Production Capacity Increase and Product Contamination

During 2018, it became clear that demand for Tri-Shield First Defense^® was outpacing production. In response to this increasing demand, we began a series of investments during 2019 to increase our production capacity for the First Defense^® product line to approximately $30 million per year. The necessary facility expansions and new equipment needed to increase production capacity were in place by the end of 2022. See PART I: ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, “Liquidity and Capital Resources”, for more detail about our production capacity.

ImmuCell Corporation

Unfortunately, as this increased production capacity was coming online, a product contamination event was detected by standard in-process quality control testing around the end of the third quarter of 2022. Contamination events during 2022 (largely this one around the end of the third quarter) resulted in a total charge to costs of goods sold of approximately $588,000. We took immediate steps to address the contamination, and production ran without issue during the balance of the fourth quarter of 2022. Then during the first quarter of 2023 our standard in-process quality control testing detected a second contamination event. The related charge to costs of goods sold during the first quarter of 2023 is expected to be up to approximately $200,000, of which approximately $114,000 worth of product remains under evaluation. In response, we have slowed down our production output as we take the necessary steps to assess and remediate the issues and perform a deep sanitization of our facilities and process equipment to ensure that any product that is put to market meets all quality standards. We believe that the ongoing implementation of our capacity expansion plans and the corrective actions being taken in response to these contamination events should allow us to operate at the higher level of production output going forward without further significant contaminations. We are working diligently to address the situation and believe we are taking the appropriate steps to emerge from this problem stronger with the production capacity in place to produce approximately $30 million of product per year going forward.

This production slowdown during the first quarter of 2023, has, in part, caused an increase in the amount of our order backlog from approximately $2.5 million as of December 31, 2022 to approximately $8 million as of March 10, 2023. However, we do not believe this backlog number is highly relevant anymore as it includes very old orders, redundancy in demand and orders that may be cancelled. We expect to report reduced sales during the first quarter of 2023 and a large backlog as of March 31, 2023. We are on track to produce approximately $3.2 million to $3.4 million of product during the first quarter of 2023, which is approximately 56% less than our $7.5 million quarterly production target. While this is less than we need, our remediation efforts are beginning to work as we cautiously come back into production. Due to the loss in earned gross margin that is being incurred during the first quarter of 2023, we have made the decision to defer, for the time being, completion of the incremental planned investment to increase our production capacity further to approximately $40 million per year.

The increase in sales demand for First Defense^® is both exciting and challenging for us. One view is that we are operating with short supply caused largely by contamination events on the First Defense^® side, while not yet achieving FDA approval of Re-Tain^®. However, the other view is that we are approaching both approximately $30 million in annual production capacity for First Defense^® (with a flex option to get to approximately $40 million per year in the future) while also advancing to the final stages of a very significant FDA product development initiative.

Animal Health Products

The First Defense^® product line is manufactured from hyperimmunehyperimmunized cows’ colostrum (the antibody rich milk that a cow produces immediately after giving birth) utilizing our proprietary vaccinesvaccine and milk protein purification technologies. The First Defense^® product line provides bovine antibodies that newborn calves need but are unable to produce on their own immediately after birth. The target disease, calf scours (bovine enteritis), causes diarrhea and dehydration in newborn calves and often leads to serious sickness and even death. The First Defense^® product line is the only USDA-licensed, orally delivered scours preventive product on the market for calves with claims against E. coli, coronavirus and rotavirus (three leading causes of scours). A single dose of our product provides a measured level of protection proven to reduce mortality and morbidity. Our pre-formed antibody products provide Immediate Immunity™ during the first few critical weeks of life when calves need this protection most. Studies have shown that calves that scour are more susceptible to other diseases later in life and under-perform calves that do not contract scours. The direct, two-part mode-of-action of the First Defense^® product line delivers specific immunoglobulins at the gut level to immediately protect against disease, while also providing additional antibodies that are absorbed into the bloodstream. These circulating antibodies function like a natural timed-release mechanism, as they are re-secreted into the gut later to provide extended protection. The First Defense^® product line is convenient to use. A calf needs to receive only one dose of First Defense^®within the first twelve hours after birth. TheOur capsule format of this product, which requires no mixing, is stored at room temperature and no mixing is required before it is given to the calf.temperature. The gel tube formats of this product require refrigeration in accordance with product label indications. We are the market leader (in terms of both unit volume and dollar sales) when compared to other calf-level scours preventatives butand have greater market potential as we gain market share from the dam-level (pre-calving scour vaccines) competitors. The third quarter of 20202021 marked the 2930^th anniversary of the original USDA approval of this product in 1991. During the fourththird quarter of 2020,2022, our cumulative sales of First Defense^® since inception exceeded 26,000,00030 million doses. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product.

ImmuCell Corporation

The First Defense^® product line continues to benefit from wide acceptance by dairy and beef producers as an effective tool to prevent scours (diarrhea) in newborn calves, which is the leading cause of death in preweaned calves. Our Beyond Vaccination^®marketing campaign focuses on providing antibodies without vaccination. A 100% vaccine responseprotection rate is biologically impossible. The First Defense^®product line removes the variability associated with a scour vaccine response and instead provides a measured level of pre-formed antibodies, protecting each calf with an equal level of scours protection. There is a strong link between how we sell our product and the challenges we face in producing it. We know better than most how variable a cow’s response is to any vaccine. We see this in every batch of First Defense^® that we produce. The value in First Defense^® is that we adjust for this variability inby standardizing the antibody content, as needed, so the newborn is given a steady, equal level of protection with each dose. This technology removes a producer’s reliance on variable vaccine responses to generate passive antibody protection and instead protects every calf equally with a measured dose of Immediate Immunity™ against the most common scour pathogens. Plus, an effectively treated calf is much less likely to require expensive antibiotic treatments orand build antibiotic resistance. We are the only manufacturer within the scour prevention space offering polyclonal multi-pathogen antibodies. The market is learning that the best preventative for scours may not be a vaccine. Wevaccine, and we are educatingcontinuing to educate the market about the health benefits of a measured dose of pre-formed antibodies.

The product line extension, Tri-Shield First Defense^®, is the first calf-level, passive antibody product on the market with USDA-approved disease claims providing Immediate Immunity™ against each of the three leading causes of calf scours (E. coli, coronavirus and rotavirus). This new product achieved USDA approval during the fourth quarter of 2017 and was listed with the Organic Materials Research Institute (OMRI) during the first quarter of 2019, which means it can be used on organic farms. Tri-Shield^®combines the E. coli and coronavirus antibodies contained in our bivalent product with a measured level of rotavirus antibodyantibodies in a single-dose gel tube delivery format. This unique breadth of claims further differentiates our product from calf-level competitive products on the market that contain only one or two of these label claims. The unique virus likevirus-like particle (VLP) technology that is used in our production process increases rotavirus titers in colostrum to a level much greater than traditional vaccine technology can. Because it is possible that allsome farms may not have (or perceive to have) a rotavirus problem, we are continuing to sell the bivalent formats of the First Defense^® product line as options for customers.

