IMMUCELL CORP DE

Previous wording

This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and will often include words such as “expects”, “may”, “anticipates”, “aims”, “intends”, “would”, “could”, “should”, “will”, “plans”, “believes”, “estimates”, “targets”, “projects”, “forecasts”, “seeks” and similar words and expressions. Such statements include, but are not limited to, any forward-looking statements relating to: our plans and strategies for our business; projections of future financial or operational performance; the timing and outcome of pending or anticipated applications for regulatory approvals; future demand for our products; the consequences of the COVID-19 pandemic, and their direct and indirect impacts on our production activities, operating results and financial condition and on the customers and markets that we serve; the impact of Russia’s unprovoked military invasion of Ukraine (and attack on its people) and the war in the Middle East on the world economy including inflation and the price and availability of grain and oil; the impact of the global supply-chain disruptions on our ability to obtain, in a timely and cost-effective fashion, all the supplies and components we need to produce our products; the impact of inflation and rising interest rates on our operating expenses and financial results; the scope and timing of ongoing and future product development work and commercialization of our products; future costs of product development efforts; the estimated prevalence rate of subclinical mastitis and producers’ level of interest in treating subclinical mastitis given the current economic and market conditions; the expected efficacy of new products; estimates about the market size for our products; future market share of and revenue generated by current products and products still in development; our ability to increase production output and reduce costs of goods sold per unit; the adequacy of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for our products on a timely basis; the impacts of backlogs on customer relationships; the efficacy, success and timeline to complete our contamination remediation efforts; the likelihood, severity or impact of future contamination events; the anticipated costs of (or time to complete) planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the robustness of our manufacturing processes and related technical issues; estimates about our production capacity, efficiency and yield; the salability of products currently held in inventory pending regulatory approval; future regulatory requirements relating to our products; future expense ratios and margins; the efficacy of our investments in our busi…

Excerpt shortened here; the source contains the full paragraph.

Current wording

This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and will often include words such as “expects”, “may”, “anticipates”, “aims”, “intends”, “would”, “could”, “should”, “will”, “plans”, “believes”, “estimates”, “targets”, “projects”, “forecasts”, “seeks” and similar words and expressions. Such statements include, but are not limited to, any forward-looking statements relating to: our plans, goals and strategies for our business; projections of future financial or operational performance; the timing and outcome of pending or anticipated applications for regulatory approvals and pending or anticipated regulatory inspections of our facilities and those of our contract manufacturers; future demand for our products; future adoption ofRe-Tain® by dairy producers; growth in acceptance of ourFirst Defense® product line by dairy and beef producers; the impact of international disputes (including Russia’s invasion of Ukraine and unrest in the Middle East) on the world economy including inflation and the price and availability of grain and oil; the impact of the global supply-chain disruptions on our ability to obtain, in a timely and cost-effective fashion, all the supplies and components we need to produce our products; the impact of inflation, tariffs and rising interest rates on our operating expenses and financial results; the scope and timing of ongoing and future product development work and commercialization of our products; future costs of product development efforts; future incidence rates of subclinical mastitis and producers’ level of interest in treating subclinical mastitis; the expected efficacy of new products; estimates about the market size for our products; future market share of and revenue generated by current products and products still in development; our ability to increase production output and reduce costs of goods sold per unit; the adequacy of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for our products on a timely basis; the impacts of backlogs on customer relationships; the efficacy of our contamination remediation efforts; whether or not we will experience future contamination events; the anticipated costs of (or time to complete) planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the robustness of our manufacturing processes to meet future demand and related technical issues; estimates about our future production capacity, efficiency and yield; the salability of products currently held in inventory pending regulatory approval; future regulatory requirements relating to our products; future expense ratios and margins; the future consequences and effectiveness of our investments in …

Excerpt shortened here; the source contains the full paragraph.

