). This risk limits our access to treatment cows because about 40% of farms do not presently have access to this kind of testing at the cow level, and thus are not good candidates for the use of **Re-Tain®.**

4\) Lower than anticipated treatment cure rates could be experienced because the product is administered to cows that we would not identify as the best treatment candidates based on SCC data.

5\) Lower than anticipated treatment cure rates could be experienced because the product is administered to cows that are infected with pathogens outside of our label claims.

6\) Off-label use of our product in cows infected with clinical mastitis before we have run the required studies and achieved a label claim extension for this disease state, resulting in negative treatment outcomes.

7\) Producers either do not choose to use it or might use it improperly, rather than follow our label instructions to administer one dose after each of three consecutive milkings, or they may limit use within the herd in an abundance of caution to avoid the negative outcomes described above.

*Reliance on sales of the* ***First Defense®*** *product line:* We are reliant on the market acceptance of the **First Defense®** product line to generate product sales and fund our operations. Our business would not have been profitable during the years ended December 31, 2012, 2013, 2015 and 2016, during the nine-month periods ended September 30, 2017 or during the three-month periods ended March 31, 2019, December 31, 2020, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022 without the gross margin that we earned on sales of the **First Defense®** product line.

*Concentration of sales:* Sales of the **First Defense®** product line aggregated 99% and 98% of our total product sales during the years ended December 31, 2022 and 2021, respectively, and 99% of our total product sales during the nine-month periods ended September 30, 2023 and 2022. Our primary customers for the majority of our product sales (92% and 86% during the years ended December 31, 2022 and 2021, respectively, and 90% and 91% during the nine-month periods ended September 30, 2023 and 2022, respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 8% and 14% of our total product sales during the years ended December 31, 2022 and 2021, respectively, and 10% and 9% of total product sales during the nine-month periods ended September 30, 2023 and 2022, respectively. The concentration of our sales from one product into just two markets (the dairy and beef markets) is a risk to our business. The animal health distribution segment has been aggressively consolidating over the last few years, with larger distributors acquiring smaller distributors. A large portion of our product sales (73% during both of the years ended December 31, 2022 and 2021 and 79% and 72% during the nine-month periods ended September 30, 2023 and 2022, respectively) was made to two large distributors. A large portion of our trade accounts receivable (81% as of September 30, 2023 and 69% as of December 31, 2022) was due from these two distributors. We have a good history with these distributors, but the concentration of sales and accounts receivable with a small number of customers does present a risk to us, including risks related to such customers experiencing financial difficulties or altering the basis on which they do business with us in a manner unfavorable to us.

*Production capacity constraints:* We invested $3.7 million from 2019 to the first quarter of 2022 to increase our production capacity (in terms of annual sales dollars) for the **First Defense®** product line from approximately $16.5 million to approximately $23 million based on current selling prices and estimated production yields. During the fourth quarter of 2021, we reached this new, higher level of production output on an annualized basis. During 2021, we initiated three additional investments aggregating $4.7 million to increase our estimated annual production capacity for the **First Defense®** product line to approximately $30 million, which we completed at the end of 2022. We are making initial plans and investments to further increase our production capacity in 2024 and after. While this capacity expansion investment has proceeded very close to budget, there is a risk of cost overruns in our ongoing projects and any future production expansions that we may undertake, and a risk that we will not be able to achieve our production capacity growth objectives on a timely basis, resulting in a continuing or increasing shortfall in supply to the market. The inability to meet market demand for our products is a risk to our business. The historically large backlog of orders, as well as any ongoing order backlog, presents a risk that we could lose customers during this period that are not easily regained thereafter, when our production capacity is expected to meet or exceed sales demand. Our long-term capital plan to continue to expand the **First Defense®** product line requires ongoing review of equipment capacity and utilization across the manufacturing value stream at the 56 Evergreen Drive facility and our leased facilities at 175 and 165 Industrial Way, as well as assessment of costs, functional obsolescence and reliability of equipment. This review and assessment could identify a need to fund unexpected equipment maintenance or replacement costs.

