IMMUCELL CORP DE

Previous 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.

Current wording

Net cash provided by operating activities was $361,000 during the nine-month period ended September 30, 2024 in contrast to net cash (used for) operating activities of ($4) million during the nine-month period ended September 30, 2023. The $4.3 million improvement in net cash provided by operating activities between the two nine-month periods was largely caused by the $2 million decrease in the net loss and a $1.7 million swing from cash (used for) inventory build to an inventory reduction. Our inventory balance decreased by $351,000 to $7.5 million as of September 30, 2024 from $7.8 million as of December 31, 2023. Interest expense (excluding amortization of debt issuance and debt discount costs) was $401,000 and $311,000 during the nine-month periods ended September 30, 2024 and 2023, respectively. Our debt bears interest at fixed rates. The blended interest rate on the debt outstanding as of September 30, 2024 and December 31, 2023 was 4.51% per annum. We anticipate that interest expense (excluding amortization of debt issuance and debt discount costs) will be $524,000 and $452,000 during the years ending December 31, 2024 and 2025, respectively. Our total non-cash depreciation, amortization and stock-based compensation expense was approximately $2.3 million during both of the nine-month periods ended September 30, 2024 and 2023. We anticipate that depreciation expense (largely pertaining to Re-Tain®), while not affecting our cash flows from operations, will be a significant factor in creating annual net operating losses until and unless product sales increase sufficiently to offset these non-cash expenses.

Previous 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.

Current wording

Net cash used for investing activities was $265,000 during the nine-month period ended September 30, 2024 in comparison to net cash used for investing activities of $1.9 million during the nine-month period ended September 30, 2023 consisting primarily of cash spent to fund the purchase of property, plant and equipment. To conserve cash at this time, we have deferred all large dollar capital expenditure projects.

Previous 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.

Current wording

Net cash provided by financing activities was $2.7 million during the nine-month period ended September 30, 2024 in comparison to net cash provided by financing activities of $2.1 million during the nine-month period ended September 30, 2023. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $11 million and $12 million as of September 30, 2024 and December 31, 2023, respectively. Debt principal repayments (excluding the line of credit) aggregated $1.1 million and $829,000 during the nine-month periods ended September 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 September 30, 2024 or December 31, 2023. Financing activities included a $3 million debt financing during the nine-month period ended September 30, 2023. 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 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 October 30, 2024, we had sold 1,160,725 shares under the at the market offering conducted pursuant to the ATM Agreement. Net proceeds through October 30, 2024 (net of approximately $152,000 in upfront legal, accounting and other fees and approximately $132,000 in sales commissions) were approximately $4,114,000. Gross proceeds from these sales during the three-month periods ended June 30, 2024 and September 30, 2024 were approximately $418,000 and $3.7 million, respectively. The ATM Agreement gives our board the flexibility to evaluate the potential uses of the proceeds while considering the cost of dilution in real time. This funding has provided a very productive financial bridge for us to fund our operations, while we work to improve our gross margin and reduce product development expenses. While the capital raised is not enough to fund larger capital expenditure investments, such as further increasingFirst Defense® production capacity or building our own facility for the aseptic filling services forRe-Tain®, it has allowed us to release funding for certain smaller and necessary capital expenditures. Further, as we fill the order backlog, we will require additional capital to fund an anticipated increase in inventory levels.

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 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.

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. 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. 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

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.

Current wording

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 from approximately $16.5 million to an estimate of approximately $30 million per year (with an option to increase further to approximately $40 million in the future). 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. 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 have been experiencing.

Previous 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):

Current wording

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.

Previous 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.

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 liquid processing capacity by 100% and our freeze-drying capacity by 50%. 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 Center for Veterinary Biologics, U.S. Department of Agriculture (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 56from 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® 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.

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 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) and iii) much needed additional warehouse space. We have been running our equipment and staff close to 100% of capacity in order to fill the backlog of orders. One of our objectives is to create a more sustainable production schedule. Freeze-Dryer #5 is the key piece of equipment required to allow us to increase our estimated annual production capacity to above $30 million. Based on past experience, we are planning for approximately 18 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. However, due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer most of this investment, for the time being. Instead, we initiated the initial steps 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 provided 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 and after two negotiated amendments, we are now obligated to make additional rent payments of $20,000 per month through June of 2025 and a final additional rent payment of $248,743 in July of 2025.