Previous wording

We are fortunate to be experiencing strong customer demand for the First Defense® product line, but the significant investments in facilities, equipment and staffing necessary to double our production capacity have been challenging. Despite delays in the installation of certain equipment, we completed these capacity-expanding investments around the end of 2022. In late 2022, we began experiencing production contamination events that became more frequent during 2023 and continued through April of 2024. In July of 2023, we secured $3 million in debt financing to help offset some of the lost sales and gross margin resulting from the slowdown implemented to mitigate the contamination events. With newly implemented controls in place, we now believe that we have successfully remediated the issues underlying these contamination events. Our next challenge is to resume our past production yields and achieve our gross margin goals of 35% to 40%, in comparison to the 27% that we recorded during the nine-month period ended September 30, 2024. We believe that by both remediating the contamination events and optimizing the operation of the new equipment installed to increase production output, we can improve process yields beginning during the fourth quarter of 2024 and into 2025. We do not see one “smoking gun” as the root cause to the contamination and yield losses. We think the solution is more about optimizing and controlling critical process parameters and multiple production inputs and process steps. Concurrently, we are reducing product development expenses as we await approval of Re-Tain®by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA). After an investment of about 25 years and approximately $50 million in the development of this technology, we are committed to seeing this product through to regulatory approval and our previously disclosed limited distribution, controlled launch strategy (Controlled Launch). At the same time, we are also in the very early stages of exploring potential strategic partnerships that could offset some of our product development expenses and enhance a mass-market launch of Re-Tain®. We have decided that some stockholder ownership dilution is a necessary cost to incur in order to improve our cash position. To that end, our at the market offering pursuant to the At-The-Market Offering Agreement (ATM Agreement) has contributed meaningfully to our capital needs during 2024, as we stabilize our production systems at a higher output level.

Current wording

In response to the strong customer demand for theFirst Defense® product line that we are experiencing, we completed significant investments in facilities, equipment and staffing necessary to double our production capacity. Despite delays in the installation of certain equipment, we completed these capacity-expanding investments around the end of 2022. In late 2022, we began experiencing production contamination events that became more frequent during 2023 and continued through April of 2024. With newly implemented controls in place, we now believe that we have successfully remediated the issues underlying these contamination events. By remediating the contamination events, optimizing the operation of the new equipment installed to increase production output and implementing a price increase, we began to improve process yields beginning during the fourth quarter of 2024, as demonstrated by the 37% and 42% gross margin percentages that we achieved during the fourth quarter of 2024 and first quarter of 2025, respectively. We did not find one “smoking gun” as the root cause to the contamination and yield losses. We think the solution is more about optimizing and controlling critical process parameters and multiple production inputs and process steps.

Previous wording

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

Current wording

Net cash provided by operating activities was $1.6 million during the quarter ended March 31, 2025 in comparison to net cash provided by operating activities of $419,000 during the quarter ended March 31, 2024. This $1.2 million improvement in net cash provided by operating activities between the quarters was largely due to the $1.9 million increase in net income to $1.4 million during the quarter ended March 31, 2025 from a net loss of $438,000 during the quarter ended March 31, 2024. This improvement in net income was supplemented by an $862,000 increase in cash collected from accounts receivable that was net against the use of $1.5 million more cash used to purchase inventory and to pay accounts payable. Interest expense (excluding amortization of debt issuance and debt discount costs) was $117,000 and $136,000 during the quarters ended March 31, 2025 and 2024, respectively. Our debt bears interest at fixed rates, which on a blended basis amounts to 4.50% per annum. We anticipate that interest expense (excluding amortization of debt issuance and debt discount costs) will be $452,000 and $322,000 during the years ending December 31, 2025 and 2026, respectively. Our total non-cash depreciation, amortization and stock-based compensation expense was $739,000 and $759,000 during the quarters ended March 31, 2025 and 2024, respectively. We anticipate that depreciation expense (largely pertaining toRe-Tain®), while not affecting our cash flows from operations, will be a significant factor in reducing our net income until and unless product sales increase sufficiently to offset these non-cash expenses. Further, as we fill the order backlog forFirst Defense®, we will require additional capital to fund an anticipated increase in inventory levels.