*Product liability:* The manufacture and sale of our products entails a risk of product liability. Our exposure to product liability is mitigated to some extent by the fact that our products are directed towards the animal health market. We have maintained product liability insurance in an amount which we believe is reasonable in relation to our potential exposure in this area. We have no history of claims of this nature being made.

### Regulatory Risks

*Regulatory requirements for the* ***First Defense®*** *product line:* **First Defense®** is sold in the United States subject to a product license from the Center for Veterinary Biologics, USDA, which was first obtained in 1991, with subsequent approvals of line extensions in 2017 and 2018. As a result, our operations are subject to periodic inspection by the USDA, and we are at risk of an unfavorable outcome from such inspections. The potency of serial lots is directly traceable to the original serial used to obtain the product performance claims (the Reference Standard). Due to the unique nature of the label claims, host animal re-testing is not required as long as periodic laboratory analyses continue to support the stability of stored Reference Standard. To date, these analyses have demonstrated strong stability. However, if the USDA were not to approve requalification of the Reference Standard, additional clinical studies could be required to meet regulatory requirements and allow for continued sales of the product, which could interrupt sales and adversely affect our operating results. Territories outside of the United States may require additional regulatory oversight that we may not be able to meet with our current facilities, processes and resources. During July 2023, the USDA issued a Voluntary Stop Distribution and Sale (VSDS) and a Hold Release on **First Defense®** preventing us from shipping product (while not restricting us from continuing to produce inventory) until two inspectional observations were resolved. We promptly responded to the inspectional observations involved. On August 1, 2023, the USDA verbally rescinded the VSDS, and on August 4, 2023, the USDA verbally rescinded the Hold Release, allowing us to resume normal shipping during the week of August 7, 2023. There is a risk that we will become subject to similar or additional regulatory actions in the future. In these cases, the resulting interruption in sales could have a material and adverse effect on our operating results.

*Regulatory requirements for* ***Re-Tain®:*** The commercial introduction of this product in the United States requires us to obtain FDA approval. Completing the development through to approval of the NADA by the FDA involves risk. While four of the five required Technical Sections have been approved, the regulatory development process timeline has been extensive (approximately 16 years from when the product rights were returned to us by a former partner in 2007) and has involved multiple commercial production strategies and multiple submissions of the Chemistry, Manufacturing and Controls (CMC) Technical Section. Most recently, we received an Incomplete Letter from the FDA regarding this CMC Technical Section during the third quarter of 2022. Beyond responding to the issues raised in this letter, the principal issue remaining is a successful pre-approval re-inspection of our manufacturing facility. We are completing preparations for this re-inspection. This clarifies the required path to product approval. To reduce the risk associated with this process, we are working with a qualified contract manufacturer (Norbrook) for alignment of the required validations and Drug Product manufacture and have met with the FDA to clarify filing strategy and requirements. Our CMC Technical Section submission will be subject to a statutory six-month review period by the FDA. This timeline is under review by the FDA with us as discussed in greater detail under the caption, “**Product Development Expenses and Strategy”**, above. We believe we can successfully complete the pre-approval re-inspection within this time frame. However, our efforts continue to be subject to inspection and approval by the FDA and other factors outside of our control, and there remains a risk that the required FDA approvals of our product and facilities could be delayed or not obtained. International regulatory approvals would be required for sales of **Re-Tain®** outside of the United States, and there is a risk that these approvals would be or become too costly to pursue or be delayed or not obtained. Sales in these international territories would also be subject to milk discard and meat withhold restrictions, thereby reducing the competitive advantage of **Re-Tain®** in those territories.

*Regulatory requirements limiting access to suppliers and customer base*: Maine, where our principal executive office and manufacturing facilities are located, has adopted product reporting and phase-out requirements for per- and polyfluoroalkyl substances (“PFAS”). Maine’s statute requires that effective as of January 1, 2025 manufacturers of products with intentionally-added PFAS report the presence of such substances (and requires that such products cannot be sold in Maine unless the required reporting is made) and specifies that (subject to certain exceptions to be promulgated by the Maine Department of Environmental Protection) no product containing intentionally-added PFAS may be sold in Maine after January 1, 2030. This reporting requirement may limit our ability to access supplies from companies which are not in compliance with the state reporting requirements and may limit those customers to whom we may sell our products. The U.S. Environmental Protection Agency also has adopted a PFAS reporting law, which requires that importers of articles that contain PFAS report the presence of such substances to the extent such information is known or reasonably ascertainable. This reporting requirement may limit our ability to import supplies.