Previous 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.

Current wording

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 experienced a fourth contamination event impacting three lots of Work-in-Process inventory during the first three and a half months of 2024. New remediation steps implemented in response to this fourth event during the second half of April of 2024 appear to 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 USDA-required quality standards.

Previous wording

Our proprietary production process allows us to create an effective product out of a non-aseptic starting raw material. This requires a careful monitoring of the tradeoff between the benefit of adding more heat for longer periods of time to reduce bacterial load against the alternative benefit of less heat for shorter periods of time to preserve more antibody content. Although using more heat could potentially reduce bacterial load, our yield is higher when we use less heat. For example, we know that putting our Work-in-Process inventory through freeze/thaw cycles is not beneficial to yield and increases the risk of contamination. One effective improvement we have implemented, where appropriate, is to lengthen the time of a heat treatment step instead of running two shorter heat treatment steps separated by a freeze/thaw. As we continue to optimize this critical process parameter, we believe we can significantly reduce the risk of further contaminations and improve our gross margin.

Current wording

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. Our proprietary production process allows us to create an effective product out of a non-aseptic starting raw material. This requires a careful monitoring of the tradeoff between the benefit of adding more heat for longer periods of time to reduce bacterial load against the alternative benefit of less heat for shorter periods of time to preserve more antibody content. Although using more heat could potentially reduce bacterial load, our yield is higher when we use less heat. For example, we know that putting our Work-in-Process inventory through freeze/thaw cycles is not beneficial to yield and increases the risk of contamination. One effective improvement we have implemented, where appropriate, is to lengthen the time of a heat treatment step instead of running two shorter heat treatment steps separated by a freeze/thaw. As we continue to optimize this critical process parameter, we believe we can significantly reduce the risk of further contaminations and improve our gross margin.

Previous wording

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 process and facility improvements. To meet our goals, we must run without significant equipment failures or contamination losses, and we must improve our production yields.

Current wording

Although these types of losses are expected to happen from time to time in the production of a biological product such as ours, we believe that the sudden and large contamination events were related in several different ways to our efforts to increase production output. We also believe we have mitigated the risk of reoccurrence of such losses through the implementation of certain new quality control steps and manufacturing process and facility improvements. To meet our goals, we must run without significant equipment failures or contamination losses, and we must improve our production yields.

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 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).

Current wording

We believe that we have moved past the contamination events that materially affected our output since late 2022 largely because we have not experienced another contamination since the first half of April of 2024. However, 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 an annual theoretical maximum 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. 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. During the third quarter of 2024, finished goods production decreased modestly to $5.4 million, which annualizes to approximately $21.8 million. During the nine-month period ended September 30, 2024, finished goods production was approximately $18.1 million, which annualizes to approximately $24.2 million (or approximately 81% of $30 million). During the trailing twelve-month period ended September 30, 2024, finished goods production was approximately $23.2 million (or approximately 77% of $30 million).

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 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®.

Current wording

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. 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.

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 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 $3.4 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:

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 after remediating the large contamination events that occurred during the first half of the year. 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. Sales during the three-month period ended September 30, 2024 were $6.0 million, representing a 10%, or $539,000, increase from sales during the second quarter of 2024. By increasing production capacity and mitigating contamination events, we were able to significantly increase sales during the most recent nine-month period compared to the previous nine-month period. Sales during the nine-month period ended September 30, 2024 were $18.7 million, representing a 34%, or $4.7 million, increase over sales of $14 million during the nine-month period ended December 31, 2023. Quarter to quarter sales since the beginning of 2022 are displayed in the following table:

Previous 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):