ImmuCell Corporation

Historically, the most common tool to help combat scours has been to vaccinate the mother cow (dam) with a scours vaccine and deliver the antibodies that she produces in her milk to the newborn. It is generally believed that only 80% of animals respond to a vaccine, which could leave about 20% of calves unprotected. We believe that the variability in a cow’s immune response to vaccines creates a sales opportunity for our product. Additionally, our research suggests that treatment protocols for dam-level scours vaccine programs are not always followed, leaving even more calves compromised. We are competing effectively against these dam-level vaccine products. Our marketing campaign, Beyond Vaccination^®, emphasizes that by delivering Immediate Immunity™directly to the calf via the First Defense^® product line, producers can reduce stress-causing injections to the cow. Reliance on a dam-level scours vaccine requires that money be spent before it is known whether the cow is carrying a viable, valued calf. With the First Defense^®product line, that investment can be targeted to the calves that are most critical to the operation. This, in turn, can free up space in the cow’s vaccination schedule to improve her immune response to vaccines that are critical to her health.

Preventing newborn calves from becoming sick helps them to reach their genetic potential and reduces the need to use treatment antibiotics later in life. We believe that the long-term growth in sales of the First Defense^®product line may reflect, at least in part, the success of our strategic decision to invest in additional sales and marketing efforts to help us introduce the expanding First Defense^®product line to new customers. Our communications campaign continues to emphasize how the unique ability of the First Defense^® product line to provide Immediate Immunity™ generates a dependable and competitive return on investment for dairy and beef producers. Preventing newborn calves from becoming sick helps them to reach their genetic potential and reduces the need to use treatment antibiotics later in life.

First Defense Technology^® is a unique whey protein concentrate that is processed utilizing our proprietary colostrum (first milk) protein purification methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed product. During 2012, we initiated a limited launch of a gel tube delivery format of our First Defense Technology^®in a gel solution. We achieved USDA claims for this product format during the fourth quarter of 2018 and Canadian approval during the first quarter of 2019, and it is now being sold as Dual-Force First Defense^®. We are selling the same concentrated whey proteins in a bulk powder format (no capsule), which is delivered with a scoop and mixed with colostrum for feeding to calves. We are working to achieve USDA claims for this product format during 2021.format. During 2011, Milk Products, LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra Start^® 150 Plus and certain similar private label products, which are colostrum replacers with First Defense Technology^® Inside.

ImmuCell Corporation

During 2001, we began to offer our own, internally developed California Mastitis Test (CMT). CMT is most often used as a quick on-farm diagnostic to determine which quarter of the udder is mastitic. This test can be performed at cow-side for early detection of mastitis. CMT products are also made by other manufacturers and are readily available to the dairy producer. In connection with our acquisition of certain gel formulation technologies during the first quarter of 2016, we acquired private label manufacturing rights covering a feed supplement product sold by Genex Cooperative, Inc. of Shawano, WI.Wisconsin. This product was discontinued by mutual agreement during the first quarter of 2022. Annual sales of this private label product were less than $170,000 during each of the years ended December 31, 2021 and 2020.

Sales and Markets

Feed Costs:The actual level of milk prices may be less important than its level relative to feed costs. One measure of this relationship is known as the milk-to-feed price ratio, which represents the amount of feed that one pound of milk can buy. This ratio varies farm-to-farm based on individual operating parameters. The highest annual average this ratio has reached since this ratio was first reported in 1985 was 3.64 in 1987. The annual average for this ratio of 1.52 in 2012 was the lowest recorded since it was first reported in 1985. Since this ratio reached 3.24 in 2005, it has not exceeded 3.00. The annual average of 2.54 for 2014 was the highest this ratio has been since it was 2.81 in 2007. This ratio averaged 2.05 during 2018 and increased to 2.25 during 2019. This ratio increased to 2.31 during the year ended December 31, 2020. An increase in feed costs also has a negative impact on the beef industry.industry and therefore could have a resulting negative impact on our business and results of operations. This ratio varies farm-to-farm based on individual operating parameters. Since this ratio reached 3.24 in 2005, it has not exceeded 3.00. This ratio averaged 1.74 for 2021, amounting to a significant decline of 25% from the 2020 average of 2.32. This average has not been lower since 2012. During 2022, this ratio improved by 10% to 1.92. This ratio dropped to 1.73 in January 2023. The following table demonstrates the annual volatility and the low values of this ratio recently:

Milk cow price: The all-time high value (annual average) for a milk cow was $1,993 during 2015. Since then, this annual average value steadily declined to $1,205 during 2019 before increasing to $1,300 during 2020.

ImmuCell Corporation

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

Small Size of Company

Dependence on key personnel: We are a small company with 6174 employees (including 57 part-time employees). As such, we rely on certain key employees to support multiple operational functions, with limited redundancy in capacity. The loss of any of these key employees could adversely affect our operations until a qualified replacement is hired and trained.trained, which could be even more challenging in the present very difficult labor market. Our competitive position will be highly influenced by our ability to attract, retain and motivate key scientific, manufacturing, managerial and sales and marketing personnel. We will require increased staffing levels to operate our expanded First Defense^®production capacity and to operate our Re-Tain^® production facility. The cost of attracting and retaining the needed additional personnel in this current job market and inflationary environment could adversely affect our margins and profitability.

ImmuCell Corporation

Reliance on outside party to provide certain services under contract for us: We are exposed to additional regulatory compliance risks through the subcontractors that we choose to work with to produce Re-Tain™Re-Tain^®, who also need to satisfy certain regulatory requirements in order to provide us with the products and services we need. WeOne example of this outside reliance is Norbrook, our Drug Product (DP) contract manufacturer. Because Norbrook has elected to terminate its supply agreement with us effective as of the end of 2022 (with final deliveries anticipated during the middle of 2023), we are investing approximately $4 million of the additional capital we raised during the first quarter of 2019 to construct and equip our own Drug ProductDP formulation and aseptic filling capability for Re-Tain™ Re-Tain^®inside our existing Drug Substance facility. Due to the loss in gross margin during the first quarter of 2023 caused by the slowdown in production output necessary to remediate a product contamination event, we have decided to defer spending of approximately 42% of these funds for the time being. We face the risk of potential supply interruption and adverse effects on the market launch of Re-Tain^® if we do not effectively manage the end of the DP supply provided from our contract manufacturer for orders scheduled for delivery during the second half of 2023 (with product expiries during the second half of 2025) to align with the new supply from our own formulation and aseptic filling facility, which we currently expect to be operational during 2025. The objective of this investment is to end our reliance on an outside party to perform these services for us. Actual project costs could exceed our current estimates, and we could fail to access adequate funding to complete this investment if costs were to increase.estimates. Completion of this project could be delayed due to a number of factors outside our control, including delays in equipment fabrication, equipment delivery or facility construction. In addition, there is a risk that we fail to achieve regulatory approval of the new facility. We face the risk of potential supply interruption if we do not effectively manage the end of supply provided from Norbrook for orders placed by December 31, 2021 for delivery into the first half of 2022facility or that such approval is delayed or requires significant additional expenditures to align with the new supply from our own formulation and aseptic filling facility which we currently expect to be operational during the fourth quarter of 2022 or second quarter of 2023.obtain.

