IMMUCELL CORP DE

Previous wording

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 (Quarterly Report). 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.

Current wording

We focus on the two most critical stages of dairy productivity, those being the first 30 days of life and the first 30 days of lactation. Our concentrated colostrum and purified Nisin technologies offer unique animal health solutions during these periods when immunity is at its most vulnerable. Both of our product lines present immediate growth opportunities and, in the future, may potentially be applied in the human health sector, alongside the animal health sector that we currently serve. 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 (Quarterly Report). 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.

Previous wording

This Quarterly Report 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 consequences of the COVID-19 pandemic, 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, success and 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 manufa…

Excerpt shortened here; the source contains the full paragraph.

Current wording

This Quarterly Report 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 consequences of the COVID-19 pandemic, 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, success and 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; the salability of products currently held in inventory pending regulatory approval; future regulatory requirements relating to our products; future expense ratios and margins; the efficacy of our investments in our bus…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Net cash provided by operating activities was $419,000 during the three-month period ended March 31, 2024 in contrast to net cash (used for) operating activities of $(2.8) million during the three-month period ended March 31, 2023. The $3.2 million improvement in cash provided by operating activities during the three-month period ended March 31, 2024 compared to the three-month period ended March 31, 2023 was largely caused by the $1.9 million decrease in the net loss and a $952,000 swing from cash used for inventory build to an inventory reduction. Our inventory balance decreased by $662,000 from $7.8 million as of December 31, 2023 to $7.1 million as of March 31, 2024. Our total depreciation and amortization expense was approximately $678,000 and $659,000 during the three-month periods ended March 31, 2024 and 2023, 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.

Current wording

Net cash provided by operating activities was $1 million during the six-month period ended June 30, 2024 in contrast to net cash (used for) operating activities of ($3.4) million during the six-month period ended June 30, 2023. The $4.4 million improvement in net cash provided by operating activities during the six-month period ended June 30, 2024 in contrast to net cash (used for) operating activities during the six-month period ended June 30, 2023 was largely caused by the $1.7 million decrease in the net loss, a $2 million swing from cash (used for) inventory build to an inventory reduction and a $459,000 swing from a reduction in accounts payable to an increase in accounts payable and accrued expenses. Our inventory balance decreased by $512,000 to $7.3 million as of June 30, 2024 from $7.8 million as of December 31, 2023. Interest expense (including amortization of debt issuance and debt discount costs) was $288,000 and $179,000 during the six-month periods ended June 30, 2024 and 2023, respectively. Our debt bears interest at fixed rates. The blended interest rate on the debt outstanding as of June 30, 2024 and December 31, 2023 was 4.51% per annum. We anticipate that interest expense (including amortization of debt issuance and debt discount costs) will be $566,000 and $494,000 during the years ending December 31, 2024 and 2025, respectively. Our total non-cash depreciation, amortization and stock-based compensation expense was approximately $1.5 million during both of the six-month periods ended June 30, 2024 and 2023. 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.

Previous wording

Net cash used for investing activities was $70,000 during the three-month period ended March 31, 2024 in comparison to net cash used for investing activities of $682,000 during the three-month period ended March 31, 2023 consisting primarily of cash spent to fund the purchase of property, plant and equipment. To conserve cash at this time, we have reduced and deferred most non-essential capital expenditures.

Current wording

Net cash used for investing activities was $177,000 during the six-month period ended June 30, 2024 in comparison to net cash used for investing activities of $1.4 million during the six-month period ended June 30, 2023 consisting primarily of cash spent to fund the purchase of property, plant and equipment. To conserve cash at this time, we have reduced and deferred all non-essential capital expenditures.

Previous wording

Net cash (used for) financing activities was $(367,000) during the three-month period ended March 31, 2024 in contrast to net cash provided by financing activities of $749,000 during the three-month period ended March 31, 2023. No draw on our line of credit was incurred during the three-month period ended March 31, 2024. Financing activities included a $1 million draw on our line of credit during the three-month period ended March 31, 2023. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $11.6 million and $12 million as of March 31, 2024 and December 31, 2023, respectively. This debt bears interest at fixed rates. The blended interest rate on the debt outstanding as of March 31, 2024 and December 31, 2023 was 4.51% per annum. Debt principal repayments aggregated $362,000 and $251,000 during the three-month periods ended March 31, 2024 and 2023, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million during both of the years ending December 31, 2024 and 2025. Interest expense (including amortization of debt issuance and debt discount costs) was $146,000 and $90,000 during the three-month periods ended March 31, 2024 and 2023, respectively. We anticipate that interest expense (including amortization of debt issuance and debt discount costs) will be $566,000 and $494,000 during the years ending December 31, 2024 and 2025, respectively. During the first quarter of 2024, the availability of our $1 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. There was no outstanding balance under this line of credit as of March 31, 2024 or December 31, 2023. See Note 10 to the accompanying unaudited financial statements for more information about our bank debt.

Current wording

Net cash (used for) financing activities was ($478,000) during the six-month period ended June 30, 2024 in contrast to net cash provided by financing activities of $497,000 during the six-month period ended June 30, 2023. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $11.3 million and $12 million as of June 30, 2024 and December 31, 2023, respectively. Debt principal repayments (excluding the line of credit) aggregated $726,000 and $503,000 during the six-month periods ended June 30, 2024 and 2023, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million during both of the years ending December 31, 2024 and 2025. During the first quarter of 2024, the availability of our $1 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. No draw on our line of credit was outstanding as of June 30, 2024 or December 31, 2023. Financing activities included a $1 million draw on our line of credit during the six-month period ended June 30, 2023. No such draw was made during the six-month period ended June 30, 2024. See Note 10 to the accompanying unaudited financial statements for more information about our bank debt. During the second quarter of 2024, we entered into an At-The-Market Offering Agreement (ATM Agreement) with Craig-Hallum Capital Group LLC, pursuant to which we may offer and sell up to $11 million of shares of our common stock. As of August 2, 2024, we had sold 82,216 shares under the at the market offering conducted pursuant to the ATM Agreement. Net proceeds (net of approximately $152,000 in upfront legal, accounting and other fees and approximately $13,000 in sales commissions) were approximately $253,000. No shares have been sold pursuant to this offering since May 20, 2024. The ATM Agreement gives our board the flexibility to evaluate the potential uses of proceeds while considering the cost of dilution in real time going forward.

Previous wording

We have invested and continue to invest in several different capital expenditure projects to increase our estimated annual full production capacity for theFirst Defense® product line from approximately $16.5 million to approximately $40 million and to complete the development ofRe-Tain®. When we describe the production capacity for the**First Defense®**product line in this Quarterly 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.

Current wording

We have invested and continue to invest in several different capital expenditure projects to increase our estimated annual full production capacity for theFirst Defense® product line from approximately $16.5 million to approximately $30 million currently (with an option to increase further to approximately $40 million in the future) and to complete the development ofRe-Tain®. When we describe the production capacity for theFirst Defense® product line in this Quarterly 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.

Previous wording

Over the past 10 years or so, we have invested approximately $13.7 million to increase our production capacity for theFirst Defense®product line to meet the still-growing demand. This investment in equipment and facilities represents approximately 56% of our stockholders’ equity as of March 31, 2024. During 2018, it became clear that demand forTri-Shield First Defense®was outpacing production. In response to this increasing demand, we began a series of investments during 2019 (as detailed above) to increase our production capacity for theFirst Defense® product line to an estimate of approximately $30 million per year. 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. We remain deeply committed to continuing to supply**First Defense®**to the market over the long term, despite the current short supply. We were able to achieve our production goals during the first quarter of 2024.

Current wording

Over the past 10 years or so, we have invested approximately $14 million to increase our production capacity for theFirst Defense® product line to meet the still-growing demand. This investment in equipment and facilities represents approximately 59% of our stockholders’ equity as of June 30, 2024. During 2018, it became clear that demand forTri-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 theFirst Defense® product line to an estimate of approximately $30 million per year. Our production process is a very complicated one, which makes it difficult to scale-up quickly. We remain deeply committed to continuing to supply**First Defense®**to the market over the long term, despite the current short supply that we are experiencing. We were able to produce approximately 74% and 96% of our current full capacity estimate during the quarters ended June 30, 2024 and March 31, 2024, respectively.