Current wording

An increase in selling price and product supply allowed us to capture an 11% increase in sales revenue during the third quarter of 2024 compared to the third quarter of 2023. Domestic sales during the three-month period ended September 30, 2024 increased by 6%, and international sales increased by 68%, in comparison to the three-month period ended September 30, 2023. International sales aggregated 13% and 9% of total sales during the three-month periods ended September 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 an 82% increase in sales during the six-month period ended June 30, 2024 compared to the six-month period ended June 30, 2023. Domestic sales during the six-month period ended June 30, 2024 increased by 80%, and international sales increased by 106%, in comparison to the six-month period ended June 30, 2023. International sales aggregated 12% and 10% of total sales during the six-month periods ended June 30, 2024 and 2023, respectively. The sales results for the six-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 51% increase in sales revenue during the nine-month period ended September 30, 2024 compared to the nine-month period ended September 30, 2023. Domestic sales during the nine-month period ended September 30, 2024 increased by 47%, and international sales increased by 91%, in comparison to the nine-month period ended September 30, 2023. International sales aggregated 12% and 10% of total sales during the nine-month periods ended September 30, 2024 and 2023, respectively. The sales results for the nine-month periods 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 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):

Current wording

An increase in selling price and product supply allowed us to capture a 46% increase in sales revenue during the trailing twelve-month period ended September 30, 2024 compared to the trailing twelve-month period ended September 30, 2023. Domestic sales during the trailing twelve-month period ended September 30, 2024 increased by 43%, and international sales increased by 84%, in comparison to the trailing twelve-month period ended September 30, 2023. International sales aggregated 11% and 9% of total sales during the trailing twelve-month periods ended September 30, 2024 and 2023, respectively. 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 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.

Current wording

Sales of theFirst Defense® product line aggregated 99% of our total sales during both of the three-month periods ended September 30, 2024 and 2023 and during both of the nine-month periods ended September 30, 2024 and 2023 and during both of the trailing twelve-month periods ended September 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 obtained USDA approval ofTri-Shield First Defense® (the trivalent format of our product delivered via a gel tube, which provides broader protection to calves) near the end of 2017. Around the time of this new product format launch, total product sales during the years ended December 31, 2017 and 2018 were $10.4 million and $11 million, respectively. While this product is very well received by the market for its effectiveness, it does require two separate liquid production processes for each dose of**Tri-Shield®**sold to the market, in contrast to the bivalent product formats that require just one, which makes it more expensive to produce. This new product format has become the most significant component of our total sales, as demonstrated in the table below (in thousands, except for percentages):

Current wording

We obtained USDA approval ofTri-Shield First Defense® (the trivalent format of our product delivered via a gel tube, which provides broader protection to calves) near the end of 2017. Around the time of this new product format launch, total product sales during the years ended December 31, 2017 and 2018 were $10.4 million and $11 million, respectively. While this product is very well received by the market for its effectiveness, it does require two separate liquid production processes for each dose of**Tri-Shield®**manufactured and sold (in contrast to the bivalent product formats that require just one) which makes it more expensive to produce. This new product format has become the highest revenue contributor, as demonstrated in the table below (in thousands, except for percentages):

Previous 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.

Current wording

We likely lost some business beginning in 2022 and through the first half of 2024 as a result of the backlog. During the first half of 2023, the impact of tight supplies hit even harder leaving our customers without product during their busiest calving season. The 2023 production shortage caused largely by the contamination events discussed above may prove to be more detrimental to our growth curve than any prior production shortage because it depleted distributor inventories and impacted more customers for a longer period of time. Our inability to timely meet the needs of our customers could result in the loss of some customers who seek alternative scours management products during this period of short supply, and some of these customers may not resume purchasing our product when we have eliminated the backlog. While we worked to allocate product directly to certain large customers during this period of short supply, we likely lost some customers that could not procure product. While backlog is a better problem to have than seeing product expiring on our shelves, it is nonetheless a significant challenge when we do not get our customers everything that they want. Our sales team is resuming more normal sales growth initiatives now, in anticipation of product supply exceeding customer demand over the next five to six months. 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 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:

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 as of June 30, 2024. We were able to reduce this backlog further to approximately $7.3 million and $6.8 million as of September 30, 2024 and October 30, 2024, respectively. As sales demand increased while our production output was reduced, the value of our order backlog has increased as demonstrated in the following table:

Previous 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.