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

ImmuCell Corporation

Global Risks

Global COVID-19 pandemic (novel coronavirus, technically known as SARS-CoV-2): TheImpact of global COVID-19 pandemic and Russia’s unprovoked military invasion of Ukraine: We are facing significant production constraints, supply disruptions and inflationary increases which appear to have been caused, in large part directly or indirectly, by the pandemic and Russia’s unprovoked military invasion of Ukraine. The extent and duration of the negative impact of the pandemic on the economics of our customers and on the demand for our products going forward are very difficult to assess. The dairy market, similar to many others, has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. The Class III milk price has been extremely volatile during the pandemic. Initially, stay at home orders disrupted the food service supply system as schools closed and restaurants were shut down. In response, producers were forced to reduce the supply of milk to the market by drying off cows early, culling cows from the herd and dumping milk, among other tactics. Market conditions have improved somewhat, but this volatility remains a concern. Additionally, like most input costs, the cost of grain and other feed is rising, which puts a strain on the profitability of our customers. There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected due to closures of processing plants and reduced throughput. This is a very unusual situation for farmers that work so hard to improve production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. The pandemic has created risk and continues to create a great deal of uncertainty and challenges for us. The positive indications about the improving healthemergence of the U.S. economy since 2008Delta and priorOmicron variants and the resulting rising number of positive cases during the latter part of 2021 and into 2022 has been a more recent concern. The pandemic has created or contributed to the COVID-19 pandemic have proven to be temporary. The COVID-19 pandemicglobal supply-chain disruptions and has affected international trade, and createdwhile creating a worldwide health and economic crisis. TheWhile presently there are some indications that suggest the situation may be improving, the full impact of this viral outbreak on the global economy, and the duration of such impact, isremains very uncertain at this time. Stock market valuations have declined and recovered somewhat but remain very volatile. Inflation has increased significantly, and remain volatile.tax rates may increase. There is a risk of a period of economic downturn, the severity and duration of which are difficult to know. Prior to the pandemic and the responsive federal economic stimulus programs, many feared the United States had taken on too much national debt. Now the debt load is significantly higher. The dairy market, similar to many others, has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. Milk was dumped on farms earlier in the year largely because of the loss of demand for dairy products from closed restaurants and school lunch programs and other negative impacts of the pandemic, but conditions have improved since then. There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected due to closures of processing plants and reduced throughput caused by, among other things, restaurants closing or curtailing their operations. This is a very unusual situation for farmers that work so hard to improve production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. A combination of the conditions, trends and concerns summarized above could have a corresponding negative effect on our business and operations, including the supply of the colostrum we purchase to produce our First Defense^® product line, the demand for our products in the U.S. market and our ability to penetrate or maintain a profitable presence in international markets. We could experienceare experiencing shortages in key components and needed products, backlogs and production slowdowns due to difficulties accessing needed supplies and labor and other restrictions affectingwhich increase our costs and affect our ability to consistently deliver our products to market.market in a timely manner. Our exposure to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on foreign manufacturers, by our on-going cross-training of our employees, by our implementation of remote work practices (where feasible)qualifying alternate suppliers and components and by our early and continued compliance with recommended hygiene and social distancing practices.hygiene. Despite our best efforts and intentions, there is a risk that an employee could become infected and could infect others. ThisRussia’s unprovoked military invasion of Ukraine and attack on its people is having a significant negative impact on the world economy, worsening trends that were already moving in an unfavorable direction. Among other exposures, the increasing price of oil is already impacting our transportation-related expenses materially, and we expect this supply stress to increase the cost of petroleum-based products that we purchase (mostly plastics).

ImmuCell Corporation

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

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

Risks Pertaining to Common Stock

Stock market valuation and liquidity: Our common stock trades on The Nasdaq Stock Market (Nasdaq: ICCC). Our average daily trading volume (which was approximately 6,612 shares per day during the 20-day period ended March 10, 2023) is lower, than the volume for most other companies and theour bid/ask stock price spread can be larger and pricesour share price can be more volatile than what other companies experience, which could result in investors facing difficulty selling their stock for proceeds that they may expect or desire. Our share price and average trading volume have seen a significant increase during the first quarteras of 2021, but still mostMarch 10, 2023 was $5.49. Most companies in the animal health sector have market capitalization values that greatly exceed our current market capitalization of approximately $80.6$43 million as of March 19, 2021.10, 2023. Our product sales during the year ended December 31, 20202022 were $15.3approximately $19 million. This means that our market valuation as of March 19, 202110, 2023 was equal to approximately 5.252 times our sales during the year ended December 31, 2020.2022. Before gross margin from the sale of new products is achieved, our market capitalization may be heavily dependent on the perceived potential for growth from our product under development and may therefore be negatively affected by the related uncertainties and risks.

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

ImmuCell Corporation

ImmuCell Corporation

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

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

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

Other Risks

Access to raw materials and contract manufacturing services: Our objective is to maintain more than one source of supply for the components used to manufacture and test our products that we obtain from third parties. However, there is a risk that we could haveare experiencing difficulty in efficiently acquiring essential supplies. We have significantly increased the number of farms from which we purchase colostrum for the First Defense^® product line. A significant reduction in farm capacity could make it difficult for us to produce enough inventory to meet customer demand. The specific antibodies that we purify from colostrum for the First Defense^® product line are not readily available from other sources. We are and will be dependent on our manufacturing facilities and operations in Portland for the production of the First Defense^® product line and Re-Tain™Re-Tain^®. We are and will be dependent on one manufacturer for the supply of the syringes used for our gel tube formats of Dual-Force First Defense^® and Tri-Shield First Defense^® and one other manufacturer for the supply of syringes for Re-Tain™Re-Tain^®. We expect to beare currently dependent on a contract with Norbrook for the Drug Product (DP) formulation and aseptic filling of our Nisin Drug SubstanceDP for orders placed through December 31, 2021 with deliveries extending intoscheduled for delivery during the firstsecond half of 2022. We expect to complete the investment to perform these services in-house during 2022 and achieve the required regulatory approval for use by the fourth quarter of 2022 or second quarter of 2023. The facility we intend to constructare constructing to perform these services in-house will be subject to FDA inspection and approval, the outcome and timing of which are not within our control. We expect to achieve FDA approval for use of our DP facility during 2025. The potential alternative options for these services are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). Any significant damage to or other disruption in the services at any of these third-party facilities or our own facilities (including due to regulatory non-approvalissues or non-compliance) would adversely affect the production of inventory and result in significant added expenses and potential loss of future sales.

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

ImmuCell Corporation

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

ITEM 1B — UNRESOLVED STAFF COMMENTS

None

ITEM 2 — PROPERTIES

We ownBuilding 56:

During 1993, we purchased a 35,00015,000 square foot (approximately) buildingfacility (that included 5,000 square feet of unfinished office space on the second floor) at 56 Evergreen Drive in Portland, Maine. We currently use this space for substantially all of ourour: i) office and laboratory needs, ii) vaccine manufacturing operations, iii) liquid processing operations and some of our manufacturing needsiv) freeze-drying operations for our USDA-regulated manufacturing operations. Once our capacity expansion investment for the First Defense^®product line is completed during the second quarter of 2021, allline. All of our powder milling and filling operations, gel formulation operations and assembly services will behave been relocated out of this building, and this space will continue to be used for all of our vaccine production, liquid processing and freeze-drying operations. When we originally purchased this building in 1993, its size was 15,000 square feet, including 5,000 square feet of unfinished space on the second floor. Inbuilding. During 2001, we completed a construction project that added approximately 5,200 square feet of new manufacturing space on the first floor and approximately 4,100 square feet of storage space on the second floor. InDuring 2007, we built out the 5,000 square feet of unfinished space on the second floor into usable office space. After moving offices from the first floor offices into this new space on the second floor, we modified and expanded the laboratory space on the first floor and added approximately 2,500 additional square feet of storage space on the second floor. During 2009, we added 350 square feet of cold storage space connected to our first floor production area and added an additional 600 square feet to the second floor storage area. During the first quarter of 2015, we completed construction of a two-story addition connected to our facility to provide us with approximately 7,100 additional square feet for cold storage, production and warehouse space for our operations. These additions increased the size of the facility to approximately 34,850 square feet.