Previous wording

During the three-year period ended December 31, 2016, we invested the aggregate of $4.2 million to construct a 7,100 square foot facility addition at 56 Evergreen Drive (Building 56) and related equipment (primarily Freeze-Dryer #2) and cold storage capacity increasing our freeze-drying capacity by 100% and making other improvements to our liquid processing capacity, which increased our annual production capacity (in terms of annual sales dollars) to approximately $16.5 million. 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 (DS) production forRe-Tain®withinBuilding 56. After construction of the DS production facility forRe-Tain® at 33 Caddie Lane (Building 33) was completed, this space was converted for use in the production of the gel tube formats of the**First Defense®**product line. After renovations of our leased facility at 175 Industrial Way (Building 175A) were completed, this space was converted to double our liquid processing capacity.

Current wording

During the three-year period ended December 31, 2016, we invested the aggregate of $4.2 million to construct a 7,100 square foot facility addition at 56 Evergreen Drive (Building 56) and related equipment (primarily Freeze-Dryer #2) and cold storage capacity increasing our freeze-drying capacity by 100% and making other improvements to our liquid processing capacity, which increased our annual production capacity (in terms of annual sales dollars) to approximately $16.5 million. 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 (DS) production forRe-Tain® withinBuilding 56. After construction of the DS production facility forRe-Tain® at 33 Caddie Lane (Building 33) was completed, this space was converted for use in the production of the gel tube formats of theFirst Defense® product line. After renovations of our leased facility at 175 Industrial Way (Building 175A) were completed during the second quarter of 2020, this space was converted to double our liquid processing capacity.

Previous wording

The purpose of the additional investments inRe-Tain®is to bring the formulation and aseptic filling capabilities forRe-Tain® Drug Product (DP) into available space in our DS facility in order to lessen or eliminate our reliance on third-party DP manufacturing services as well as to build out warehouse space atBuilding 14 for packing and shipping facilities forRe-Tain®. We began initial installation of the filling equipment during the first quarter of 2022 and then paused this installation work pending concurrence with the FDA pertaining to our third submission of the Chemistry, Manufacturing and Controls (CMC) Technical Section, which is discussed in greater detail below. Due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer the spending of approximately $2 million of these funds, for the time being. 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. At the same time, we are investigating other potential relationships with contract manufacturers that might do this work for us. The amount and timing of these investments are detailed in the following table (in thousands):

Current wording

During 2019, we initiated several additional capital expenditure investments inFirst Defense® andRe-Tain®. The primary purpose of the additional investment inFirst Defense® is to fulfill the current backlog and materially reduce the risk of another order backlog. Operating at very close to 100% of available capacity is not efficient or sustainable. Our objective is to be in position to operate without significant contaminations at the capacity level we choose to cover sales with adequate buffer stock, which would allow more time for necessary preventative maintenance. We also need to meet or exceed our production yield assumptions to succeed. The primary purpose of the additional investments inRe-Tain®is to bring the formulation and aseptic filling capabilities forRe-Tain® Drug Product (DP) into available space in our DS facility in order to lessen or eliminate our reliance on third-party DP manufacturing services as well as to build out warehouse space atBuilding 14 for packing and shipping facilities forRe-Tain®. We began initial installation of the filling equipment during the first quarter of 2022 and then 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 inFirst Defense® gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer the spending of approximately $2 million of these funds forRe-Tain®, for the time being. 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. The amount and timing of these investments are detailed in the following table (in thousands):

Previous wording

The first phase of the additional investments inFirst Defense® included significant renovations to a 14,300 square foot leased facility atBuilding 175A, some facility modifications atBuilding 56 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 theFirst Defense® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. Renovations ofBuilding 175A to enable this expansion were completed during the second quarter of 2020. By moving our powder and gel filling and assembly services fromBuilding 56 into this new space, we created space atBuilding 56 for the installation of the expanded freeze-drying capacity. The new facilities are built to contemporary current Good Manufacturing Practices (cGMP) standards with efficient material and people flows. A site license approval for this new facility was issued by the USDA during the third quarter of 2020. During the second quarter of 2021, we completed the relocation of our gel formulation equipment fromBuilding 56 toBuilding 175A, which created the space necessary to double our liquid processing capacity atBuilding 56. We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) atBuilding 56 from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity atBuilding 56 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.

Current wording

The first phase of the additional investments inFirst Defense® beginning in 2019 included significant renovations to a 14,300 square foot leased facility atBuilding 175A, some facility modifications atBuilding 56 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 theFirst Defense® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. Renovations ofBuilding 175A to enable this expansion were completed during the second quarter of 2020. By moving our powder and gel filling and assembly operations fromBuilding 56 into this new space, we created space atBuilding 56 for the installation of the expanded freeze-drying capacity. The new facilities are built to contemporary current Good Manufacturing Practices (cGMP) standards with efficient material and people flows. A site license approval for this new facility was issued by the USDA during the third quarter of 2020. During the second quarter of 2021, we completed the relocation of our gel formulation equipment fromBuilding 56 toBuilding 175A, which created the space necessary to double our liquid processing capacity atBuilding 56. We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) atBuilding 56 from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity atBuilding 56 from the USDA during the third quarter of 2022. This investment also included equipment and vehicle purchases necessary to expand and improve our colostrum collection capabilities and logistics.

Previous wording

The third phase of the additional investments inFirst Defense® involves the construction of an additional 15,400 square feet of space adjacent to and connected toBuilding 175A at 175 Industrial Way (Building 175B) and new equipment to further increase our estimated annualFirst Defense® production capacity from approximately $30 million to approximately $40 million with options for further expansion. Given the long lead time required for investments like this, we initiated this project by entering into a lease amendment during the third quarter of 2022 covering a to-be-constructed building shell for approximately $250,000 per year. Construction of the building shell by our landlord was substantially complete as of April 1, 2023, and rent payments commenced as of August 1, 2023. We made this lease commitment because of the unique proximity of the land adjacent to our currently leased space and the high level of demand for properties of this type in the Portland market. We did not want to risk losing this opportunity to others. The anticipated benefits to us from this new lease include: i) space for the potential to install Freeze-Dryers #5, #6, #7 and #8 if justified by market demand in the future, ii) improved space and quality for our powder milling operations by separating our upstream processes (liquid processing) atBuilding 56 from our clean downstream processes (milling, formulation, filling and packaging) atBuilding 175A and iii) much needed additional warehouse space. Freeze-Dryer #5 is the key piece of equipment required to allow us to increase our estimated annual production capacity to above $30 million. Based on past experience, we are planning for approximately 18 to 24 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. We have been running our equipment and staff close to 100% of capacity in order to fill the backlog of orders. One of our objectives is to create a more sustainable production schedule. However, due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer most of this investment, for the time being. Instead, we initiated the initial steps of this project with a reduced budget of approximately $700,000 in what we callBuilding 175B during the third quarter of 2023. This work was completed during the first quarter of 2024, which will provide additional warehousing space and allow us to move all shipping and receiving functions out ofBuilding 56 and intoBuilding 175B to create more space for liquid processing atBuilding 56. In consideration for our landlord agreeing to pay for the cost of those certain tenant improvements, we are obligated to make additional rent payments of $20,000 per month from November 2023 through June 2024 and a one-time additional rent payment of $488,743 in July 2024.