Previous wording

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

Current wording

Net cash used for investing activities was $329,000 and $70,000 during the quarters ended March 31, 2025 and 2024, respectively, consisting solely of cash spent to fund the purchase of property, plant and equipment. To conserve cash at this time, we have deferred all large dollar capital expenditure projects.

Previous wording

Net cash provided by financing activities was $2.7 million during the nine-month period ended September 30, 2024 in comparison to net cash provided by financing activities of $2.1 million during the nine-month period ended September 30, 2023. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $11 million and $12 million as of September 30, 2024 and December 31, 2023, respectively. Debt principal repayments (excluding the line of credit) aggregated $1.1 million and $829,000 during the nine-month periods ended September 30, 2024 and 2023, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million during both of the years ending December 31, 2024 and 2025. During the first quarter of 2024, the availability of our $1 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. No draw on our line of credit was outstanding as of September 30, 2024 or December 31, 2023. Financing activities included a $3 million debt financing during the nine-month period ended September 30, 2023. See Note 10 to the accompanying unaudited financial statements for more information about our bank debt. During the second quarter of 2024, we entered into an ATM Agreement with Craig-Hallum Capital Group LLC, pursuant to which we may offer and sell up to $11 million of shares of our common stock. As of October 30, 2024, we had sold 1,160,725 shares under the at the market offering conducted pursuant to the ATM Agreement. Net proceeds through October 30, 2024 (net of approximately $152,000 in upfront legal, accounting and other fees and approximately $132,000 in sales commissions) were approximately $4,114,000. Gross proceeds from these sales during the three-month periods ended June 30, 2024 and September 30, 2024 were approximately $418,000 and $3.7 million, respectively. The ATM Agreement gives our board the flexibility to evaluate the potential uses of the proceeds while considering the cost of dilution in real time. This funding has provided a very productive financial bridge for us to fund our operations, while we work to improve our gross margin and reduce product development expenses. While the capital raised is not enough to fund larger capital expenditure investments, such as further increasingFirst Defense® production capacity or building our own facility for the aseptic filling services forRe-Tain®, it has allowed us to release funding for certain smaller and necessary capital expenditures. Further, as we fill the order backlog, we will require additional capital to fund an anticipated increase in inventory levels.

Current wording

Net cash used for financing activities was $404,000 and $367,000 during the quarters ended March 31, 2025 and 2024, respectively, consisting largely of debt principal repayments. We had aggregate debt outstanding (net of debt issuance and debt discount costs) of approximately $10.2 million and $10.5 million as of March 31, 2025 and December 31, 2024, respectively. We anticipate that debt principal repayments will aggregate approximately $1.5 million and $3.3 million during the years ending December 31, 2025 and 2026, respectively. During the first quarter of 2024, the availability of our $1 million line of credit, which bears interest at the National Prime Rate per annum, was extended until September 11, 2025. No draw on our line of credit was outstanding as of March 31, 2025 or December 31, 2024. See Note 9 to the accompanying unaudited financial statements for more information about our bank debt. During the second quarter of 2024, we entered into an At-The-Market (ATM) Agreement with Craig-Hallum Capital Group LLC, under which we may offer and sell up to $11 million of shares of our common stock. As of December 31, 2024, we had sold 1,228,227 shares under this ATM Offering conducted pursuant to the ATM Agreement. Net proceeds through December 31, 2024 (net of approximately $152,000 in upfront legal, accounting and other fees and approximately $140,000 in sales commissions) were approximately $4.4 million. There was not much activity under the ATM Offering during the first quarter of 2025, but we did incur professional fees to maintain the effectiveness of the program. From January 1, 2025 to May 6, 2025, we sold 58,306 shares under this ATM Offering generating net proceeds of approximately $269,884. The ATM Agreement gives our board the flexibility to evaluate the potential uses of the proceeds while considering the cost of dilution in real time. This funding has provided a very productive financial bridge for us to fund our operations, while we work to improve our gross margin and reduce product development expenses. While the capital raised is not enough to fund larger capital expenditure investments, such as further increasingFirst Defense® production capacity or building our own facility for the aseptic filling services forRe-Tain®, it has allowed us to release funding for certain smaller and necessary capital expenditures.