Building 33:

ImmuCell Corporation

During the fourth quarter of 2015, we exercised an option to acquire land at 33 Caddie Lane in Portland, Maine which is near our facility at 56 Evergreen Drive, on which we initiated construction of our Drug Substance production facility for Re-Tain™Re-Tain^® during the third quarter of 2016. During the fourth quarter of 2017, we obtained a certificateCertificate of occupancyOccupancy from the City of Portland for our 16,202 square foot (9,803 on the first floor and 6,399 on the second floor) Drug Substance production facility. Our FDA-regulated operations are conducted in this building.

ImmuCell Corporation

Building 14:

During the first quarter of 2017, we purchased a 4,1144,080 square foot facility adjacent to the Drug Substance production facility for Re-Tain™Re-Tain^®. at 14 Wedge Way in Portland, Maine. We are using this warehouse space primarily for storage of inventory, materials and equipment. We are presently modifying this facility for packing, shipping and cold storage for Re-Tain^®and other warehousing needs. We expect these modifications to be complete during the middle of 2023.

Building 175:

During 2019, we entered into a lease covering approximately 14,300 square feet of office and warehouse space to expand our USDA-regulated manufacturing operations. We have renovated this space (a Certificate of Occupancy was issued during the second quarter of 2020) to help us expand our production capacity and improve quality for the First Defense^® product line. This space is being used for all of our powder milling and filling, gel formulation and assembly services. The original lease term was ten years with a right to renew for a second ten-year term and a right of first offer to purchase. During the third quarter of 2022, we entered into a new 20-year lease covering a facility that is now being constructed by our landlord (Building 165, described below), which is adjacent to (and could be connected to) Building 175. In connection with this new lease, the lease to Building 175 was extended by approximately 13 years to match the expiration of the other lease to Building 165.

Building 165:

During the third quarter of 2022, we committed to lease an additional 15,400 square feet of space at 165 Industrial Way in Portland, Maine, which could be connected to Building 175, over a 20-year term. The lease commencement date is when the landlord is issued a Certificate of Occupancy for the building shell, which is anticipated to be around the beginning of the second quarter of 2023. Lease payments begin four months after this date. We intend to use this space for the following three purposes: 1) improve product quality by moving powder milling out of Building 56, 2) provide much needed additional warehouse space and 3) provide space for additional freeze-drying equipment to increase our production capacity to approximately $40 million per year. Due to the loss in gross margin on product sales during the first quarter of 2023 caused by the slowdown in production output necessary to remediate a product contamination event, we have decided to defer, for the time being, completion of the investment to build out Building 165. The objective to separate our powder milling operations out of Building 56 has been achieved by moving milling to Building 175 for the time being.

Other:

During the first quarter of 2017, we entered into a renewable, two-year lease for approximately 1,350 square feet of office, warehouse and garage space in Warsaw, New York to support our farm operations. This lease was extended through and terminated at the end of March of 2021. During March of 2021, we entered into a different renewable, two-year lease for approximately 1,300 square feet of office, storage and parking space in New York.

Subsequently, we entered into a new two-year lease to the same property through March of 2025 that includes an option to renew for an additional two-year term. We are renting approximately 960 square feet in Winona, Minnesota for a sales office through at least June 2021.office. This lease automatically renews with 4% increases for one-year terms unless we or the landlord give 60-days’ notice of a change.

On September 12, 2019, we entered into The current term expires in June 2023. We do not expect to provide notice of cancellation at this time. We also maintain access to cows (as a lease covering approximately 14,300 square feetsource of office and warehouse space with a Lease Possession Datecolostrum used in the production of November 15, 2019 and a Lease Commencement Date of February 13, 2020 for some of our USDA-regulated manufacturing operations. We have renovated this space to help us expand our production capacity for the First Defense^® product line. Once our capacity expansion investment for the First Defense^® product line is completed during the second quarter of 2021, this space will be used for all of our powder filling, gel formulation and assembly services. The lease term is ten yearsline) through contractual relationships with a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property taxes, utilities, insurance, maintenance and related building and operating expenses.

commercial dairy farms. We maintain property insurance in amounts that approximate replacement cost and a modest amount of business interruption insurance. We also maintain access to certain animals, primarily cows as a source of colostrum used in the production of the First Defense^® product line, through contractual relationships with commercial dairy farms.

ITEM 3 — LEGAL PROCEEDINGS

In the ordinary course of business, we may become subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of any such lawsuits, investigations and claims against us, we do not believe that any pending or threatened legal proceedings to which we are or could become a party will have a material adverse effect on our business, results of operations, or financial condition.

ITEM 4 — MINE SAFETY DISCLOSURES

None

ImmuCell Corporation

PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol ICCC. As of March 19, 2021,10, 2023, we had 15,000,000 common shares authorized and 7,220,8367,746,864 common shares outstanding, and there were approximately 712661 shareholders of record. We have not paid dividends on our common stock and do not have any present plan or expectation to pay dividends.

Equity Compensation Plan Information

The table below summarizes the common stock reserved for issuance upon the exercise of stock options outstanding as of December 31, 20202022 or that could be granted in the future:

Purchase of Equity Securities

During the fourth quarter of 2020,2022, we accepted as partial$30,670 in cash in consideration for the exercise of stock options,options. During 2021, we accepted $11,693 in cash and the surrender of 6,58317,128 stock options with a fair market value ranging from $5.94$9.52 to $5.99$10.02 per share at the time of exercise.exercise in consideration for the exercise of stock options. In all cases, new shares were issued from treasury stock.

ITEM 6 — SELECTED FINANCIAL DATA[RESERVED]

Not applicable

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and the related notes and other financial information included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, and related financing, includes forward-looking statements that involve risks and uncertainties. One should review Part I, Item 1A — “Risk Factors” of this Annual Report for a discussion of some of the important factors that could cause actual results to differ materially from the results, objectives or expectations described in or implied by the forward-looking statements contained in the following discussion and analysis.