Current wording

The third phase of the additional investments inFirst Defense® involved the construction of an additional 15,400 square feet of space adjacent to and connected toBuilding 175A at 175 Industrial Way (Building 175B) and newequipment to further increase our estimated annualFirst Defense®production capacity from approximately $30 million to approximately $40 million with options for further expansion. Given the long lead time required for investments like this, we initiated this project by entering into a lease amendment during the third quarter of 2022 covering a to-be-constructed building shell for approximately $250,000 per year. Construction of the building shell by our landlord was substantially complete as of April 1, 2023, and rent payments commenced as of August 1, 2023. We made this lease commitment because of the unique proximity of the land adjacent to our currently leased space and the high level of demand for properties of this type in the Portland market. We did not want to risk losing this opportunity to others. The anticipated benefits to us from this new lease include: i) space for the potential to install Freeze-Dryers #5, #6, #7 and #8 if justified by market demand in the future, ii) improved space and quality for our powder milling operations by separating our upstream processes (liquid processing) atBuilding 56 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 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. We have been running our equipment and staff close to 100% of capacity in order to fill the backlog of orders. One of our objectives is to create a more sustainable production schedule. However, due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer most of this investment, for the time being. Instead, we initiated the initial steps of this project with a reduced budget of approximately $700,000 atBuilding 175B during the third quarter of 2023. This work was completed during the first quarter of 2024, which provides additional warehousing space and allowed us to move all shipping and receiving functions out ofBuilding 56 to create more space for liquid processing atBuilding 56. In consideration for our landlord agreeing to pay for the cost of those certain tenant improvements, we were obligated to make additional rent payments of $20,000 per month from November of 2023 through June of 2024 and a one-time additional rent payment of $488,743 in July of 2024. During the second quarter of 2024, this payment obligation was re-negotiated so that we are now obligated to…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

The past year or so has been considerably challenging for us. As of July 2022, we had completed almost all of the facility expansion work and new equipment installations needed to increase our production capacity to almost $30 million per year. 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 related to our incoming raw material was detected by standard in-process quality control testing around the end of the third quarter of 2022. Scrapped product from contamination events and other production process losses (largely due to the contamination event around the end of the third quarter) resulted in a total charge to costs of goods sold of $589,000 during 2022. We took immediate steps to address the contamination, and production ran without issue during the balance of the fourth quarter of 2022. By the end of 2022, we had Freeze-Dryer #4 approved for use by the USDA. Just as we began to operate at this higher level of capacity at the beginning of 2023, we were forced to slow down production to remediate a second contamination event related to our incoming raw material. In response to this contamination event, we slowed down our production output as we took the necessary steps to assess and remediate the issues to ensure that any product that is released to market continues to meet all quality standards. At the same time, Freeze-Dryer #2 stopped operating requiring a six-month repair and netting us back to three operating freeze dryers during that period. As of early July 2023, we were back to four operating freeze dryers, and we believed that the contamination events were largely behind us. We subsequently experienced a smaller third contamination event in September 2023 impacting two lots of work-in-progress inventory likely related to our increased level of liquid processing. Although all of the incoming material utilized in this production phase had passed quality control testing, the product failed the quality control tests later in the production process. The production pause necessary to remediate the problem reduced our production output during September and October of 2023. Scrapped product from contamination events and other production process losses resulted in a total charge to costs of goods sold of $527,000 during 2023.

Current wording

The past two years or so has been considerably challenging for us. As our increased production capacity was coming online, a first product contamination event likely related to our incoming raw material (that is sourced from many different cows at many different farms) was detected by standard in-process quality control testing around the end of the third quarter of 2022. We took immediate steps to address the contamination, and production ran without issue during the balance of the fourth quarter of 2022. Subsequently, as we began to operate at a higher level of capacity at the beginning of 2023, we were forced to slow down production again to remediate a second contamination event also likely related to our incoming raw material. We then ran for approximately six months without contamination and then experienced a smaller third contamination event in September of 2023 impacting two lots of Work-in-Progress inventory likely related to our increased level of liquid processing. Although all of the incoming material utilized in this production phase had passed quality control testing, the product failed the quality control tests later in the production process. We have experienced a fourth contamination event impacting four lots of Work-in-Process inventory during the first half of 2024. New remediation steps implemented in response to this fourth event during late April of 2024 appear to be very successful so far because we have run without contamination since then and through the date of the filing of this Quarterly Report. Throughout these contamination events, all product that was sold to market had passed final release testing to meet our quality standards.

Previous wording

We believe that we are on the right track to move past the contamination events that have materially affected our output since late 2022, but we still have more work to do to catch up to product demand. As we continue to optimize our investments to increase production capacity and to implement the corrective actions being taken in response to these contamination events, we aspire to reach stable production of approximately $30 million per year going forward. While we produced far less than we needed during 2023, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. With a positive trend in our quality control test results, we are building back production. As we resume full production, our goal is to be able to produce at least $6 million or more worth of product per quarter, which would annualize to about 80% or more of our estimated $30 million annual production capacity. Finished goods produced increased steadily from approximately $3.3 million to $4 million and further to $5.3 million during the first, second and third quarters of 2023, respectively, before dropping modestly to $5.1 million during the fourth quarter of 2023. The output levels achieved during the months of November and December of 2023 annualize to approximately $26.8 million (or approximately 89% of $30 million), which equates to an average quarterly production of approximately $6.7 million. We were able to increase finished goods production to $7.2 million during the first quarter of 2024, which annualizes to approximately $28.7 million (or approximately 96% of $30 million). This level of production will remain our aspirational goal, but we do not expect that it can be repeated or exceeded on a regular basis.

Current wording

We believe that we are on the right track to move past the contamination events that have materially affected our output since late 2022, but we still have more work to do to catch up to product demand. As we look back at these production contamination events, we believe that the root cause of the initial contaminations was associated with rapid growth at the farms where we acquire our raw material. Having largely remediated that problem, we experienced additional contaminations that we believe were largely caused by our rapidly increased production capacity. As we continue to optimize our investments to increase production capacity and to implement the corrective actions being taken in response to these contamination events, we aspire to reach an annual full production capacity of approximately $30 million per year going forward. While we produced far less than we needed during 2023, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. As we resume full production, our goal is to be able to produce at least $6 million or more worth of product per quarter, which would annualize to about 80% or more of our estimated $30 million annual production capacity to balance production output with regularly scheduled preventative maintenance. Finished goods produced increased steadily from approximately $3.3 million to $4 million and further to $5.3 million during the first, second and third quarters of 2023, respectively, before dropping modestly to $5.1 million during the fourth quarter of 2023. We were able to increase finished goods production to $7.2 million during the first quarter of 2024, which annualizes to approximately $28.7 million (or approximately 96% of $30 million). This level of production will remain our aspirational goal, but we do not expect that it can be repeated or exceeded on a regular basis. During the second quarter of 2024, finished goods production decreased to $5.5 million, which annualizes to approximately $22 million (or approximately 74% of $30 million). During the six-month period ended June 30, 2024, finished goods production was approximately $12.7 million, which annualizes to approximately $25.4 million (or approximately 85% of $30 million).

Previous wording

Since February of 2023, we have been pursuing an insurance claim under our business interruption policy to offset a small portion of the losses that we have incurred related to at least three different product contamination events that took place during 2022 and 2023. While our financial losses are far larger, we are seeking an insurance benefit of approximately $700,000. To date, we have received $250,000. The balance of this claim remains under review by our underwriter. We cannot estimate the likelihood of our success with this claim.

Current wording

Since February of 2023, we have been pursuing an insurance claim under our business interruption policy to offset a small portion of the losses that we have incurred related to the contamination events discussed above. While our financial losses are far larger, we are seeking an insurance benefit of approximately $700,000. To date, we have received $250,000. The balance of this claim remains under review by our underwriter. We cannot estimate the likelihood of our success with this claim.

Previous wording

The increase in sales demand forFirst 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 the cost of 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 forFirst Defense®(with an option to increase our estimated full capacity to approximately $40 million per year in the future with the additional capital investments discussed above) while, at the same time, advancing to the final stages of a very significant FDA product development initiative withRe-Tain®.

Current wording

The increase in sales demand forFirst 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 at risk before the complete in-process quality control test results are available. While this does add time to the overall production cycle, we believe that it has helped us reduce the cost of 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 forFirst Defense® (with an option to increase our estimated full capacity to approximately $40 million per year in the future with the additional capital investments discussed above) while, at the same time, advancing to the final stages of a very significant FDA product development initiative withRe-Tain®.

Previous wording

Our near-term goal is to increase and stabilize supply, regain lost business and re-establish our growth curve. Through continued growth in sales of theFirst Defense® product line and the dedication of additional resources to production, it is our objective to exceed our total product sales of approximately $17.5 million and $18.6 million achieved during the years ended December 31, 2023 and 2022, respectively, as soon as possible. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the four-year period after the market launch ofRe-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.