### Economic Risks Pertaining to the Dairy and Beef Industries

The industry data referred to below is compiled from USDA databases.

*Cattle count:* The January count of all cattle and calves in the United States had steadily declined from 97,000,000 as of January 1, 2007 to 88,500,000 as of January 1, 2014. Then this figure increased each year, reaching 94,800,000 as of January 1, 2019 before declining to 93,800,000 as of both January 1, 2020 and January 1, 2021. This count continued to decline to 92,100,000 as of January 1, 2022 and to 89,300,000 as of January 1, 2023. Reflecting seasonal trends, this figure was equal to 102,000,000, 101,000,000, 98,600,000 and 95,900,000 as of July 1, 2020, 2021, 2022, and 2023, respectively. A significant decline in the cattle count could negatively affect the size of our addressable market.

*Herd size:* Prior to 1957, there were over 20,000,000 cows in the U.S. dairy herd. Prior to 1986, there were over 10,000,000 cows in the U.S. dairy herd. From 1998 through 2021, the size (annual average) of the U.S. dairy herd ranged from the low of 9,011,000 in 2004 to the high of 9,448,000 in 2021. This average declined to 9,402,000 during the year ended December 31, 2022 and then increased modestly to 9,407,000 during the first nine months of 2023. A significant decline in the herd size could negatively affect the size of our addressable market.

*Milk cow price:* The all-time high value (annual average) for a milk cow was $1,993 during 2015. Since then, this annual average value steadily declined to $1,205 during 2019 before increasing to $1,300 during 2020 and to $1,363 during 2021. This price for 2022 increased significantly to an average of $1,598, which is a 17% increase over 2021. The 2023 average price of $1,763 represents a 10% increase over prior year. A significant decline in the milk cow price could negatively affect the size of our addressable market.

*Milk price:* The dairy market, similar to many others, has been unstable for several reasons including as a result of the pandemic. The price paid to producers for milk has been very volatile. This market volatility, and the resulting impact on our primary end users, could negatively impact our ability to maintain and grow sales at a profitable level. The Class III milk price (an industry benchmark that reflects the value of product used to make cheese) is an important indicator because it defines our customers’ revenue level. This annual average milk price level (measured in dollars per hundred pounds of milk) reached its highest point (since these prices were first reported in 1980) during 2014 at $22.34 (peaking at $24.60 in September 2014), which price level has never been repeated. During the year ended December 31, 2020, this average milk price was equal to $18.16, but it was extremely volatile during the year due largely to disruption in demand related to the COVID-19 pandemic. The one-month fluctuation of 73% from a low of $12.14 in May 2020 to $21.04 in June 2020 set an all-time record for variability. The average price for 2021 decreased by 6% to $17.08. This price average increased by 29% to $21.96 during the year ended December 31, 2022. The average price decreased by 22% to $17.10 during the first ten months of 2023. The annual fluctuations in this milk price level are demonstrated in the following table:

| Average Class III Milk Price During the Years Ended December 31, |  | (Decrease) Increase |
| --- | ---: | ---: |
| 2014 | $22.34 |  |
| 2015 | $15.80 | (29%) |
| 2016 | $14.87 | (6%) |
| 2017 | $16.17 | 9% |
| 2018 | $14.61 | (10%) |
| 2019 | $16.96 | 16% |
| 2020 | $18.16 | 7% |
| 2021 | $17.08 | (6%) |
| 2022 | $21.96 | 29% |