Liquidity and Capital Resources

Net cash provided by(used for) operating activities improved to $1.3was ($1.5) million during the year ended December 31, 20202022 in comparisoncontrast to $234,000net cash provided by operating activities of $954,000 during the year ended December 31, 2019. Cash paid for capital expenditures2021. The $2.5 million decrease in net cash provided by operating activities from period to period was $4.1largely the net result of a $2.4 million increase in the net loss with $2 million more cash being used to build inventory being net against $1.8 million more cash being generated by the collection of accounts receivable. As we increased our production capacity to eliminate the backlog of orders, our inventory balance increased to $6 million as of December 31, 2022 from $3.1 million as of December 31, 2021. Our total depreciation and $1.4amortization expense was approximately $2.5 million during both of the years ended December 31, 20202022 and 2019, respectively. Our total depreciation expense was approximately $2.3 million and $2.2 million during the years ended December 31, 2020 and 2019, respectively.2021. We anticipate that depreciation expense, while not affecting our cash flows from operations, will resultbe a significant factor in creating annual net operating losses until and unless product sales increase sufficiently to offset these non-cash expenses. Going forward, repaymentsNet cash (used for) investing activities was ($4) million during the year ended December 31, 2022 in comparison to net cash (used for) investing activities of ($1.6) million during the indebtedness incurred to fund these capital expendituresyear ended December 31, 2021. Approximately $4 million and acquire these assets will reduce our$2.6 million of cash flows. Debt principal payments (exclusive of the $8.3 millionwas used to repay our refinanced bank debt during the first quarter of 2020acquire property, plant and $624,000 used to pay down our mortgage loan during the fourth quarter of 2020) were $633,000 and $861,000equipment during the years ended December 31, 2022 and 2021, respectively, which payments were largely related to our ongoing investments to expand our manufacturing facilities. Net cash provided by financing activities decreased to $1.1 million during the year ended December 31, 2022 in comparison to net cash provided by financing activities of $3.9 million during the year ended December 31, 2021. During 2022, we received $2 million in debt proceeds compared to $400,000 in debt proceeds received during 2021. We raised no new equity during 2022, but during 2021, we raised $4.2 million from a public offering of common stock. Debt principal repayments will continue to reduce our cash flows.

ImmuCell Corporation

We entered into several bank debt refinancings and amendments with Gorham Savings Bank (GSB) from the first quarter of 2020 to the first quarter of 2022 that have improved our liquidity by spreading our principal payments out over a longer period of time and pushing out balloon principal payment obligations that existed under some of the repaid debt. Also, because all of this debt bears interest at fixed rates, we are avoiding the adverse effects of rising interest rates on our debt service costs. The blended interest rate on this debt, including the State of Maine debt from the Maine Technology Institute (MTI) described below, is 3.65% per annum (3.52% per annum excluding the MTI debt). As of December 31, 2022, we had total bank debt outstanding (including the MTI debt) of approximately $10.2 million as compared to approximately $9.1 million as of December 31, 2021. Debt principal repayments aggregated approximately $897,000 and $768,000 during the years ended December 31, 2022 and 2021, respectively. We anticipate that debt principal repayments will aggregate approximately $1 million during the year ending December 31, 2023. Interest expense (excluding amortization of debt issuance costs) was approximately $341,000 and $307,000 during the years ended December 31, 2022 and 2021, respectively. We anticipate that interest expense will be approximately $352,000 during the year ending December 31, 2023. During the first quarter of 2022, the availability of our $1.0 million line of credit, which bears interest at the National Prime Rate per annum, was extended until March 11, 2024. These credit facilities are secured by substantially all of our assets, including our facility at 56 Evergreen Drive in Portland (which was independently appraised at $6.3 million in connection with the 2022 financing) and our facility at 33 Caddie Lane in Portland (which was independently appraised at $3.2 million in connection with a 2017 financing and at $2.5 million in connection with a 2020 refinancing). These credit facilities are subject to certain restrictions and financial covenants. We are required to meet a minimum debt service coverage (DSC) ratio set by GSB of 1.35. Our actual DSC ratio was equal to 2.68, 2.03 and 1.57 during the years ended December 31, 2021, 2020 and 2019, respectively. We are obligatedBy negotiation with GSB in connection with the 2022 financing, the required minimum DSC ratio was reduced to make principal repayments of approximately $768,000, $818,000 and $916,000 under these loans during1.0 for the yearsyear ending December 31, 2021,2022. The actual DSC ratio during the year ended December 31, 2022 was 0.44. The compliance requirement with the DSC ratio was waived by GSB for 2022. During the first quarter of 2023, the DSC ratio covenant for the year ending December 31, 2023 was waived by GSB. Instead, we are required to meet a minimum DSC ratio requirement of 1.35 for the twelve-month periods ending June 30, 2024, September 30, 2024 and December 31, 2024 and then again annually after that.

During June 2020, we received a $500,000 loan from the Maine Technology Institute (MTI). The first 2.25 years of this loan were interest-free with no interest accrual or required principal payments. Principal and interest payments at a fixed rate of 5% per annum are due quarterly over the final 5 years of the loan, which began during the fourth quarter of 2022 and continues through the third quarter of 2027. During July 2021, we received an additional $400,000 loan from the MTI. The first 2 years of this second loan are interest-free with no interest accrual or required principal payments. Principal and interest payments at a fixed rate of 5% per annum are due quarterly over the final 5.5 years of the loan, beginning during the third quarter of 2023 respectively.and continuing through the fourth quarter of 2028. Both loans are unsecured and subordinated to all other bank debt from GSB and may be prepaid without penalty at any time. This support from the State of Maine through the MTI helps us move forward aggressively with our investments while increasing our total employee count.

ImmuCell Corporation

From the first quarter of 2016 through the second quarter of 2021, we raised gross proceeds of approximately $26.7 million (net proceeds were approximately $24.8 million) from six different common equity transactions priced between $5.25 and $8.25 per share with a weighted average price of approximately $5.87 per share. No warrants were issued in connection with any of these transactions, and no convertible or preferred securities were issued. This capital, together with our bank debt and gross margin from product sales, has allowed us to transform the Company. We are (and have been) investing significantly to increase our capacity to produce the First Defense^® product line from approximately $16.5 million to approximately $40 million in annual sales volume per year. The actual value of our production capacity varies based on biological and process yields, product format mix, selling price and other factors. Based on our best estimates and projections, we believe that our cash and cash equivalents, together with gross margin anticipated to be earned from ongoing product sales, will be sufficient to meet our most urgentcurrently planned working capital and capital expenditure requirements and to finance our ongoing business operations for at least twelve12 months (which is the period of time required to be addressed for such purposes by accounting disclosure standards) from the date of this filing. We have funded most of our business operations principally from the gross margin on our product sales and equity and debt financings. The table below summarizes the changes in selected, key accounts (in thousands, except for percentages):

ImmuCell Corporation

We have invested and continue to invest in eight different capital expenditure projects to increase our production capacity for the First Defense^® product line and complete the development of Re-Tain^®. When we describe the production capacity for the First Defense^® product line in this report, it should be noted that the actual value of this capacity varies based on biological and process yields, product format mix, selling price and other factors. From the first quarter of 2016 through the first quarter of2014 to 2019, we raised gross proceeds of approximately $22.5 million (net proceeds were approximately $20.5 million) from five different common equity transactions priced between $5.25 and $7.30 per share. No warrants were issued in connection with any of these transactions, and no convertible or preferred securities were issued.