Current wording

Our near-term goal is to increase and stabilize supply, regain lost business and re-establish our growth curve. If we are able to avoid further significant contamination events and achieve our goal of balancing supplies to meet projected demand by the end of 2024, we anticipate being able to achieve approximately $24 million in sales during 2024. This projection not only aims to meet end-user demand but also to replenish the distribution chain with the necessary buffer stock. This target would surpass our total product sales of approximately $17.5 million and $18.6 million achieved during the years ended December 31, 2023 and 2022, respectively. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the four-year period after the market launch ofRe-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.

Previous wording

Sales during the three-month period ended March 31, 2023 were $3.45 million, representing a 12%, or $464,000, decrease from sales of $3.9 million during the fourth quarter of 2022. Sales during the three-month period ended June 30, 2023 were $3.53 million, representing a 2%, or $86,000, increase over sales during the first quarter of 2023. Sales during the three-month period ended September 30, 2023 were $5.4 million, representing a 53%, or $1.9 million, increase over sales during the second quarter of 2023. Sales during the three-month period ended December 31, 2023 were $5.1 million, representing a 6%, or $301,000, decrease from sales during the third quarter of 2023. Sales during the second half of 2023 were stronger as we were able to increase production. Sales during the six-month period ended December 31, 2023 were $10.5 million, representing a 50%, or $3.5 million, increase over sales of $7 million during the six-month period ended June 30, 2023. Sales during the three-month period ended March 31, 2024 were $7.3 million, representing a 42%, or $2.2 million, increase over sales during the fourth quarter of 2023. Quarter to quarter sales over the past two years are displayed in the following table:

Current wording

Sales during the three-month period ended March 31, 2023 were $3.4 million, representing a 12%, or $464,000, decrease from sales of $3.9 million during the fourth quarter of 2022. Sales during the three-month period ended June 30, 2023 were $3.5 million, representing a 2%, or $86,000, increase over sales during the first quarter of 2023. Sales during the three-month period ended September 30, 2023 were $5.4 million, representing a 53%, or $1.9 million, increase over sales during the second quarter of 2023. Sales during the three-month period ended December 31, 2023 were $5.1 million, representing a 6%, or $301,000, decrease from sales during the third quarter of 2023. Sales during the second half of 2023 were stronger as we were able to increase production. Sales during the six-month period ended December 31, 2023 were $10.5 million, representing a 50%, or $3.5 million, increase over sales of $7 million during the six-month period ended June 30, 2023. Sales during the three-month period ended March 31, 2024 were $7.3 million, representing a 42%, or $2.2 million, increase over sales during the fourth quarter of 2023. Sales during the three-month period ended June 30, 2024 were $5.5 million, representing a 25%, or $1.8 million, decrease from sales during first quarter of 2024. Quarter to quarter sales over the past two years are displayed in the following table:

Previous wording

An increase in selling price and product supply allowed us to capture an 111% increase in sales during the first quarter of 2024 compared to the first quarter of 2023. Domestic sales during the three-month period ended March 31, 2024 increased by 112%, and international sales increased by 104%, in comparison to the three-month period ended March 31, 2023. International sales aggregated 13% of total sales during both of the three-month periods ended March 31, 2024 and 2023. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

Current wording

An increase in selling price and product supply allowed us to capture a 55% increase in sales during the second quarter of 2024 compared to the second quarter of 2023. Domestic sales during the three-month period ended June 30, 2024 increased by 50%, and international sales increased by 109%, in comparison to the three-month period ended June 30, 2023. International sales aggregated 11% and 8% of total sales during the three-month periods ended June 30, 2024 and 2023, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

Previous wording

An increase in selling price and product supply allowed us to capture a 33% increase in sales during the trailing twelve-month period ended March 31, 2024 compared to the trailing twelve-month period ended March 31, 2023. Domestic sales during the trailing twelve-month period ended March 31, 2024 increased by 33%, and international sales increased by 31%, in comparison to the trailing twelve-month period ended March 31, 2023. International sales aggregated 9% of total sales during both of the trailing twelve-month periods ended March 31, 2024 and 2023. The sales results for the trailing twelve-month periods are summarized in the following table (in thousands, except for percentages):

Current wording

An increase in selling price and product supply allowed us to capture a 48% increase in sales during the trailing twelve-month period ended June 30, 2024 compared to the trailing twelve-month period ended June 30, 2023. Domestic sales during the trailing twelve-month period ended June 30, 2024 increased by 47%, and international sales increased by 54%, in comparison to the trailing twelve-month period ended June 30, 2023. International sales aggregated 10% of total sales during both of the trailing twelve-month periods ended June 30, 2024 and 2023. The sales results for the trailing twelve-month periods are summarized in the following table (in thousands, except for percentages):

Previous wording

Sales of theFirst Defense® product line aggregated 99% of our total sales during both of the three-month periods ended March 31, 2024 and 2023. Our sales are generally seasonal with highest demand expected during the first quarter of each year. Most of our growth (when not limited by backlog) is being realized through increased demand and a deliberate strategy to prioritize production capacity towardsTri-Shield First Defense® (the trivalent format of our product delivered via a gel tube), which provides broader protection to calves. The compound annual growth rate (CAGR) of our total product sales was 10.8%, 9.7% and 6.2% during the twelve-year, five-year, and four-year periods ended December 31, 2023, respectively.

Current wording

Sales of theFirst Defense® product line aggregated 99% of our total sales during both of the three-month periods ended June 30, 2024 and 2023 and during both of the six-month periods ended June 30, 2024 and 2023 and during both of the trailing twelve-month periods ended June 30, 2024 and 2023. Our sales are generally seasonal with highest demand expected during the first quarter of each year. The compound annual growth rate (CAGR) of our total product sales was 10.8%, 9.7% and 6.2% during the twelve-year, five-year, and four-year periods ended December 31, 2023, respectively.

Previous wording

We likely lost some business beginning during 2022 and through the first quarter of 2024 as a result of the backlog. During the first half of 2023, the impact of tight supplies hit even harder leaving our customers without product during their busiest calving season. The 2023 production shortage caused largely by certain contamination events may prove to be more detrimental to our growth curve than any prior production shortage (or customer demand excess) because it impacted more customers for a longer period of time. Our inability to timely meet the needs of our customers could result in the loss of some customers who seek alternative scours management products during this period of short supply and some of these customers may not resume purchasing our product when we have eliminated the backlog. While we worked to allocate product directly to certain large customers during this period of short supply, we likely lost some customers that could not 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.

Current wording

We likely lost some business beginning during 2022 and through the first half of 2024 as a result of the backlog. During the first half of 2023, the impact of tight supplies hit even harder leaving our customers without product during their busiest calving season. The 2023 production shortage caused largely by the contamination events discussed above may prove to be more detrimental to our growth curve than any prior production shortage because it depleted distributor inventories and impacted more customers for a longer period of time. Our inability to timely meet the needs of our customers could result in the loss of some customers who seek alternative scours management products during this period of short supply and some of these customers may not resume purchasing our product when we have eliminated the backlog. While we worked to allocate product directly to certain large customers during this period of short supply, we likely lost some customers that could not 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 product supply to exceed demand. 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.