Previous wording

Based on our best estimates and projections, we believe that our cash and cash equivalents, together with gross margin anticipated to be earned from ongoing product sales will be sufficient to meet our currently planned working capital and capital expenditure requirements and to finance our ongoing business operations for at least 12 months (which is the period of time required to be addressed for such purposes by accounting disclosure standards) from the date of this filing. The table below summarizes the changes in selected key accounts (in thousands, except for percentages):

Current wording

We project (based on our best estimates) that our existing cash and cash equivalents, together with gross margin anticipated to be earned from ongoing product sales will be sufficient to meet our currently planned working capital and capital expenditure requirements and to finance our ongoing business operations for at least the next 12 months (the period of time required to be addressed for such purposes by accounting disclosure standards). The table below summarizes the changes in selected key accounts (in thousands, except for percentages):

Previous wording

During 2018, it became clear that demand forTri-Shield First Defense® was outpacing production. In response to this increasing demand, we began a series of investments during 2019 to increase our production capacity for theFirst Defense® product line from approximately $16.5 million to an estimate of approximately $30 million per year (with an option to increase further to approximately $40 million in the future). The primary purpose of the additional investment inFirst Defense® is to fulfill the current backlog and materially reduce the risk of another order backlog. Operating at very close to 100% of available capacity is not efficient or sustainable. Our objective is to be in position to operate without significant contaminations at the capacity level we choose to cover sales with adequate buffer stock, which would allow more time for necessary preventative maintenance. We also need to meet or exceed our production yield assumptions to succeed. Our production process is a very complicated one, which makes it difficult to scale-up quickly. We remain deeply committed to continuing to supply**First Defense®**to the market over the long term, despite the current short supply that we have been experiencing.

Current wording

We began significant investments to increase our production capacity forFirst Defense® product line during 2014. During 2018, it became clear that demand forTri-Shield First Defense® was outpacing production. In response to this increasing demand, we began a series of additional investments during 2019 to increase our production capacity for theFirst Defense® product line from approximately $16.5 million to approximately $30 million or more per year (with an option to increase further to approximately $40 million in the future). When we describe the production capacity for theFirst Defense® product line in this Quarterly Report, it should be noted that the actual value of this capacity varies based on biological and process yields, product format mix, selling price and other factors. The additional investment inFirst Defense® should allow us to fulfill the current backlog ofFirst Defense® orders. Operating at very close to 100% of available capacity is not efficient or sustainable. Our objective is to be in position to operate without contaminations or significant disruptions at the capacity level we choose to cover sales with adequate buffer stock, which would allow more time for necessary preventative maintenance. We also need to meet or exceed our production yield assumptions to succeed. Our production process is complex and difficult to scale-up quickly. We remain deeply committed to fulfilling the order backlog and meeting on going demand forFirst Defense®.

Previous wording

The first phase of the additional investments inFirst Defense® beginning in 2019 included significant renovations to a 14,300 square foot leased facility atBuilding 175A, some facility modifications atBuilding 56 and the necessary production equipment (including Freeze-Dryer #3) to increase our liquid processing capacity by 100% and our freeze-drying capacity by 50%. This resulted in increasing the annual production capacity of theFirst Defense® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. Renovations ofBuilding 175A to enable this expansion were completed during the second quarter of 2020. By moving our powder and gel filling and assembly operations fromBuilding 56 into this new space, we created space atBuilding 56 for the installation of the expanded freeze-drying capacity. The new facilities are built to contemporary current Good Manufacturing Practices (cGMP) standards with efficient material and people flows. A site license approval for this new facility was issued by the Center for Veterinary Biologics, U.S. Department of Agriculture (USDA) during the third quarter of 2020. During the second quarter of 2021, we completed the relocation of our gel formulation equipment fromBuilding 56 toBuilding 175A, which created the space necessary to double our liquid processing capacity atBuilding 56. We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) atBuilding 56 from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity atBuilding 56from the USDA during the third quarter of 2022. This investment also included equipment and vehicle purchases necessary to expand and improve our colostrum collection capabilities and logistics.