*Feed Costs:* The actual level of milk prices may be less important than its level relative to feed costs. One measure of this relationship is known as the milk-to-feed price ratio, which represents the amount of feed that one pound of milk can buy. An increase in feed costs also has a negative impact on the beef industry and therefore could have a resulting negative impact on our business and results of operations. This ratio varies farm-to-farm based on individual operating parameters. Since this ratio reached 3.24 in 2005, it has not exceeded 3.00. This ratio averaged 1.74 for 2021, amounting to a significant decline of 25% from the 2020 average of 2.32. This average has not been lower since 2012. During 2022, this ratio improved by 10% to 1.91. This ratio dropped to 1.56 during the first nine months of 2023. The following table demonstrates the annual volatility and the low values of this ratio recently:

| Average Milk-To-Feed Price Ratio During the Years Ended December 31, |  | (Decrease) Increase |
| --- | ---: | ---: |
| 2014 | 2.54 |  |
| 2015 | 2.14 | (16%) |
| 2016 | 2.26 | 6% |
| 2017 | 2.42 | 7% |
| 2018 | 2.05 | (15%) |
| 2019 | 2.25 | 10% |
| 2020 | 2.32 | 3% |
| 2021 | 1.74 | (25%) |
| 2022 | 1.92 | 10% |

*Market volatility*: While the number of cows in the U.S. herd and the production of milk per cow directly influence the supply of milk, the price for milk is also influenced by very volatile international demand for milk products. Given our focus on the dairy and beef industries, the volatile market conditions and the resulting financial insecurities of our primary end users are risks to our ability to maintain and grow sales at a profitable level. These factors also heighten the challenge of selling premium-priced animal health products (such as **Tri-Shield®** and **Re-Tain®**) into the dairy market.

### Small Size of Company

*Dependence on key personnel:* We are a small company with approximately 77 employees (including 5 part-time employees). As such, we rely on certain key employees to support multiple operational functions, with limited redundancy in capacity. The loss of any of these key employees could adversely affect our operations until a qualified replacement is hired and trained, which could be even more challenging in the present very difficult labor market. Our competitive position will be highly influenced by our ability to attract, retain and motivate key scientific, manufacturing, managerial and sales and marketing personnel. We will require increased staffing levels to operate our expanded **First Defense®** production capacity and to operate our **Re-Tain®** production facility. The cost of attracting and retaining the needed additional personnel in this current job market and inflationary environment could adversely affect our margins and profitability.

*Reliance on outside party to provide certain services under contract for us:* We are exposed to additional regulatory compliance risks through the subcontractors that we choose to work with to produce **Re-Tain®**, who also need to satisfy certain regulatory requirements in order to provide us with the products and services we need. One example of this outside reliance is Norbrook, our Drug Product (DP) contract manufacturer. Because Norbrook has elected to terminate its supply agreement with us during 2024, we initiated an investment of approximately $4 million to construct and equip our own DP formulation and aseptic filling capability for **Re-Tain®** in our existing Drug Substance facility. Due to the loss in gross margin during the first nine months of 2023 caused by the slowdown in production output necessary to remediate product contamination events, we have decided to defer spending of approximately $1.7 million of these funds for the near term. The objective of this investment is to end our reliance on an outside party to perform these services for us. Actual project costs could exceed our current estimates. Completion of this project could be delayed due to a number of factors outside our control, including delays in equipment fabrication, equipment delivery or facility construction. In addition, there is a risk that we fail to achieve regulatory approval of the new facility or that such approval is delayed or requires significant additional expenditures to obtain. We are evaluating alternatives for DP supply going forward, which include the resumption of the investment in our own in-house DP services (when prudent based on our cash reserves) or another contract manufacturing agreement or a further extension with Norbrook. We face the risk of potential supply interruption and adverse effects on the market launch of **Re-Tain®** if we do not effectively manage the end of the DP supply provided from our contract manufacturer for orders scheduled for delivery during the second half of 2023 and into 2024 (with product expiries during the second half of 2025) to align with the new supply from a new contract manufacturing agreement or our own formulation and aseptic filling facility. This could result in a planned pause in supply to the market after the Controlled Launch and before we are prepared for a full market re-launch through distribution.