Previous wording

The backlog was reduced from approximately $2.4 million as of December 31, 2021 to approximately $205,000 as of September 30, 2022. In part because of a first contamination event experienced around the end of the third quarter of 2022, our backlog increased to approximately $2.5 million as of December 31, 2022. In part because of a second contamination event experienced during the first quarter of 2023, the backlog continued to increase to approximately $7.5 million as of March 31, 2023, to approximately $8 million as of June 30, 2023, to approximately $8.9 million as of September 30, 2023 and to approximately $9.4 million as of December 31, 2023. We were able to reduce this backlog modestly to approximately $9.1 million as of March 31, 2024 and May 3, 2024. As sales demand increased while our production output was reduced, the value of our order backlog has fluctuated as demonstrated in the following table:

Current wording

The backlog was reduced from approximately $2.4 million as of December 31, 2021 to approximately $205,000 as of September 30, 2022. In part because of a first contamination event experienced around the end of the third quarter of 2022, our backlog increased to approximately $2.5 million as of December 31, 2022. In part because of a second contamination event experienced during the first quarter of 2023, the backlog continued to increase to approximately $7.5 million as of March 31, 2023, to approximately $8 million as of June 30, 2023, to approximately $8.9 million as of September 30, 2023 and to approximately $9.4 million as of December 31, 2023. We were able to reduce this backlog modestly to approximately $9.1 million as of March 31, 2024 and then reduce it further to approximately $8.9 million and $7.9 million as of June 30, 2024 and August 6, 2024, respectively. As sales demand increased while our production output was reduced, the value of our order backlog has fluctuated as demonstrated in the following table:

Previous wording

We sell our ownCMT, which is used to detect somatic cell counts in milk. Sales ofCMT increased by 5%, or $2,000, to $37,000 during the three-month period ended March 31, 2024, in comparison to the three-month period ended March 31, 2023. Sales ofCMT increased by 16%, or $25,000, to $179,000 during the trailing twelve-month period ended March 31, 2024, in comparison to the trailing twelve-month period ended March 31, 2023. Sales ofCMT aggregated approximately 1% of our total product sales during the periods reported.

Current wording

We also sell our ownCMT, which is used to detect somatic cell counts in milk. Sales ofCMT aggregated approximately 1% of our total product sales during the periods reported. Sales ofCMT decreased by 15%, or $8,000, to $43,000 during the three-month period ended June 30, 2024, in comparison to the three-month period ended June 30, 2023. Sales ofCMT decreased by 7%, or $6,000 during the six-month period ended June 30, 2024 in comparison to the six-month period ended June 30, 2023. Sales ofCMT increased by 3%, or $5,000, to $172,000 during the trailing twelve-month period ended June 30, 2024, in comparison to the trailing twelve-month period ended June 30, 2023.

Previous wording

Effective January 1, 2022, we increased our selling price of theFirst Defense®product line by approximately 5% andCMTby approximately 7%. Effective January 1, 2023, we increased our selling price of theFirst Defense®product line by approximately 4% (range of 2% to 8%) andCMT by approximately 5%. Effective November 15, 2023, we adjusted the pricing of backlogged orders to accommodate our rising costs of goods and eliminate any irrelevant purchase orders. We notified distributors that all pending orders would either be removed from our system or modified (with their authorization) to reflect the new pricing structure representing an increase of approximately 8%. Subsequently, most distributors opted to increase the prices on these older purchase orders to retain them on the list for fulfillment. The backlog of orders was worth approximately $9 million just before this most recent price change. Also effective November 15, 2023, we increase our selling price forCMT by approximately 12%.

Current wording

Effective January 1, 2022, we increased our selling price of theFirst Defense®product line by approximately 5% andCMT by approximately 7%. Effective January 1, 2023, we increased our selling price of theFirst Defense®product line by approximately 4% (range of 2% to 8%) andCMT by approximately 5%. Effective November 15, 2023, we adjusted the pricing of backlogged orders to accommodate our rising costs of goods and eliminate any irrelevant purchase orders. We notified distributors that all pending orders would either be removed from our system or modified (with their authorization) to reflect the new pricing structure representing an increase of approximately 8%. Subsequently, most distributors opted to increase the prices on these older purchase orders to retain them on the list for fulfillment. The backlog of orders was worth approximately $9 million just before this most recent price change. Also effective November 15, 2023, we increased our selling price forCMT by approximately 12%.

Previous wording

The change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales during the three-month periods and the trailing twelve-month periods ended March 31, 2024 and 2023 are summarized in the following tables (in thousands, except for percentages):

Current wording

The change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales during the three-month periods, the six-month periods and the trailing twelve-month periods ended June 30, 2024 and 2023 are summarized in the following tables (in thousands, except for percentages):

Previous wording

The gross margin during recent periods was significantly less than what we have experienced historically and significantly less than what we anticipate going forward. Directionally, we are pleased to see the shorter, more recent period higher (at 32%) than the trailing twelve-month period ended March 31, 2024. Gross margin has been running at less than our 45% target largely because of the significant decrease in sales during 2023, which was caused by a reduction in production output, not by a reduction in demand. The reduction in production output was, in turn, largely the result of our decision to slow down our production rate while remediating the production contamination events. During 2023, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. The gross margin as a percentage of product sales was 22%, 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The production contamination events and other production process losses experienced during the three-month periods ended March 31, 2024 and 2023 resulted in scrapped inventory valued at approximately $117,000 and $236,000, respectively. Absent these write-offs, our gross margin as a percentage of product sales would have been approximately 33% and 16% during the three-month periods ended March 31, 2024 and 2023, respectively. The product contamination events and other production process losses experienced during the years ended December 31, 2023 and 2022 resulted in scrapped inventory valued at approximately $527,000 and $589,000, respectively. Absent these write-offs, our gross margin as a percentage of product sales would have been approximately 25% and 44% during the years ended December 31, 2023 and 2022, respectively. Although these types of losses are expected to happen from time to time in the production of a biological product such as ours, we believe we have mitigated the risk of reoccurrence of such losses through the implementation of certain new quality control steps and manufacturing processes and facility improvements.

Current wording

The gross margin during recent periods was significantly less than what we have experienced historically and significantly less than what we anticipate going forward. Gross margin has been running at less than our 40% target (including depreciation). The recent reduction in production output was largely the result of our decision to slow down our production rate while remediating the production contamination events discussed above. During this period, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. As we build back sales, we are increasing the amount of gross margin earned compared to prior periods and working to improve the gross margin as a percentage of sales. The gross margin as a percentage of product sales was 22%, 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The 22% gross margin percentage during the three-month period ended June 30, 2024 and the year ended December 31, 2023 (with the 2023 annual gross margin including even lower gross margin percentages during the first quarter of 2023 and during the six-month period ended June 30, 2023) was our lowest ever. The following table displays the relationship between sales and gross margin during recent periods (in thousands except for percentages):

Previous wording

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. TheTri-Shield® product format is more complex (i.e., three antibodies versus two antibodies forDual-Force®) making it more costly to produce, and both the bivalent and trivalent gel product formats are more expensive to produce than the bolus format. These new formats are creating sales growth for us, and we are focused on increasing total gross margin dollars, even if that is accomplished with a lower gross margin as a percentage of sales. A number of other factors contribute to the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter and from year to year. We also invest to sustain compliance with current Good Manufacturing Practices (cGMP) in our production processes. Increasing production can be more expensive in the initial stages. To achieve our inventory production growth objectives, we continue to acquire more raw material (colostrum) from many more cows at several new farms. During this expansion phase, colostrum quality can be more variable. Additionally, the biological yields from our raw material are always variable, which impacts our costs of goods sold in a similar way. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on the time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. As is the case with any vaccine program, animals respond less effectively to their first exposure to a new vaccine, and thereafter the effectiveness of their immune response improves in response to subsequent immunizations. While this variability impacts our costs of producing inventory, the commercial value of ourFirst 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. In the past, 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 of approximately 45%.

Current wording

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. TheTri-Shield® product format is more complex (i.e., three antibodies versus two antibodies forDual-Force®) making it more costly to produce, and both the bivalent and trivalent gel product formats are more expensive to produce than the bolus format. These new formats are creating sales growth for us, and we are focused on increasing total gross margin dollars, even if that is accomplished with a lower gross margin as a percentage of sales. A number of other factors contribute to the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter and from year to year. We also invest to sustain compliance with current Good Manufacturing Practices (cGMP) in our production processes. Increasing production can be more expensive in the initial stages. To achieve our inventory production growth objectives, we continue to acquire more raw material (colostrum) from many more cows at several new farms. During this expansion phase, colostrum quality can be more variable. Additionally, the biological yields from our raw material are always variable, which impacts our costs of goods sold in a similar way. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on the time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. As is the case with any vaccine program, animals respond less effectively to their first exposure to a new vaccine, and thereafter the effectiveness of their immune response improves in response to subsequent immunizations. While this variability impacts our costs of producing inventory, the commercial value of ourFirst 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. In the past, we have been able to reduce the impact of cost increases by implementing yield improvements.

Previous wording

Additionally, 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, 2023 and into 2024. 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.