Current wording

The first phase of the additional investments inFirst Defense® beginning in 2019 included significant renovations to a 14,300 square foot leased facility atBuilding 175A, some facility modifications atBuilding 56 and the necessary production equipment (including Freeze-Dryer #3) to increase our liquid processing capacity by 100% and our freeze-drying capacity by 50%. This resulted in increasing the annual production capacity of theFirst Defense® product line (in terms of annual sales dollars) from approximately $16.5 million to approximately $23 million. Renovations ofBuilding 175A to enable this expansion were completed during the second quarter of 2020. By moving our powder, gel filling and assembly operations fromBuilding 56 into this new space, we created space atBuilding 56 for the installation of the expanded freeze-drying capacity. The new facilities are built to current Good Manufacturing Practices (cGMP) regulations with efficient material and people flows. A site license approval for this new facility was issued by the United States Department of Agriculture (USDA) during the third quarter of 2020. During the second quarter of 2021, we completed the relocation of our gel formulation equipment fromBuilding 56 toBuilding 175A, which created the space necessary to double our liquid processing capacity atBuilding 56. We obtained site license approval of the expanded freeze-drying capacity (Freeze-Dryer #3) atBuilding 56 from the USDA during the third quarter of 2021, and we obtained site license approval of the expanded liquid processing capacity atBuilding 56 from the USDA during the third quarter of 2022. This investment also included equipment and vehicle purchases necessary to expand and improve our colostrum collection capabilities and logistics.

Previous wording

The second phase of the additional investments inFirst Defense®included the installation of Freeze-Dryer #4 to further increase the estimated annual production capacity of theFirst Defense® product line (in terms of annual sales dollars) by an additional 33% from approximately $23 million to approximately $30 million. As of July of 2022, we had completed almost all of the facility expansion work and new equipment installations needed to increase our production capacity to almost $30 million per year. However, the most critical piece of new equipment (being Freeze-Dryer #4) was delivered six months late by the fabricator. Regardless, by the end of 2022, we had Freeze-Dryer #4 installed and approved for use by the USDA. At the same time, Freeze-Dryer #2 stopped operating requiring a six-month repair and netting us back to three operating freeze dryers during the first half of 2023. As of July of 2023, we were back to four operating freeze dryers. This investment also included equipment and facility modifications to scale-up and upgrade our vaccine manufacturing capacity and improve our quality laboratories atBuilding 56 as well as the installation of new equipment to increase the throughput of our gel filling operations atBuilding 175A.

Current wording

The second phase of the additional investments inFirst Defense®included the installation of Freeze-Dryer #4 to further increase the estimated annual production capacity of theFirst Defense® product line (in terms of annual sales dollars) by an additional 33% from approximately $23 million to approximately $30 million or more. As of July of 2022, we had completed almost all of the facility expansion work and new equipment installations needed to increase our production capacity to approximately $30 million or more per year. However, the most critical piece of new equipment (being Freeze-Dryer #4) was delivered six months late by the fabricator. Regardless, by the end of 2022, we had Freeze-Dryer #4 installed and approved for use by the USDA. At the same time, Freeze-Dryer #2 stopped operating requiring a six-month repair and netting us back to three operating freeze dryers during the first half of 2023. As of July of 2023, we were back to four operating freeze dryers. This investment also included equipment and facility modifications to scale-up and upgrade our vaccine manufacturing capacity and improve our quality laboratories atBuilding 56 as well as the installation of new equipment to increase the throughput of our gel filling operations atBuilding 175A.