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 increased by 65%, or $24,000, to $60,000 during the three-month period ended September 30, 2024, in comparison to the three-month period ended September 30, 2023. Sales ofCMT increased by 15%, or $18,000, to $140,000 during the nine-month period ended September 30, 2024 in comparison to the nine-month period ended September 30, 2023. Sales ofCMT increased by 23%, or $37,000, to $196,000 during the trailing twelve-month period ended September 30, 2024, in comparison to the trailing twelve-month period ended September 30, 2023.

Previous 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%.

Current 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 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, 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):

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, the nine-month and the trailing twelve-month periods ended September 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. 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):

Current wording

The gross margin during recent periods was significantly less than what we anticipate going forward. The 2023 reduction in production output was largely the result of our decision to slow down our production rate while remediating the production contamination events discussed above. During 2023, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. As we build back sales during 2024, we are increasing the amount of gross margin earned compared to prior periods and improving the gross margin as a percentage of sales compared to 2023. The gross margin as a percentage of product sales was 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 year ended December 31, 2023 (including even lower gross margin percentages during the three-month period ended March 31, 2023 and the six-month period ended June 30, 2023) was our lowest ever. Achieving process yield improvements (in addition to running without significant equipment failures or product contaminations) will be essential to increasing our gross margin in future periods. Some of the critical process parameters that we are investigating include optimizing: 1) the time and temperature for pasteurization steps, 2) a critical filtration step and 3) the antibody content of incoming Work-in-Process inventory. As we fully integrate and utilize our increased capacity and evaluate our product costs and selling price, we believe we could increase our gross margin by approximately 8 to 13 percentage points in comparison to the 27% gross margin reported for the nine-month period ended September 30, 2024. Our immediate goal is to resume a 35% gross margin as soon as possible with the next goal being to achieve a 40% gross margin. This goal has been reduced from prior projections given the lower rates experienced during 2023 and to date in 2024.

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.

Current wording

While our biological and process yields continue to be variable, we have seen a favorable improvement to our finished goods yield recently. 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 cGMP in our production processes. Increasing production can be more expensive in the initial stages. To achieve our inventory production growth objectives, we continue to acquire more raw material (colostrum) from many more cows at several new farms. Additionally, the biological yields from our raw material are always variable, which impacts our costs of goods sold in a similar way. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on the time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. As is the case with any vaccine program, animals respond less effectively to their first exposure to a new vaccine, and thereafter the effectiveness of their immune response improves in response to subsequent immunizations. While this variability impacts our costs of producing inventory, the commercial value of our**First Defense®**product line is that we compensate for the variability in a cow’s immune response by standardizing each dose of finished product. This ensures that every calf is equally protected, which is something that dam-level commercial scours vaccines cannot offer. We continue to work on processing and yield improvements and other opportunities to reduce costs, while enhancing process knowledge and robustness. Additionally, the significant global supply-chain disruptions that almost all industries are experiencing presently are a challenge to us. The costs of our critical supplies, components, raw materials, utilities and services increased significantly during 2021 and that trend continued during 2022, 2023 and into 2024. We have little choice but to pay the higher prices and try to take on more months of supply than we would have held previously if we could get our orders fulfilled timely. We believe that gross margin trends going forward should be viewed over longer periods of time than just one quarter.

Previous wording

As of the end of the periods noted in the table below, Work-in-Process inventory as a percentage of total inventory has ranged from 57% to 77%, and the dollar value of Work-in-Process inventory has increased significantly since December 31, 2021. The colostrum we purchase for use in the production ofFirst Defense® is the largest component of Work-in-Process inventory. As we began to increase our production capacity, we also increased the number of farms that we work with in order to increase the amount of this critical ingredient. As certain contamination events discussed above slowed the implementation of our increased capacity, we accumulated more colostrum than originally planned. While this is a good safety measure to have in place to ensure that we do not run short of colostrum, we do expect to reduce this use of cash as we move forward with our increased production rate. In a frozen state, this colostrum has a 30-month useable shelf life. Work-in-Process inventory has increased as demonstrated in the following table (in thousands, except for percentages):