Current wording

Additionally, 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, utilities and services increased significantly during 2021 and that trend continued during 2022, 2023 and into 2024. 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. 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 including depreciation equal to 40% of product sales. This goal has been reduced from prior projections given the lower rates experienced during 2023 and to date in 2024.

Previous wording

Overview: The majority of our product development expenses pertain to the development ofRe-Tain®. During the three-month period ended March 31, 2024, product development expenses increased by 14%, or $152,000, to $1.3 million in comparison to $1.1 million during the three-month period ended March 31, 2023. Product development expenses aggregated 17% and 32% of product sales during the three-month periods ended March 31, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $367,000 and $374,000 during the three-month periods ended March 31, 2024 and 2023, respectively. Approximately $298,000 and $314,000 of these non-cash expenses were comprised of depreciation expenses pertaining to our DS facility and equipment for**Re-Tain®during the three-month periods ended March 31, 2024 and 2023, respectively. We began depreciating this asset when the Certificate of Occupancy for the new construction was issued during the fourth quarter of 2017, but sales of our new product cannot be realized until we achieve FDA approval. We expect product development expenses to decrease during 2024 as inventory production ofRe-Tain®**for implementation of our controlled launch strategy described below (pending FDA approval) is completed.

Current wording

Overview: The majority of our product development expenses pertain to the development ofRe-Tain®. During the three-month period ended June 30, 2024, product development expenses decreased by 6%, or $69,000, to $1.0 million in comparison to $1.1 million during the three-month period ended June 30, 2023. Product development expenses aggregated 19% and 31% of product sales during the three-month periods ended June 30, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $377,000 and $375,000 during the three-month periods ended June 30, 2024 and 2023, respectively. Approximately $299,000 and $315,000 of these non-cash expenses were comprised of depreciation expenses pertaining to our DS facility and equipment for**Re-Tain®during the three-month periods ended June 30, 2024 and 2023, respectively. During the six-month period ended June 30, 2024, product development expenses increased by 4%, or $83,000, to $2.3 million in comparison to $2.2 million during the six-month period ended June 30, 2023. Product development expenses aggregated 18% and 32% of product sales during the six-month periods ended June 30, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $744,000 and $749,000 during the six-month periods ended June 30, 2024 and 2023, respectively. Approximately $597,000 and $629,000 of these non-cash expenses were comprised of depreciation expenses pertaining to our DS facility and equipment forRe-Tain®during the six-month periods ended June 30, 2024 and 2023, respectively. We began depreciating this asset when the Certificate of Occupancy for the new construction was issued during the fourth quarter of 2017, but sales of our new product cannot be realized until we achieve FDA approval. We expect product development expenses to decrease during the second half of 2024 as inventory production ofRe-Tain®**for implementation of our controlled launch strategy described below (pending FDA approval) has now been largely completed.

Previous wording

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 beforeRe-Tain****®product sales can be initiated in the United States. Implementing Nisin DS (the active pharmaceutical ingredient) production, which is a required component of the CMC Technical Section, has been the most lengthy part of this project. We previously entered into an agreement with a multi-national pharmaceutical ingredient manufacturer for our commercial-scale supplies of DS. However, we determined during 2014 that the agreement did not offer us the most advantageous supply arrangement in terms of either cost or long-term dependability. As a result, we presented this product development opportunity to a variety of large and small animal health companies. While such a corporate partnership could have provided access to a much larger sales and marketing team and allowed us to avoid the large investment in a commercial-scale production facility, we concluded that a partner would have taken an unduly large share of the gross margin from all future product sales ofRe-Tain****®. However, the regulatory and marketing feedback that we received from prospective partners, following their due diligence, was positive. During the third quarter of 2014, we completed an investment in facility modifications and processing equipment necessary to produce our DS at small-scale at our 56 Evergreen Drive facility. This small-scale facility was used to: i) expand our process knowledge and controls, ii) establish operating ranges for critical process parameters, iii) conduct product stability studies, iv) optimize process yields and v) determine the cost of production. We believe these efforts have reduced the risks associated with our investment in the commercial-scale DS production facility. Having raised equity during 2016 and 2017, we were able to move away from these earlier partnering strategies and assume control over the commercial-scale manufacturing process in our own facility. During the fourth quarter of 2015, we acquired land near our existing Portland facility for the construction of a new commercial-scale DS production facility. We commenced construction of this facility during the third quarter of 2016 and completed construction during the fourth quarter of 2017. Equipment installation and qualification was initiated during the third quarter of 2017 and completed during the third quarter of 2018. Total construction and equipment costs aggregated approximately $20.8 million. With construction of the facility complete, we continue to work with outside parties to investigate improvements to our DS production yields as well as potential efficacy enhancements.

Current wording

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 beforeRe-Tain****® product sales can be initiated in the United States. Implementing DS production, which is a required component of the CMC Technical Section, has been the 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 ofRe-Tain****®. However, the regulatory and marketing feedback that we received from prospective partners, following their due diligence, was positive. During the third quarter of 2014, we completed an investment in facility modifications and processing equipment necessary to produce our DS at small-scale at our 56 Evergreen Drive facility. This small-scale facility was used to: i) expand our process knowledge and controls, ii) establish operating ranges for critical process parameters, iii) conduct product stability studies, iv) optimize process yields and v) determine the cost of production. We believe these efforts have reduced the risks associated with our investment in the commercial-scale DS production facility. Having raised equity during 2016 and 2017, we were able to move away from these earlier partnering strategies and assume control over the commercial-scale manufacturing process in our own facility. During the fourth quarter of 2015, we acquired land near our existing Portland facility for the construction of a new commercial-scale DS production facility. We commenced construction of this facility during the third quarter of 2016 and completed construction during the fourth quarter of 2017. Equipment installation and qualification was initiated during the third quarter of 2017 and completed during the third quarter of 2018. Total construction and equipment costs aggregated approximately $20.8 million. With construction of the facility complete, we continue to work with outside parties to investigate improvements to our DS production yields as well as potential efficacy enhancements.

Previous wording

Under the FDA’s phased submission process, we made a first-phased submission covering just the DS during the first quarter of 2019. The first-phased DS submission included data from the DS Registration Batches produced at commercial scale in our new DS manufacturing facility. This first-phased submission was followed by a second-phased submission covering both DS and DP, during the first quarter of 2021. The second-phased DS and DP submission responded to comments raised by the FDA regarding the first-phased DS submission and included detailed information about the manufacturing process and controls for DP. One of the key components of the second-phased DS and DP submission was also demonstrating stability of the product through expiry. During the third quarter of 2021, the FDA issued a Technical Section Incomplete Letter with regard to this second-phased DS and DP submission. This response was not unexpected as it is common for the FDA to issue queries and comments, especially related to an aseptic DP submission. We made a second submission of the DS and DP Technical Section during the first quarter of 2022. During the third quarter of 2022, we received a Technical Section Incomplete Letter from the FDA with regards to this second DS and DP submission of the CMC Technical Section. The submission required that internal and external laboratories re-develop and qualify several analytical tests and associated controls. We made this third DS and DP submission of the CMC Technical Section during the third quarter of 2023.

Current wording

Under the FDA’s phased submission process, we made a first-phased DS submission (without the DP submission) during the first quarter of 2019 that included data from the DS Registration Batches produced at commercial scale in our new DS manufacturing facility. This first-phased submission was followed by a second-phased submission covering both DS and DP, during the first quarter of 2021. The second-phased DS and DP submission responded to comments raised by the FDA regarding the first-phased DS submission and included detailed information about the manufacturing process and controls for DP. One of the key components of the second-phased DS and DP submission was also demonstrating stability of the product through expiry. During the third quarter of 2021, the FDA issued a Technical Section Incomplete Letter (Incomplete Letter) with regard to this second-phased DS and DP submission. This response was not unexpected as it is common for the FDA to issue queries and comments, especially related to an aseptic DP submission. We made a second DS and DP submission of the CMC Technical Section during the first quarter of 2022. During the third quarter of 2022, we received an Incomplete Letter from the FDA with regards to this second DS and DP submission of the CMC Technical Section. The 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.