*Competition from others:* Many of our competitors are significantly larger and more diversified in the relevant markets than we are and have substantially greater financial, marketing, manufacturing and human resources and more extensive product development and sales/distribution capabilities than we do, including greater ability to withstand adverse economic or market conditions and declining revenues and/or profitability. Merck and Zoetis, among other companies, sell products that compete directly with the **First Defense®** product line in preventing scours in newborn calves. The scours product sold by Zoetis sells for approximately half the price of our product, although it does not have an *E. coli* claim (which ours does). With **Tri-Shield®**, we can compete more effectively against vaccines that are given to the mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf. Elanco, Merck and Zoetis provide these dam vaccine products to the market. There are many companies competing in the mastitis treatment market, most notably Boehringer Ingelheim, Merck and Zoetis. The subclinical mastitis products sold by these large companies are well established in the market and are priced lower than what we expect for **Re-Tain®**, but all of them involve traditional antibiotics and are sold subject to a requirement to discard milk during and for a period of time after treatment (unlike our product which carries zero milk discard and zero milk withhold claims). There is no assurance that our products will compete successfully in these markets. We may not be aware of other companies that compete with us or intend to compete with us in the future.

### Global Risks

*Impact of global COVID-19 pandemic:* We are facing significant production constraints, supply disruptions and inflationary increases which appear to have been caused, in large part directly or indirectly, by the pandemic. The extent and duration of the negative impact of the pandemic on the economics of our customers and on the demand for our products going forward are very difficult to assess. The dairy market, similar to many others, has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. The Class III milk price has been extremely volatile during the pandemic. Market conditions have improved somewhat, but this volatility remains a concern. Additionally, like most input costs, the cost of grain and other feed is rising, which puts a strain on the profitability of our customers. There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected due to closures of processing plants and reduced throughput. This is a very unusual situation for farmers that work so hard to improve production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. The pandemic has created risk and continues to create uncertainty and challenges for us and has created or contributed to global supply-chain disruptions and has affected international trade, while creating a worldwide health and economic crisis. While presently there are some indications that suggest the situation may be improving, the full impact of this viral outbreak on the global economy, and the duration of such impact, remains very uncertain at this time. Stock market valuations have declined and recovered somewhat but remain very volatile. Inflation has increased significantly, and tax rates may increase. There is a risk of a period of economic downturn, the severity and duration of which are difficult to know. Prior to the pandemic and the responsive federal economic stimulus programs, many feared the United States had taken on too much national debt. Now the debt load is significantly higher. A combination of the conditions, trends and concerns summarized above could have a corresponding negative effect on our business and operations, including the supply of the colostrum we purchase to produce our **First Defense®** product line, the demand for our products in the U.S. market and our ability to penetrate or maintain a profitable presence in international markets. We are experiencing shortages in key components and needed products, backlogs and production slowdowns due to difficulties accessing needed supplies and labor and other restrictions which increase our costs and affect our ability to consistently deliver our products to market in a timely manner. Our exposure to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on foreign manufacturers, by our on-going cross-training of our employees, by qualifying alternate suppliers and components and by our early and continued compliance with recommended hygiene. Despite our best efforts and intentions, there is a risk that an employee could become infected and could infect others.

*Russia’s unprovoked military invasion of Ukraine and the war in the Middle East:* Russia’s unprovoked military invasion of Ukraine (and attack on its people) and the war in the Middle East are having a significant negative impact on the world economy, worsening trends that were already moving in an unfavorable direction. Among other exposures, the increasing price of oil is already impacting our transportation-related expenses materially, and we expect this supply stress to increase the cost of petroleum-based products that we purchase (mostly plastics). Both of these military actions could cause or enhance some of the conditions discussed in the previous paragraph.

*Climate change:* Our business, and our activities and the activities of our customers and suppliers, could be disrupted by climate change. Potential physical risks from climate change may include altered distribution and intensity of rainfall, prolonged droughts or flooding, increased frequency of wildfires and other natural disasters, rising sea levels, and a rising heat index, any of which could cause negative impacts to our and our customers’ and suppliers’ businesses. Increased temperatures and rising water levels may negatively impact our dairy and beef livestock customers by increasing the prevalence of parasites and diseases that affect food animals. The physical changes caused by climate change may also prompt changes in regulations or consumer preferences which in turn could have negative consequences for our and our customers’ businesses. Climate change may negatively impact our customers’ operations, through climate-related impacts such as increased air and water temperatures, rising water levels and increased incidence of disease in livestock. In addition, concerns regarding greenhouse gas emissions and other potential environmental impacts of livestock production have led to some consumers opting to limit or avoid consuming animal products. If such events affect our customers’ businesses, they may purchase fewer of our products, and our revenues may be negatively impacted. Climate driven changes could have a material adverse impact on the financial performance of our business and on our customers. In addition, increased frequency of natural disasters and adverse weather conditions may disrupt our manufacturing processes or our supply chain. These disruptions may have a material adverse effect on our business, financial condition, results of operations and/or cash flows.