From 2010 to 2017, we secured five different debt financings with TDBank N.A., each with different maturity dates and balloon principal repayment obligations. During the first quarter of 2020, we closed on a debt refinancing aggregating $8.6 million plus a line of credit in the amount of $1.0 million with Gorham Savings Bank (GSB). This new debt was comprised of a $5.1 million mortgage loan that bears interest at a fixed rate of 3.50% per annum (with a 10-year term and 25-year amortization schedule) and a $3.5 million note that bears interest at a fixed rate of 3.50% per annum (with a 7-year term and amortization schedule). The refinancing proceeds were used to provide some additional workinginitiated four capital but mostly to refinance $8.3 million of then outstanding bank debt and pay off an interest rate swap termination liability of $165,000. This debt refinancing improved our liquidity by lowering our interest expense, spreading our principal payments out over a longer time period and eliminating pending balloon principal payments that existed under some of the repaid debt. We were required to hold $1.4 million in escrow (a non-current asset), which reduced the effective availability of our liquid assets for operational needs by that amount. During the fourth quarter of 2020, we closed on a $1.5 million note with GSB that bears interest at a fixed rate of 3.5% per annum (with a 7-year term and amortization schedule). We used $624,000 of the proceeds to prepay a portion of the then outstanding principal on our mortgage loan, which reduced the then outstanding balance to 80% of the most recent appraised value of the property securing the debt, which allowed GSB to release the $1.4 million of funds held in escrow. These credit facilities are subject to certain restrictions and financial covenants and are secured by substantially all of our assets, including our facility at 56 Evergreen Drive in Portland (which was independently appraised at $4.2 million in connection with the 2015 financing and at $3 million in connection with the 2020 refinancing) and our facility at 33 Caddie Lane in Portland (which was independently appraised at $3.2 million in connection with the 2017 financing and at $2.5 million in connection with the 2020 refinancing).We are required to meet a minimum debt service coverage ratio set by GSB of 1.35. Our actual debt service coverage ratio was equal to 2.03 and 1.57 during the years ended December 31, 2020 and 2019, respectively. However, based on current projections of our future financial performance, which includes a high level of ongoing product development expenses to support Re-Tain™, we may not satisfy this annual requirement for the year ending December 31, 2021. We are negotiating an acceptable solution with GSB.

During June 2020, we received a $500,000 loan from the Maine Technology Institute that is subordinated to all other bank debt. The first 27 months of this loan are interest-free with no interest accrual or required principal payments. Principal and interest payments at a fixed rate of 5% per annum are due quarterly over the final five years of the loan, beginning during the fourth quarter of 2022 and continuing through the third quarter of 2027. The loan may be prepaid without penalty at any time.

ImmuCell Corporation

Our capital expenditures during the seven-year period from January 1, 2014 to December 31, 2020 areexpenditure investments, as described in the following table:table (in thousands):

PROJECT A (which was completed during 2016) included a 7,100 square foot facility addition at 56 Evergreen Drive and related equipment (including freeze-dryer #2) and cold storage capacity to increase the production capacity for the First Defense^® product line. During the first quarter of 2016, we completed this investment, increasing our freeze dryingfreeze-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. The actual value of this production output varies based on production yields, selling price, product format mix and other factors. This investment also included the construction and equipping of a pilot plant for small-scale Drug Substance production facility for Re-Tain™Re-Tain^® within our First Defense^®production facility at 56 Evergreen. Since ProjectEvergreen Drive. After PROJECT B was completed, this space has been used to producewas converted for use in the production of the gel tube formats of the First Defense^®product line. One of the objectives of Projectline at 56 Evergreen Drive. After PROJECT C is to move the gel tube operations to 175 Industrial Way so that the vacated was completed, this space can be usedwas converted to double our liquid processing capacity at 56 Evergreen Drive.

PROJECT B (which was completed during 2018) was related to the Drug Substance production facility for Re-Tain™ Re-Tain^®at 33 Caddie Lane. During the fourth quarter of 2017, we completed construction of the Drug Substance production facility. We began equipment installation during the third quarter of 2017, and we completed this installation during the third quarter of 2018. The total cost of this investment for the Drug Substance production facility and related processing equipment was $20.8 million plus $331,000 for the land and $472,000 for the acquisition of an adjacent 4,1004,080 square foot warehouse facility at 14 Wedge Way, which is now beingwill be used for packing, shipping and cold storage of First DefenseRe-Tain^{®® operations.} and other warehousing needs. (See PROJECT G, below).

PROJECT C (which we anticipate completing during the second quarter of 2021) consistsconsisted of significant renovations to a 14,300 square foot leased facility at 175 Industrial Way, some facility modifications at 56 Evergreen Drive and the necessary production equipment (including freeze-dryer #3) to increase the annual production capacity of the First Defense^® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. These production capacity projections differ moderately from prior estimates largely because of biological yield differences and changes in the product format mix. The actual value of our production output varies based on production yields, selling price, product format mix and other factors. This expansion involvesinvolved a 50% increase in our freeze drying capacityfreeze-drying equipment and a 100% increase in our liquid processing capacity. Renovations to our leased facility at 175 Industrial Way to enable this expansion were completed during the second quarter of 2020. A site license approval for this new facility was issued by the USDA during the third quarter of 2020. By moving our powder and gel filling and assembly services from 56 Evergreen Drive into this new space at 175 Industrial Way, we created space at 56 Evergreen Drive for the installation of the expanded freeze dryingfreeze-drying capacity. We completed that installationThe new facilities are built to contemporary cGMP standards with good material and people flows. A site license approval for this new facility at 175 Industrial Way was issued by the USDA during the firstthird quarter of 2021. Presently,2020. During the second quarter of 2021, we are completingcompleted the relocation of our gel formulation equipment from 56 Evergreen Drive to 175 Industrial Way, creatingwhich created the space for the doubling ofnecessary to double our liquid processing capacity at 56 Evergreen Drive. We deferred the implementation of this final phaseobtained site license approval of the expansion project toexpanded freeze-drying capacity at 56 Evergreen Drive from the secondUSDA during the third quarter of 2021, in order not to disrupt finished product releases during our peak selling season. Equipment modifications and relocationswe obtained site license approval of this nature require a shut down of operations for several weeks to validate the modified equipment and achieveexpanded liquid processing capacity at 56 Evergreen Drive from the USDA approval for its use in its new location. Since this investment was initiated during 2019 and through December 31, 2020, we paid approximately $3.2 million towards Project C, leaving an investment of approximately $300,000 to complete the investment during the secondthird quarter of 2021.2022. As part of this $3.5 million investment, we also have made the facility modifications at 56 Evergreen Drive to create the space necessary for a future expansion ofto expand our freeze drying capacityfreeze-drying equipment (including freeze-dryer #4) by an additional 33%, which would increase our annual production capacity from approximately $23 million to approximately $30 million. The equipment required to achieve this further production capacity increase would cost approximately an additional $800,000. We anticipate bringing this further expanded production capacity on-line duringmillion or more (together with the second half of 2022 to meet projected growthwork involved in sales demand.PROJECT F discussed below).

ImmuCell Corporation

PROJECT D (construction of which we anticipate completing by the end of 2022) is a $4 million budgeted investment to bring the formulation and aseptic filling servicescapabilities for Re-Tain™Re-Tain^® Drug Product in-houseinto available space in our Drug Substance facility to end our reliance on third-party Drug Product manufacturing services. We expectbegan initial equipment installation during the first quarter of 2022. We have presently paused this installation work pending concurrence with the FDA pertaining to our third submission of the CMC Technical Section, which is discussed in greater detail below. Due to the loss in gross margin during the first quarter of 2023 caused by the slowdown in production output necessary to remediate a product contamination event, we have decided to defer spending of approximately 42% of these funds for the time being. We anticipate FDA approval of this facility to be operational(which is a requirement for commercial manufacturing) during 2022. Since2025 if we resume spending on this investment was initiated during 2019 and through December 31, 2020, we have expended approximately $1.1 million towards Project D, leaving an investment of approximately $2.9 million to completeproject in the project during 2021 and 2022.coming months.