Current wording

Work-in-Process inventory as a percentage of total inventory has ranged from 57% to 82%, and the dollar value of Work-in-Process inventory has increased significantly since December 31, 2021. The hyper-immunized colostrum we purchase for use in the production of**First Defense®is the largest component of Work-in-Process inventory. As we began to increase our production capacity, we also increased the supplier base that we work with in order to increase the amount of this critical ingredient. As certain contamination events discussed above slowed the implementation of our increased capacity, we accumulated more colostrum than originally planned. While this is a good safety measure to have in place to ensure that we do not run short of colostrum, we do expect to reduce this use of cash as we move forward with our increased production rate. Also, we are developing what could potentially be a spray-dried alternative format ofFirst Defense®that would not require the liquid processing and freeze-drying production steps used to produceFirst Defense®**in a capsule or gel tube. If successful, this effort could expand our product portfolio with a bulk product designed to meet the needs of large dairy and calf-ranch customers at a lower cost. This would help us turn some of this inventory to cash sooner. In a frozen state, this colostrum has a 30-month useable shelf life. The increase in Work-in-Process inventory is demonstrated in the following table (in thousands, except for percentages):

Previous 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.

Current wording

Overview: The majority of our product development expenses pertain to the development ofRe-Tain®. During the three-month period ended September 30, 2024, product development expenses decreased by 30%, or $332,000, to $786,000 in comparison to $1.1 million during the three-month period ended September 30, 2023. Product development expenses aggregated 13% and 21% of product sales during the three-month periods ended September 30, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $367,000 and $391,000 during the three-month periods ended September 30, 2024 and 2023, respectively. Approximately $342,000 and $353,000 of these non-cash expenses were comprised of depreciation expenses pertaining largely to our DS facility and equipment for**Re-Tain®during the three-month periods ended September 30, 2024 and 2023, respectively. During the nine-month period ended September 30, 2024, product development expenses decreased by 7%, or $249,000, to $3.1 million in comparison to $3.3 million during the nine-month period ended September 30, 2023. Product development expenses aggregated 16% and 27% of product sales during the nine-month periods ended September 30, 2024 and 2023, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of approximately $1.1 million during both of the nine-month periods ended September 30, 2024 and 2023. Approximately $1 million of these non-cash expenses were comprised of depreciation expenses pertaining largely to our DS facility and equipment forRe-Tain®during both of the nine-month periods ended September 30, 2024 and 2023. We began depreciating this asset when the Certificate of Occupancy for the new construction was issued during the fourth quarter of 2017, but sales of our new product cannot be realized until we achieve FDA approval. Product development expenses (excluding depreciation expense of $1.4 million) were $3 million during the year ended December 31, 2023, when we were in production mode. Beginning during the second half of 2024, we implemented an aggressive idle of product development expenses pertaining toRe-Tain****®**after the production of inventory intended for our Controlled Launch was completed. It is our goal to reduce product development expenses (excluding depreciation) to approximately $2.5 million during the year ending December 31, 2024. This would represent a 17%, or $519,000, reduction from the 2023 expense (excluding depreciation). Product development expenses (excluding depreciation) were $1.6 million during the six-month period ended June 30, 2024. This means that it is our objective to reduce product development expenses by approximately 45%, or approximately $731,000, during the second half of 2024 in comparison to the first half of 2024. It is our further objective to reduce product development expenses (excluding depreciation) to approximately $2 million durin…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

During the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces the real estate taxes on our DS production facility forRe-Tain® by 65% over the eleven-year period beginning on July 1, 2017 and ending June 30, 2028 and by 30% during the year ending June 30, 2029, at which time the rebate expires. During the second quarter of 2017, the TIF was approved by the Maine Department of Economic and Community Development. The value of the tax savings will increase (decrease) in proportion to any increases (decreases) in the assessment of the building for city real estate tax purposes or the City’s tax rate. The following table discloses how much of the new taxes we have generated is being relieved by the TIF and how much we are paying:

Current wording

During the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces the real estate taxes onBuilding 33 (our DS production facility forRe-Tain®) by 65% over the eleven-year period beginning on July 1, 2017 and ending June 30, 2028 and by 30% during the year ending June 30, 2029, at which time the rebate expires. During the second quarter of 2017, the TIF was approved by the Maine Department of Economic and Community Development. The value of the tax savings will increase (decrease) in proportion to any increases (decreases) in the assessment of the building for city real estate tax purposes or the City’s tax rate. The following table discloses how much of the new taxes we have generated is being relieved by the TIF and how much we are paying:

Previous wording

Development objective: As we work to change the way that mastitis is managed in the dairy industry, we aim to demonstrate that our bacteriocin, Nisin A, which is designed specifically for subclinical mastitis, can provide producers the freedom to change when and how mastitis is treated.Re-Tain®is not a broad-spectrum antibiotic used in human health. Rather, it consists of a highly targeted active ingredient without an FDA-required milk discard or meat withhold. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $36.00 (for 3.5 days of milk at 60 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) to approximately $150.00 (for 11 days of milk at 80 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) per treated animal. These high milk discard costs associated with traditional antibiotic treatments lead producers to only treat mastitis after clinical signs develop. We expect thatRe-Tain®will be a first-of-its-kind product that can be used to economically treat at the earliest stage of infection, giving producers the ability to get ahead of mastitis before clinical signs develop so the best cows stay at their best performance level and in the herd longer. The final and most critical development objective forRe-Tain® is to achieve regulatory approval of our manufacturing operations.

Current wording

Development objective: As we work to change the way that mastitis is managed in the dairy industry, we aim to demonstrate that our bacteriocin, Nisin A, which is designed specifically for subclinical mastitis, can provide producers the freedom to change when and how mastitis is treated.**Re-Tain®is not a broad-spectrum antibiotic used in human health. Rather, it consists of a highly targeted active ingredient without an FDA-required milk discard or meat withhold. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $36.00 (for 3.5 days of milk at 60 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) to approximately $150.00 (for 11 days of milk at 80 pounds per day at the Class III milk price average of $17.02 per hundredweight during 2023) per treated animal. These high milk discard costs associated with traditional antibiotic treatments lead producers to only treat mastitis after clinical signs develop. We expect thatRe-Tain®**will be a first-of-its-kind product that can be used to economically treat at the earliest stage of infection, giving producers the ability to get ahead of mastitis before clinical signs develop so the best cows stay at their best performance level and in the herd longer.

Previous wording

Development status: Approval by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA) of the New Animal Drug Application (NADA) forRe-Tain® is required before any sales of the product can be initiated. The NADA is comprised of five principal Technical Sections plus a sixty-day administrative review at the end. Each Technical Section can be reviewed and approved separately. By statute, each Technical Section submission is generally subject to one or more six-month review cycles by the FDA. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows:

Current wording

Development status: Approval by the FDA of the New Animal Drug Application (NADA) forRe-Tain® is required before any sales of the product can be initiated. The NADA is comprised of five principal Technical Sections plus a sixty-day administrative review at the end. Each Technical Section can be reviewed and approved separately. By statute, each Technical Section submission is generally subject to one or more six-month review cycles by the FDA. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows:

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 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.

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 pilot-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 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.

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 Incomplete Letter required that internal and external laboratories re-develop and qualify several analytical tests and associated controls.

Previous 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.

Current wording

We made a third DS and DP submission of the CMC Technical Section during the third quarter of 2023. In late October of 2023, the FDA notified us that it was refusing to review our 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 and at the DP facility of our contract manufacturer must be cleared before this fourth submission could be made. Subsequently, the FDA notified us during the second quarter of 2024 that the inspectional observation at our DS facility had been cleared.