Previous wording

In late October of 2023, the FDA notified us that it was refusing to review our submission because Norbrook was identified as the DP manufacturer in our submission, but the FDA was expecting that we would identify our own in-house services as the DP manufacturer (instead of Norbrook). This miscommunication was due to a statement in our April of 2022 response to an FDA 483 inspectional observation in which we noted that Norbrook was expected to exit the DP manufacturing agreement with us at the end of 2022, which would have required us to procure and install some long lead time equipment (filler and labeler) in our DS suite in late 2022. Instead, we were able to extend the agreement with Norbrook to complete the manufacture of DP inventory for the initial commercial sales under our controlled launch strategy. As a result, we continued to identify Norbrook as our DP manufacturer. In fact, Norbrook has recently substantially completed the production of the launch goods, and this work has been extended into 2024 with final product packaging occurring post-approval. As a result of this miscommunication, we were required to re-submit the CMC Technical Section in November of 2023. On May 10, 2024, the FDA issued a CMC Technical Section Incomplete Letter (Incomplete Letter) to us. Pursuant to the Incomplete Letter, the FDA has provided some minor questions about our submission requiring a re-submission of the CMC Technical Section, which is typically subject to a six-month review. However, the FDA has indicated that this re-submission potentially could be handled through a shortened review period because the open items are not complex. Having reviewed the Incomplete Letter, we agree with this assessment. Most critical to the timeline, however, is that the FDA has also required that we not re-submit the CMC Technical Section until inspectional observations at the facilities of our DP contract manufacturer are resolved. Given the unique facts and circumstances, we are working with the FDA and our DP contract manufacturer to obtain an expedited review. If the FDA issues a Technical Section Complete Letter in response to this fourth submission, we believe that we could commence commercial sales approximately three to four months later, allowing time for a two-month Administrative New Animal Drug Application review period and product packaging and shipping.

Current wording

In late October of 2023, the FDA notified us that it was refusing to review our third submission because Norbrook was identified as the DP manufacturer in our submission, but the FDA 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 of 2022 response to an FDA 483 inspectional observation in which we noted that Norbrook was expected to exit the DP manufacturing agreement with us at the end of 2022, which would have required us to procure and install some long lead time equipment (filler and labeler) in our DS suite in late 2022. Instead, we were able to extend the agreement with Norbrook to complete the manufacture of DP inventory for the initial commercial sales under our controlled launch strategy. As a result, we continued to identify Norbrook as our DP manufacturer. As a result of this miscommunication, we were required to re-submit our third submission the CMC Technical Section in November of 2023. During May of 2024, the FDA issued another Incomplete Letter to us. Pursuant to this Incomplete Letter, the FDA has provided some minor questions about our third submission requiring a fourth submission of the CMC Technical Section. The FDA also noted that all inspectional observations at our DS facility must be cleared before this fourth submission could be made. The FDA notified us during the second quarter of 2024 that the inspectional observation at our DS facility had been cleared.

Previous wording

While being prudent with how much cash we invest into inventory that would have short expiry dating if market launch is delayed, we built more DS inventory during 2022 and 2023 to support the initial commercial sales ofRe-Tain****®. As discussed above, our contract manufacturer has agreed to convert this DS to DP into 2024. We anticipate a pause in the supply of product to market after the initial launch goods are sold and before the product is re-launched with DP produced by our in-house aseptic filling operations (if that investment is re-funded) or by an alternative contractor that we have not identified to date. We have produced adequate inventory to implement our limited distribution, controlled launch strategy with expiration dating estimated at between the second quarter of 2025 and the first quarter of 2026, subject to the final product shelf-life disposition by the FDA. We presently have no arrangement in place to aseptically fill new DP inventory and are planning to reduce operating costs at our DS production facility until initial market acceptance (and perhaps the interest of a marketing partner) justifies a new arrangement for aseptic filling and the production of additional inventory.

Current wording

Upon FDA approval, we intend to implement our previously disclosed limited distribution, controlled launch strategy with product expiration dating estimated at between the second quarter of 2025 and the first quarter of 2026, subject to confirmation of final product shelf-life disposition by the FDA. While being prudent with how much cash we invested into inventory that would have short expiry dating if market launch is delayed, we built more DS inventory during 2022 and 2023 to support the initial commercial sales ofRe-Tain****®. We presently have no arrangement in place to aseptically fill new DP inventory and are planning to reduce operating costs at our DS production facility until initial market acceptance (and perhaps the interest of a marketing partner) justifies a new arrangement for aseptic filling and the production of additional inventory. We anticipate a pause in the supply of product to market after the initial launch goods are sold and before the product is re-launched with DP produced by our in-house aseptic filling operations (if that investment is re-funded) or by an alternative contractor that we have not identified to date.

Previous wording

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 is providing DP for our controlled launch with production into 2024. We believe this will enable us to commence sales ofRe-Tain****® without delay upon receipt of the anticipated FDA approval.

Current wording

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 is providing DP for our controlled launch with production into 2024.

Previous wording

Our potential alternative third-party options for the formulation and aseptic filling services that are presently being performed by Norbrook are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). During the first quarter of 2022, we initiated an investment in the installation of equipment to produce DP at our own facility at 33 Caddie Lane. Given the loss in gross margin during the first ten months of 2023 caused by the slowdown in production output that was necessary to remediate the production contamination events, we decided to defer the completion of this investment for the time being. Subject to the timing of our installation and validation work, we anticipate FDA approval of this facility (which is a requirement for commercial manufacturing) at least two years from when this project is restarted allowing for two six-month review cycles. This will be a post-approval submission. If we decide to complete our potential future DP manufacturing facility, such facility will, upon completion, be subject to FDA inspection and approval. We anticipate it would have enough formulation and aseptic filling capacity to exceed the expected production capacity of our DS facility, which is approximately $7 million to $10 million in annual sales. This production capacity estimate is based on our assumptions as to product pricing and does not yet reflect inventory build strategies in advance of product approval or ongoing yield improvement initiatives. Establishing our own DP formulation and aseptic filling capability would provide us with the longer-term advantage of controlling the manufacturing process forRe-Tain****®in one facility, thereby potentially reducing our manufacturing costs and eliminating international cold chain shipping logistics and costs. The DP formulation and aseptic filling operation, if completed, will be located in existing facility space that we had intended to utilize to double our DS production capacity if warranted by sales volumes following market launch. As a result, if we decide to complete this DP facility (rather than utilizing a third party for these services), we would need to explore alternative strategies (in parallel with ongoing DS yield improvement initiatives) to expand our DS production capacity. This integrated manufacturing capability forRe-Tain****®would substantially reduce our dependence on third parties. Upon completion of our formulation and aseptic filling facility, the only significant third-party input forRe-Tain****® would be the DP syringes. It is anticipated that Hubert De Backer of Belgium (HDB) will supply these syringes in accordance with purchase orders that we submit. HDB is a syringe supplier for many of the largest participants in the human and veterinary medical industries, and with whom Norbrook presently works. Based on HDB’s performance history and reputation in the industry, we are confident …

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 atBuilding 33. Given the loss in gross margin during the first ten months of 2023 caused by the slowdown in production output that was necessary to remediate the production contamination events discussed above, we decided to defer the completion of this investment for the time being. Subject to the timing of our installation and validation work, we anticipate FDA approval of this facility (which is a requirement for commercial manufacturing) at least two years from when this project is restarted allowing for two six-month review cycles. This will be a post-approval submission. If we decide to complete our potential future DP manufacturing facility, such facility will, upon completion, be subject to FDA inspection and approval. We anticipate it would have enough formulation and aseptic filling capacity to exceed the expected production capacity of our DS facility, which is approximately $7 million to $10 million in annual sales. This production capacity estimate is based on our assumptions as to product pricing and does not yet reflect inventory build strategies in advance of product approval or ongoing yield improvement initiatives. Establishing our own DP formulation and aseptic filling capability would provide us with the longer-term advantage of controlling the manufacturing process forRe-Tain****® in one facility, thereby potentially reducing our manufacturing costs and eliminating international cold chain shipping logistics and costs. The DP formulation and aseptic filling operation, if completed, will be located in existing facility space that we had intended to utilize to double our DS production capacity if warranted by sales volumes following market launch. As a result, if we decide to complete this DP facility (rather than utilizing a third party for these services), we would need to explore alternative strategies (in parallel with ongoing DS yield improvement initiatives) to expand our DS production capacity. This integrated manufacturing capability forRe-Tain****® would substantially reduce our dependence on third parties. Upon completion of our formulation and aseptic filling facility, the only significant third-party input forRe-Tain****® would be the DP syringes. It is anticipated that Hubert De Backer of Belgium (HDB) will supply these syringes in accordance with purchase orders that we submit. HDB is a syringe supplier for many of the largest participants in the human and veterinary medical industries, and with whom Norbrook presently works. Based on HDB’s performance history and reputation in the industry, we …

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Other product development initiatives: Our second most important product development initiative has been focused on other improvements, line extensions or additions to ourFirst Defense® product line. We are currently working to establish USDA claims for our bivalent bulk powder formulation ofFirst 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.