Previous wording

The third phase of the additional investments inFirst Defense® involved the construction of an additional 15,400 square feet of space adjacent to and connected toBuilding 175A at 175 Industrial Way (Building 175B) and new equipment to further increase our estimated annualFirst Defense® production capacity from approximately $30 million to approximately $40 million with options for further expansion. Given the long lead time required for investments like this, we initiated this project by entering into a lease amendment during the third quarter of 2022 covering a to-be-constructed building shell for approximately $250,000 per year. Construction of the building shell by our landlord was substantially complete as of April 1, 2023, and rent payments commenced as of August 1, 2023. We made this lease commitment because of the unique proximity of the land adjacent to our currently leased space and the high level of demand for properties of this type in the Portland market. We did not want to risk losing this opportunity to others. The anticipated benefits to us from this new lease include: i) space for the potential to install Freeze-Dryers #5, #6, #7 and #8 if justified by market demand in the future, ii) improved space and quality for our powder milling operations by separating our upstream processes (liquid processing) atBuilding 56 from our clean downstream processes (milling, formulation, filling and packaging) and iii) much needed additional warehouse space. We have been running our equipment and staff close to 100% of capacity in order to fill the backlog of orders. One of our objectives is to create a more sustainable production schedule. Freeze-Dryer #5 is the key piece of equipment required to allow us to increase our estimated annual production capacity to above $30 million. Based on past experience, we are planning for approximately 18 months of lead time for fabrication, installation, qualification and implementation of Freeze-Dryer #5. However, due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate the product contamination events discussed below, we have decided to defer most of this investment, for the time being. Instead, we initiated the initial steps of this project with a reduced budget of approximately $700,000 atBuilding 175B during the third quarter of 2023. This work was completed during the first quarter of 2024, which provided additional warehousing space and allowed us to move all shipping and receiving functions out ofBuilding 56 to create more space for liquid processing atBuilding 56. In consideration for our landlord agreeing to pay for the cost of those certain tenant improvements and after two negotiated amendments, we are now obligated to make additional rent payments of $20,000 per month through June of 2025 and a final additional rent payment of $248,743 in July of 2025.

Current wording

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

Previous wording

The primary purpose of the additional investments inRe-Tain®is to bring the formulation and aseptic filling capabilities forRe-Tain® Drug Product (DP) into available space in our DS facility in order to lessen or eliminate our reliance on third-party DP manufacturing services as well as to build out warehouse space atBuilding 14 for packing and shipping facilities forRe-Tain®. We began initial installation of the filling equipment during the first quarter of 2022 and then paused this installation work pending concurrence with the FDA pertaining to our third submission of the Chemistry, Manufacturing and Controls (CMC) Technical Section, which is discussed in greater detail below.

Current wording

The primary purpose of the additional investments inRe-Tain®is to bring the formulation and aseptic filling capabilities forRe-Tain® DP into available space in our DS facility in order to lessen or eliminate our reliance on third-party DP manufacturing services as well as the build out of warehouse space atBuilding 14 for packing and shipping facilities forRe-Tain®. We began initial installation of the filling equipment during the first quarter of 2022 and then paused this installation work due to the lack of adequate cash.

Previous wording

The amount and timing of these additional investments inFirst Defense® and**Re-Tain®**that were initiated during 2019 are detailed in the following table (in thousands):

Current wording

The amount and timing of these additional investments in First Defense® and Re-Tain® that were initiated beginning in 2019 are detailed in the following table (in thousands):

Previous wording

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

Current wording

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

Previous wording

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

Current wording

As we look back at these production contamination events, we believe the initial contaminations were associated with rapid growth in our milk supply. Having largely remediated that problem, we then experienced additional contaminations that we believe were largely caused by rapidly increasing our production capacity. Our proprietary production process does allow us to create an effective product out of a non-aseptic starting raw material. Although these types of losses are expected to happen from time to time in the production of a biological product such as ours, we believe that the sudden and large contamination events were related in several different ways to our efforts to increase production output. We also believe we have mitigated the risk of large-scale reoccurrence of such losses by implementing various new quality control steps and manufacturing process and facility improvements. To meet our goals, we must run without significant equipment failures or contamination losses, and we must continue to improve our production yields.