During 2021, we initiated three more capital expenditure investments, and during the second quarter of 2022, we initiated one additional capital expenditure investment, as described in the following table (in thousands):

In addition to the specific projects listed above, our budget for routine and necessarymiscellaneous capital investments and replacements during the years. The original budgetexpenditures for the year ended December 31, 2020 of $300,0002022 was increased$825,000. We spent approximately $34,000 more than this budget amount during 2022, and we expect to $450,000. The budget for 2021spend approximately $97,000 during 2023 to complete these miscellaneous expenditures from the 2022 budget. These routine and 2022 is $550,000 per year.

We have set aside approximately $4.3 million ofmiscellaneous capital expenditures amounted to $260,000, $554,000 and $574,000 during the $7.9 million of the cash we had on hand as ofyears ended December 31, 2020 to complete the investments in Projects C and D and to fund Project E for 2021, and 2022. We plan to complete our $3.5 million investment to increase our production capacity so that we can fill the backlog of orders, meet ongoing demand and use any excess production to build inventory stocks by the end of 2021. This will also require that we invest some available cash in inventory. Our inventory balances were $2.1 million and $2.5 million as of December 31, 2020 and 2019, respectively. Our inventory balances consisted of approximately 1%The spend on this budget category during 2021 was lower than expected, and, 21% finished goods as of December 31, 2020 and 2019, respectively. See Note 5a result, the spend during 2022 was higher than the historical norm. The budget for these miscellaneous capital expenditures during 2023 is $1,000,000. Due to the accompanying audited financial statementsloss in gross margin during the first quarter of 2023 caused by the slowdown in production output necessary to remediate a product contamination event, we have decided to reduce spending on these routine and miscellaneous capital expenditures by 50% for more details about our inventory.the time being.

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

Results of Operations

Business Segments

As detailed in Note 17, “Segment Information”, to the accompanying audited financial statements, we operate in two business segments. The Scours segment is dedicated to manufacturing and selling First Defense^®, a product used to prevent scours in newborn calves, which is regulated by the USDA. The Mastitis segment is focused on developing and commercializingRe-Tain^®, a product to treat subclinical mastitis in lactating dairy cows, which is regulated by the FDA.

ImmuCell Corporation

Product Sales

TotalThrough continued growth in sales of the First Defense^® product line, and as additional resources are dedicated to production, sales, marketing and technical services, it is our objective to exceed our total product sales of approximately $19 million achieved during the year ended December 31, 2022 as soon as possible. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the five-year period after the market launch of Re-Tain^®. We do not solely benchmark our sales expectations off trailing twelve-month sales results. Instead, we look at the sales of competitive products to assess the size of the addressable market and plan for growth when projecting our future production capacity needs.

Sales decreased by 4%, or $675,000, to $18.6 million during the year ended December 31, 2022, in comparison to $19.2 million during the year ended December 31, 2021. Domestic sales during the year ended December 31, 20202022 increased by 12%2%, or $1.6 million, to $15.3 million from $13.7 million during the year ended December 31, 2019, with domestic sales increasing by 12% and international sales increasingdecreased by 11%41%, in comparison to the year ended December 31, 2019.2021. International sales aggregated 11%8% and 14% of total sales during both the years ended December 31, 2020 and 2019. The compound annual growth rate of our total product sales during the ten years ended December 31, 2020 was approximately 13%. The compound annual growth rate of our total product sales during the three years ended December 31, 2020 was approximately 18%. Sales achieved during 2020 were the equivalent of approximately 93% of the $16.5 million that we estimate to be our current annual production capacity. As of December 31, 2020, we had depleted our available finished goods inventory and had a backlog of orders worth approximately $1.8 million, compared to backlogs of approximately $130,000, $945,000, $1.4 million and $0 as of September 30, 2020, June 30, 2020, March 31, 2020 and December 31, 2019, respectively. If we had been able to ship the backlog of orders before December 31, 2020, our total sales for the year ended December 31, 2020 would have reached approximately $17.2 million. This pro-forma calculation indicates the current annual demand for our product and demonstrates the need for us to increase our annual production capacity over the current level of approximately $16.5 million (Project C, discussed above). While this is a very positive indication about the strong demand for our First Defense^® product line, not being able to meet the needs of our customers presently could result in the loss of some customers that seek alternative scours management products during this period of short supply and may not resume purchasing our product when we have eliminated the backlog. We are missing some business during the peak season of 2021. As a result of this short supply, we anticipate that our sales during the three-month period ending March 31, 2021 will be approximately 16% lower than the sales recorded during the three-month period ended March 31, 2020. The projected sales for the first quarter of 2021 represent the equivalent of approximately 100% of the $4.1 million that we estimate to be our current quarterly production capacity. As our product mix shifts in favor of Tri-Shield First Defense^®, it has become more difficult to achieve or exceed this estimated production capacity. After our increased production capacity comes on-line during the second quarter of 2021, and assuming we sell and produce to plan, we expect sales for the year ending December 31, 2021 to be greater than sales recorded during the year ended December 31, 2020. A precise estimation of the amount of the recovery from the first quarter sales drop to the anticipated year-over-year sales increase is very difficult to make, given the uncertainties related to the impacts of new business opportunities missed due to COVID-related restrictions and customers lost (that may be or may not return at or above prior levels of purchasing) and other factors experienced during the period of order backlog.

ImmuCell Corporation

Investments in the First Defense^® product line have created positive results. Sales of the First Defense^® product line increased by 14% during the year ended December 31, 2020 in comparison to the year ended December 31, 2019, aggregating 98% and 97% of our total product sales during the years ended December 31, 20202022 and 2019,2021, respectively. The annual sales results are summarized in the following table (in thousands, except for percentages):

Sales of the First Defense^® product line aggregated 99% and 98% of our total sales during the years ended December 31, 2022 and 2021, respectively. Our sales are seasonal with highest sales expected during the first quarter of each year. Most of our growth (when not limited by backlog) is being realized through increased demand and a deliberate strategy to bias limitedprioritize production capacity towards Tri-Shield First Defense^®(the (the trivalent format of our product delivered via a gel tube), which provides broader protection to calves.

Starting in the third quarter of 2016 and through most of 2017, we had sufficient available inventory and were shipping in accordance with the demand The compound annual growth rate (CAGR) of our distributors. However, we quickly sold out of our initial launch quantities of Tri-Shield First Defense^® soon after regulatory approvaltotal product sales was obtained12.4%, 14.0% and 10.6% during the fourth quarter of 2017. During most of 2018eleven-year, four-year, and into the first half of 2019, we could only accept purchase orders from customers for Tri-Shield^® to match available inventory, which required a careful allocation of product supply directly to certain end-users and veterinary clinics. Initially, production of this new product format did not keep pace with demand primarily because of our inability to produce enough of the new, complex rotavirus vaccine that is used to immunize our source cows. Work on production improvements in our vaccine laboratory throughout 2018 led to significant improvements in vaccine yield and process repeatability resolving this Tri-Shield^® shortfall going into 2019. Allowing for the five to six month production cycle from the manufacture of our proprietary vaccine to the production of a finished dose, we were able to return to a mass market selling approach through distribution for Tri-Shield^® during the second half of 2019. Wethree-year periods ended the year with no backlog of orders for the First Defense^® product line as of December 31, 2019. Our current production output was not enough to meet increasing demand for the First Defense^® product line during 2020, and, as noted above, we ended the year with a backlog of orders worth approximately $1.8 million as of December 31, 2020. We expect to fully realize the benefits of our expanded production capacity beginning during the second quarter of 2021.2022, respectively.