Current wording

Other product development initiatives: Our second most important product development initiative has been focused on other improvements, line extensions or additions to ourFirst Defense® product line. The bolus format ofFirst Defense® andTri-Shield First Defense® have been listed with the Organic Materials Research Institute (OMRI) since 2013 and 2019, respectively. This means they can be used on organic farms. During the third quarter of 2024, the gel tube format ofFirst Defense® also became OMRI listed. We are currently working to establish USDA claims for our bivalent bulk powder formulation ofFirst Defense Technology®. During the third quarter of 2024, we entered into a research agreement with the Mayo Clinic, a non-profit, educational, research and healthcare institution, to explore potential applications of Nisin in certain human surgical situations. 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.

Previous wording

During the three-month period ended March 31, 2024, sales and marketing expenses decreased by 9%, or $79,000, to $801,000 in comparison to $879,000 during the three-month period ended March 31, 2023, amounting to 11% and 26% of product sales during the three-month periods ended March 31, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $44,000 and $48,000 during the three-month period ended March 31, 2024 and 2023, respectively. Our current budgetary guideline is to keep these expenses under 20% of total sales. We continue to leverage the efforts of our small sales force by using animal health distributors.

Current wording

During the three-month period ended June 30, 2024, sales and marketing expenses increased by 37%, or $265,000, to $985,000 in comparison to $720,000 during the three-month period ended June 30, 2023, amounting to 18% and 20% of product sales during the three-month periods ended June 30, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $44,000 and $39,000 during the three-month period ended June 30, 2024 and 2023, respectively. During the six-month period ended June 30, 2024, sales and marketing expenses increased by 12%, or $187,000, to $1.8 million in comparison to $1.6 million during the six-month period ended June 30, 2023, amounting to 14% and 23% of product sales during the six-month periods ended June 30, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $88,000 and $87,000 during the six-month period ended June 30, 2024 and 2023, respectively. Our current budgetary guideline is to keep these expenses under 20% of total sales. We continue to leverage the efforts of our small sales force by using animal health distributors.

Previous wording

**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.

Current wording

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 sub clinically 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.

Previous wording

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 ofRe-Tain®. Based on consultations with industry experts and key opinion leaders, we have opted to carefully control the launch of this novel product over the first 18 to 24 months or so 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 ofRe-Tain®to a level that enables our sales team to select the optimal dairy farms at which to introduceRe-Tain®and to limit the initial number of participating farms so that the desired levels of support and guidance relating to effective usage ofRe-Tain®can be provided with our available resources. We recognize that it will be important to manage expectations from the producer to the milk processor because it is possible that processors may express reservations with regards to the zero milk discard claim. Our controlled launch strategy reduces the amount of inventory that we would need to build at risk before regulatory approval is achieved. This strategic choice means that we have elected not to pursue an alternative strategy that might have maximized short-term, initial sales quickly through a mass market approach where we provide product to distribution and let them sell it to as many farms as possible. While we are dedicated to increasing our sales revenue, we must consider the damage a mass market strategy could cause to the long-term value of the product. We have seen products sold by much larger companies that were substantially damaged by such failed market launch strategies. We continue to develop detailed launch plans, focusing on the readiness of dairy operators to successfully introduceRe-Tain® to their herds. We believe that these prudent steps, while potentially leading to lower initialRe-Tain® revenues, may create a smooth and successful launch and could safeguard the longer term performance of our investment inRe-Tain®. We also believe that the operational adjustments and accommodations that dairy farmers will need to make to effectively useRe-Tain® and avoid the potential problems described underPART II: OTHER INFORMATION, ITEM 1A – RISK FACTORS, 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 ofRe-Tain®.

Current wording

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 ofRe-Tain®. Based on consultations with industry experts and key opinion leaders, we have opted to carefully control the launch of this novel product over the first 18 to 24 months or so 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 ofRe-Tain®to a level that enables our sales team to select the optimal dairy farms at which to introduceRe-Tain®and to limit the initial number of participating farms so that the desired levels of support and guidance relating to effective usage ofRe-Tain®can be provided with our available resources. We recognize that it will be important to manage expectations from the producer to the milk processor because it is possible that processors may express reservations with regards to the zero milk discard claim. Our controlled launch strategy reduces the amount of inventory that we would need to build at risk before regulatory approval is achieved. This strategic choice means that we have elected not to pursue an alternative strategy that might have maximized short-term, initial sales quickly through a mass market approach where we provide product to distribution and let them sell it to as many farms as possible. While we are dedicated to increasing our sales revenue, we considered available product supply and the damage a mass market strategy could cause to the long-term value of the product. We have seen products sold by much larger companies that were substantially damaged by such failed market launch strategies. We continue to develop detailed launch plans, focusing on the readiness of dairy operators to successfully introduceRe-Tain® to their herds. We believe that these prudent steps, while potentially leading to lower initialRe-Tain® revenues, may create a smooth and successful launch and could safeguard the longer term performance of our investment inRe-Tain®. We also believe that the operational adjustments and accommodations that dairy farmers will need to make to effectively useRe-Tain® and avoid the potential problems described underPART II: OTHER INFORMATION, ITEM 1A – RISK FACTORS, 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 ofRe-Tain®.

Previous wording

During the three-month period ended March 31, 2024, administrative expenses decreased by 6%, or $35,000, to $532,000 in comparison to $567,000 during the thee-month period ended March 31, 2023. Administrative expenses amounted to 7% and 16% of product sales during the three-month periods ended March 31, 2024 and 2023, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $46,000 and $50,000 during the three-month periods ended March 31, 2024 and 2023, respectively. We strive to be efficient with these expenses while funding all the legal, audit and other costs associated with being a publicly-held company. Given the growth in our business, our administrative staff has increased to four employees reporting to our CEO. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more active investor relations program. Given travel restrictions related to the COVID-19 pandemic, this initiative has pivoted to a virtual meeting format, which is less expensive. Having experienced this efficiency, it is our intent to continue with the same strategy, for the most part, even as travel restrictions have been 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.

Current wording

During the three-month period ended June 30, 2024, administrative expenses increased by 14%, or $73,000, to $602,000 in comparison to $529,000 during the three-month period ended June 30, 2023. Administrative expenses amounted to 11% and 15% of product sales during the three-month periods ended June 30, 2024 and 2023, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $55,000 and $47,000 during the three-month periods ended June 30, 2024 and 2023, respectively. During the six-month period ended June 30, 2024, administrative expenses increased by 3%, or $37,000, to just over $1.1 million in comparison to just under $1.1 million during the six-month period ended June 30, 2023. Administrative expenses amounted to 9% and 16% of product sales during the six-month periods ended June 30, 2024 and 2023, respectively. Administrative expenses included non-cash depreciation and stock-based compensation expenses of $101,000 and $96,000 during the six-month periods ended June 30, 2024 and 2023, respectively. We strive to be efficient with these expenses while funding all the legal, audit and other costs associated with being a publicly-held company. Given the growth in our business, our administrative staff has increased to four employees reporting to our CEO. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more active investor relations program. Given travel restrictions related to the COVID-19 pandemic, this initiative has pivoted to a virtual meeting format, which is less expensive. Having experienced this efficiency, it is our intent to continue with the same strategy, for the most part, even as travel restrictions have been 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.