*Bovine diseases:* The potential for epidemics of bovine diseases such as Foot and Mouth Disease, Bovine Tuberculosis, Brucellosis and Bovine Spongiform Encephalopathy (BSE) presents a risk to us and our customers. Documented cases of BSE in the United States have led to an overall tightening of regulations pertaining to ingredients of animal origin, especially bovine. The **First Defense®** product line is manufactured from bovine milk (colostrum), which is not considered a BSE risk material. Future regulatory action to increase protection of the human food supply could affect the **First Defense®** product line, although presently we do not anticipate that this will be the case.

### Risks Pertaining to Common Stock

*Stock market valuation and liquidity:* Our common stock trades on The Nasdaq Stock Market (Nasdaq: ICCC). Our average daily trading volume (which was 17,879 shares per day during the 20-day period ended November 1, 2023) is lower, our bid/ask stock price spread can be larger and our share price can be more volatile than what other companies experience, which could result in investors facing difficulty selling their stock for proceeds that they may expect or desire. Our share price as of November 1, 2023 was $5.10. Most companies in the animal health sector have market capitalization values that greatly exceed our market capitalization of approximately $39.5 million as of November 1, 2023. Our product sales during the trailing twelve-month period ended September 30, 2023 were $16 million. This means that our market capitalization as of November 1, 2023 was equal to approximately 2.4 times our sales during the trailing twelve-month period ended September 30, 2023. Before gross margin from the sale of new products is achieved, our market capitalization may be heavily dependent on the perceived potential for growth from our product under development and may therefore be negatively affected by the related uncertainties and risks.

*Certain provisions might discourage, delay or prevent a change in control of our Company or changes in our management:* Provisions of our certificate of incorporation, our bylaws, our Common Stock Rights Plan or Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

- limitations on the removal of directors;
- advance notice requirements for stockholder proposals and nominations;
- the ability of our Board of Directors to alter or repeal our bylaws;
- the ability of our Board of Directors to refuse to redeem rights issued under our Common Stock Rights Plan or otherwise to limit or suspend its operation that would work to dilute the stock ownership of a potential hostile acquirer, potentially preventing acquisitions that have not been approved by our Board of Directors; and
- Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could depress the trading price of our common stock or limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood of obtaining a premium for our common stock in an acquisition.

*No expectation to pay any dividends or repurchase stock for the foreseeable future:* We do not anticipate paying any dividends to, or repurchasing stock from, our stockholders for the foreseeable future. Instead, we expect to use cash to fund product development costs and investments in our facilities and production equipment, and to increase our working capital and to reduce debt. Stockholders must be prepared to rely on market sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, restrictions imposed by applicable laws, current and anticipated needs for liquidity and other factors our Board of Directors deems relevant.

*Possible dilution:* We may need to access the capital markets again and issue additional common stock in order to fund our growth objectives, as described elsewhere in this report. Such issuances could have a dilutive effect on our existing stockholders.

Other Risks

*Access to raw materials and contract manufacturing services:* Our objective is to maintain more than one source of supply for the components used to manufacture and test our products that we obtain from third parties. However, we are experiencing difficulty in efficiently acquiring essential supplies. We have significantly increased the number of farms from which we purchase colostrum for the **First Defense®** product line. A significant reduction in farm capacity could make it difficult for us to produce enough inventory to meet customer demand. The specific antibodies that we purify from colostrum for the **First Defense®** product line are not readily available from other sources. We are and will be dependent on our manufacturing facilities and operations in Portland for the production of the **First Defense®** product line and **Re-Tain®**. We will be dependent on one manufacturer for the supply of syringes for **Re-Tain®**. We are currently dependent on a contract with Norbrook for the Drug Product (DP) formulation and aseptic filling for supply of our Nisin DP through 2024. The facility we may resume constructing to perform these services in-house will be subject to FDA inspection and approval, the outcome and timing of which are not within our control. We expect to achieve FDA approval for use of our DP facility approximately two years from when this project is restarted. The potential alternative options for these services are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). Any significant damage to or other disruption in the services at any of these third-party facilities or our own facilities (including due to lack of financing, regulatory issues or non-compliance) would adversely affect the production of inventory and result in significant added expenses and potential loss of future sales. We face the risk of potential supply interruption and adverse effects on the market launch of **Re-Tain®** if we do not effectively manage the end of the DP supply provided from our contract manufacturer for orders scheduled for delivery during the second half of 2023 and into 2024 (with product expiries during the second half of 2025) to align with the new supply from a new contract manufacturing agreement or our own formulation and aseptic filling facility.