Previous wording

This fourth submission has not been made yet because all inspectional observations must also be cleared at the DP facility of our contract manufacturer before the FDA will issue a Technical Section Complete Letter. Our contract manufacturer submitted responses to its inspectional observations in early July of 2024 . Clearing the outstanding inspectional observations with the FDA defines the critical path timeline. Once the DP facility inspection is cleared by the FDA, we anticipate making a Non-Administrative NADA submission that would include our fourth submission of the CMC Technical Section, together with the minor technical sections covering All Other Information and Product Labeling. We are implementing this filing strategy to attempt to eliminate the need for the 60-day review period allowed for an Administrative NADA submission at the end of the application process. By statute, this submission would be subject to a review period of up to 180 days. However, we believe that a shorter review period may be provided because the responses to the CMC Incomplete Letter are not complex.

Current wording

We anticipate making a Non-Administrative NADA submission that would include our fourth submission of the CMC Technical Section, together with the minor technical sections covering All Other Information and Product Labeling during the fourth quarter of 2024. We are implementing this filing strategy to eliminate the need for an Administrative NADA submission covering All Other Information and Product Labeling at the end of the application process which would then be subject to an additional 60-day review at that time. By statute, this CMC Technical Section submission would be subject to a review period of up to 180 days, but we believe that a shorter review period may be provided because the responses to the CMC Incomplete Letter are not complex. We expect the FDA to complete this review only after it clears the inspectional observations at the DP facility of our contract manufacturer, which is the critical path constraint.

Previous 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.

Current wording

Upon FDA approval, we intend to implement our Controlled Launch 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 in inventory that would have short expiry dating if market launch is delayed, we built DS inventory during 2022 and 2023 to support the initial commercial sales ofRe-Tain****®. We presently have no agreement in place to aseptically fill new DP inventory. During the second half of 2024, we began to reduce operating costs at our DS production facility until initial market acceptance (and perhaps the interest of a marketing partner) justifies a new agreement for aseptic filling and the production of additional inventory. We do anticipate a pause in the supply of product to market after the initial 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. While we do not expect**Re-Tain****®**to make a significant contribution to our sales growth in the early years after market launch, we do see value in achieving regulatory approval and testing market acceptance.

Previous wording

Our DS manufacturing facility and that of our DP contract manufacturer (and our potential future DP manufacturing facility) are subject to ongoing FDA inspections. During the third quarter of 2019, the FDA conducted a pre-approval inspection of our DS facility. This resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We submitted responses and data summaries in a phased manner over the fourth quarter of 2019 and first quarter of 2020. During the first quarter of 2022, the FDA conducted another pre-approval inspection of our DS facility. This also resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We have responded to all of the queries. Early during the first quarter of 2024, the FDA conducted another pre-approval inspection of our DS facility. This resulted in the issuance of one deficiency as identified on the FDA’s Form 483. Since then, we have fully responded to this inspectional observation. The facility of our DP contract manufacturer is subject to similar inspectional compliance obligations. As discussed above, a pre-approval inspection of that facility was conducted around the end of the first quarter of 2024.

Current wording

Our DS manufacturing facility and that of our DP contract manufacturer (and our potential future DP manufacturing facility) are subject to ongoing FDA inspections. During the third quarter of 2019, the FDA conducted a pre-approval inspection of our DS facility. This resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We submitted responses and data summaries in a phased manner over the fourth quarter of 2019 and first quarter of 2020. During the first quarter of 2022, the FDA conducted another pre-approval inspection of our DS facility. This also resulted in the issuance of certain deficiencies as identified on the FDA’s Form 483. We have responded to all of the queries. Early during the first quarter of 2024, the FDA conducted another pre-approval inspection of our DS facility. This resulted in the issuance of one deficiency as identified on the FDA’s Form 483. Since then, we have successfully responded to this inspectional observation. The remaining critical path milestone is for Norbrook to successfully complete closure of deficiencies at their DP facility, which is currently underway.

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.

Current wording

We have always believed that the fastest route to FDA approval and market launch is with the services of Norbrook, reducing our risk by benefiting from their demonstrated expertise in aseptic filling. From 2010 to the present, we have worked with Norbrook under several amended contract manufacturing agreements covering the DP formulation, aseptic filling and final packaging services. 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 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.

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 and feedback from the FDA during their 2022 inspection, we decided to defer the completion of this investment 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, allowing for two six-month review cycles, subject to the timing of our installation and validation work. 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…

Excerpt shortened here; the source contains the full paragraph.