Valuation of the backlog is a non-GAAP estimate that is based on purchase orders on hand at the time that could not be met because of a lack of available inventory. While we are confident thatQuantification of the backlog during the current periods has become far less comparable to prior periods. At times, customers have placed orders for more than a month’s worth of their demand, perhaps in reaction to our customers would have accepted and paid for this product if itongoing backlog situation, whereas in the past they ordered more closely in line with their current demand. The backlog was reduced from approximately $2.4 million as of December 31, 2021 to approximately $205,000 as of September 30, 2022. We had been availableadequate finished goods inventory to ship we do allow customersmost of this backlog during the third quarter, but the product was held for cold shipping on the first Monday of October. In part because of a first contamination event experienced around the end of the third quarter of 2022, our backlog increased to cancel orders, in whole or inapproximately $2.5 million as of December 31, 2022. In part to meet their current needs as time goes by. This is happeningbecause of a second contamination event experienced during the first quarter of 20212023, the backlog increased further to approximately $8 million as of March 10, 2023. We are reporting this figure because it does reflect the orders on our books presently that we cannot ship. However, we do not believe this backlog is highly relevant anymore as it includes very old orders, redundancy in demand and orders that may continuebe cancelled. We likely lost some business during 2022 as a result of the backlog. Our inability to happen astimely 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 who 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 with more inventory becoming available later in 2023. We will work to clearregain 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 backloglonger periods of time, even if we experience some quarter-to-quarter fluctuations.

A supply disruption pertaining to needed plastic syringes used in our gel product format resulted in the drop in sales during the second quarter of 2021. Therefore,2022. This supply disruption was resolved during the measurementthird quarter of 2022. The significant global supply-chain disruptions that almost all industries are experiencing presently are a challenge to us and contribute to our order backlog. Prices for raw materials and critical supplies are increasing significantly, and it is becoming increasingly more difficult to obtain timely delivery of the backlog amount is no longer a consistent indication of the amount of unmet demand for our product. As the increased production capacity comes online during the second quarter of 2021,orders that we expect to fulfill the remaining backlog and meet ongoing strong demand. This would allow us to build inventory during the second half of 2021and return to a growth mode, as we prepare for peak season sales during the first quarter of 2022 without risk of backlog.

We are gaining market share in the United States year after year with our Beyond Vaccination^® strategy. Our share of the market (on a unit volume basis) of scour preventative products administered at the calf-level increased to approximately 41% during 2020 (from 36% during 2019, 34% during 2018 and 32% during 2017). Our share of the market of calves treated with products administered to calves and those administered to the dam prior to calving (adjusting for two doses of dam-level scour vaccines required for primary vaccination of first-calf-heifers) increased to approximately 13% during 2020 (from 11% during 2019, 10.3% during 2018 and 9.7% during 2017). We see the potential for future market share growth in the dairy market, andplace. Therefore, we have increasedlittle 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 focus on the beef market.orders fulfilled timely.

ImmuCell Corporation

Effective January 1, 2019,2023, we implemented a 2%increased our selling price increase for Dual-Force^®. Effective February 1, 2020, we implemented a price increase of approximately 2% on the First Defense^® product line (except for Tri-Shield^® and the 90-dose bulk powder format)by approximately 3% (range of 2% to 4%) and CMT by approximately 5%. Effective January 1, 2022, we increased our selling price of the First Defense^®product line by approximately 5% and CMT by approximately 7%. Effective January 1, 2021, we increased our selling price of the First Defense^® product line in the domestic market by approximately 1.6% to 3%, depending on product format, and we increased our selling price of CMT by almost 4%.

Sales of products other than the First Defense^®

ImmuCell Corporation

We acquired a private label product line decreased by 44%, or $209,000, to $270,000 during the year ended December 31, 2020 in comparison to the year ended December 31, 2019. Sales of these other products aggregated approximately 2% and 3% of our total product sales during the years ended December 31, 2020 and 2019, respectively. We sell our own CMT (our(our second leading source of product sales during 2020 and our third leading source of product sales during 2019) which is used to detect somatic cell counts in milk. We acquired a private label product (our third leading source of product sales during 2020 and our second leading source of product sales during 2019)2021) in connection with our January 2016 acquisition of certain gel formulation technology. This product was discontinued during the first quarter of 2022 because it was not a significant contributor to our total sales and it competed for valuable time and space in our production schedule. We have made and sold bulk reagents for Isolate™ (our fourthsell our own CMT (our third leading source of product sales during 2019)2021), which is a drinking water test that is soldused to detect somatic cell counts in milk. Sales of these products (other than the First Defense^® product line) decreased by our former distributor in the United Kingdom. We made one final sale of this productapproximately 50%, or $154,000, to this distributor worth $134,000 during the first quarter of 2019. Because this product was non-core to our strategic focus, we sold the underlying cell line assets and intellectual property to our former distributor during the third quarter of 2018 for $700,000. We have retained the rights to all animal health, diagnostic, feed and nutritional applications of this technology.

The extent of the negative impact of the COVID-19 pandemic on the economics of our customers and on the demand for our products going forward is very difficult to assess. The Class III milk price (measured in dollars per 100 pounds) averaged $18.16$156,000 during the year ended December 31, 2020, but this price has been extremely volatile2022, in comparison to the year ended December 31, 2021. Sales of these other products aggregated approximately 1% and 2% of our total product sales during the pandemic. For example, the price increased by 102% from a low of $12.14 during May 2020 to a recent high of $24.54 during July, which is very close to an all-time record high of $24.60 during September 2014. Initially, stay at home orders disrupted the food service supply system as schools closedyears ended December 31, 2022 and restaurants were shut down. In response, producers were forced to reduce the supply of milk to the market by drying off cows early, culling cows from the herd and dumping milk, among other tactics. Market conditions are better now, but this volatility remains a concern, and there is no way to be confident that these recent high milk prices will be sustained. The $938,000 in funding that we received from the federal government through the Paycheck Protection Program (PPP) under the CARES Act helped us maintain full employment without furloughs or layoffs and continue executing our growth plans, even though we may see a future decline in sales and gross margin as a result of the pandemic. The PPP funding created some needed financial liquidity allowing us to move forward with our investments even though we did not achieve the level of sales anticipated in our 2020 budget. After making several inquiries into different laboratories, we were able to have our antibodies tested for effectiveness against COVID-19 during the second quarter of 2020. While we understood that COVID-19 and bovine coronavirus are in different taxonomic groups, we wanted to investigate whether our antibodies could offer some cross-neutralization of COVID-19 in the laboratory testing. Unfortunately, the test results indicated, as expected, that our antibodies offered no viral neutralization activity, meaning they would be ineffective against COVID-19.2021, respectively.

Gross Margin

ImmuCell Corporation

Gross Margin

ChangesThe change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales are summarized in the following table for the respective periods (in thousands, except for percentages):