*Failure to protect intellectual property:* The protection and enforcement of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. We rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. However, we may be unable to adequately protect our intellectual property rights or prevent third parties from infringing or misappropriating our intellectual property rights. We may not be able to obtain registration for all intellectual property we seek to register, and effective intellectual property protection may not be available in every country in which our products are sold. In some cases, we have chosen (and may choose in the future) not to seek patent protection for certain products or processes. Instead, we have sought (and may seek in the future) to maintain the confidentiality of any relevant proprietary technology through trade secrets, operational safeguards and contractual agreements. Reliance upon trade secret, rather than patent, protection may cause us to be vulnerable to competitors who successfully replicate (knock off) our manufacturing techniques and processes. Further, our confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information. Others may independently develop similar trade secrets or technology or obtain access to our unpatented trade secrets or proprietary technology. Others may have filed patent applications and may have been issued patents involving products or technologies potentially useful to us or necessary for us to commercialize our products or achieve our business goals. If that were to be the case, there can be no assurance that we will be able to obtain licenses to such patents on terms that are acceptable to us. Any of our intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Third parties may claim in the future, that we have infringed their intellectual property rights, which could result in significant costs and potential damages and license requirements. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or other proprietary rights or to establish the validity of such rights. However, we may be unable to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. In addition, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights.

*Increasing dependence on the continuous and reliable operation of our information technology systems:* We rely on information systems throughout our company. Any disruption of these systems or significant security breaches could adversely affect our business. Although we maintain information security policies and employ system backup measures and engage in information system redundancy planning and processes, such policies, measures, planning and processes, as well as our current disaster recovery plan may be ineffective or inadequate to address all eventualities. As information systems and the use of software and related applications by us, our business partners, suppliers, and customers become more cloud-based, we become inherently more susceptible to cyberattacks. There has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability and integrity of data and information. There are reports of increased activity by hackers and scammers during the COVID-19 pandemic. Russia’s unprovoked military invasion of Ukraine may elevate the risk of such cyberattacks. Any such attack or breach could compromise our networks and the information stored thereon could be accessed, publicly disclosed, lost, or stolen. While we have invested in our data and information technology infrastructure (including working with an information security technology consultant to assess and enhance our security systems and procedures, and periodically training our employees in such systems and procedures), there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains. We have not experienced any material adverse effect on our business or operations as a consequence of any such attack or breach but may incur increasing costs in performing the tasks described above. Given the unpredictability of the timing, nature and scope of such disruptions and the evolving nature of cybersecurity threats, which vary in technique and sources, if we or our business partners or suppliers were to experience a system disruption, attack or security breach that impacts any of our critical functions, or our customers were to experience a system disruption, attack or security breach via any of our connected products and services, we could potentially be subject to production downtimes, operational delays or other detrimental impacts on our operations. Furthermore, any access to, public disclosure of, or other loss of data or information, including any of our (or our customers’ or suppliers’) confidential or proprietary information or personal data or information, as a result of an attack or security breach could result in governmental actions or private claims or proceedings, which could damage our reputation, cause a loss of confidence in our products and services, damage our ability to develop (and protect our rights to) our proprietary technologies and have a material adverse effect on our business, financial condition, results of operations or prospects. While this exposure is common to all companies, larger companies with greater resources may be better able to mitigate this risk than we can.

Filed Nov 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001213900-23-086092. Last ingested by Listed: Oct 24, 2026, 14:57 ET. No prices; not investment advice.