Previous wording

We believe that we have moved past the contamination events that materially affected our output since late 2022 largely because we have not experienced another contamination since the first half of April of 2024. However, we still have more work to do to catch up to product demand. As we continue to optimize our investments to increase production capacity and to implement the corrective actions being taken in response to these contamination events, we aspire to reach an annual theoretical maximum production capacity of approximately $30 million per year going forward. While we produced far less than we needed during 2023, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. As we resume full production, our goal is to be able to produce at least $6 million or more worth of product per quarter, which would annualize to about 80% or more of our estimated $30 million annual production capacity to balance production output with regularly scheduled preventative maintenance. Finished goods produced increased steadily from approximately $3.3 million to $4 million and further to $5.3 million during the first, second and third quarters of 2023, respectively, before dropping modestly to $5.1 million during the fourth quarter of 2023. We were able to increase finished goods production to $7.2 million during the first quarter of 2024, which annualizes to approximately $28.7 million. This level of production will remain our aspirational goal, but we do not expect that it can be repeated or exceeded on a regular basis. During the second quarter of 2024, finished goods production decreased to $5.5 million, which annualizes to approximately $22 million. During the third quarter of 2024, finished goods production decreased modestly to $5.4 million, which annualizes to approximately $21.8 million. During the nine-month period ended September 30, 2024, finished goods production was approximately $18.1 million, which annualizes to approximately $24.2 million (or approximately 81% of $30 million). During the trailing twelve-month period ended September 30, 2024, finished goods production was approximately $23.2 million (or approximately 77% of $30 million).

Current wording

We still have more work to do to catch up to product demand forFirst Defense®. We continue to optimize our investments to increase production capacity and to implement the corrective actions being taken in response to these contamination events. Although we produced far less than we needed during 2023 and 2024, we believe that our remediation efforts are allowing us to steadily ramp back up to full production capacity. We have reached our goal to exceed $30 million in annualized production output with sales of $8.1 million and $7.8 million during the quarters ended March 31, 2025 and December 31, 2024, respectively.

Previous wording

The learnings from the remediation of the contamination events have improved our production processes going forward. We have implemented several important improvements at the source farm level including more product and environmental testing, more training of farm staff and better enforcement of our protocols. While we never release product to the market that does not pass our final quality control release tests, we had allowed product to advance in the production process at risk, while the in-process quality control tests were being performed. We no longer advance product to the next stage at risk before the complete in-process quality control test results are available. While this does add time to the overall production cycle, we believe that it has helped us reduce the cost of further contaminations. Notwithstanding the challenges that contamination events have posed for us, we are excited to be approaching both our estimated full capacity of approximately $30 million per year forFirst Defense® (with an option to increase our estimated full capacity to approximately $40 million per year in the future with the additional capital investments discussed above) while, at the same time, advancing to the final stages of a very significant FDA product development initiative withRe-Tain®.

Current wording

The lessons from the remediation of the contamination events have improved our production processes going forward. We have implemented several important improvements at the source farm level including more product and environmental testing, more training of farm staff and better enforcement of our protocols. While we never release product to the market that does not pass our in-process and final quality control release tests, we had allowed product to advance in the production process at risk, while the in-process quality control tests were being performed. We no longer advance product to the next stage before complete in-process quality control test results for the current stage are reviewed. Although this adds time to the overall production cycle, we believe that it has helped us reduce the chance of further contaminations. Notwithstanding the challenges that contamination events have posed for us, we are excited to have reached both our estimated annualized full capacity of at least $30 million forFirst Defense® (with an option to increase our estimated full capacity to approximately $40 million per year in the future with the additional capital investments, as discussed above) while, at the same time, advancing to the final stages of a very significant FDA product development initiative withRe-Tain®.

Previous wording

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

Current wording

We pursued an insurance claim under our business interruption policy to offset at least some portion of the losses that we incurred from the contamination events discussed above. Although not a total recovery of our financial losses, we did settle our insurance claim during the first quarter of 2025 and received an insurance payout of approximately $427,000, which is in addition to the $250,000 that we previously received during the third quarter of 2023 under this claim.

Previous wording

Our near-term goal is to increase and stabilize supply, regain lost business and re-establish our growth curve. If we are able to achieve our goal of balancing supplies to meet projected demand by the end of 2024, we anticipate being able to achieve approximately $24 million in sales during 2024. This projection not only aims to meet end-user demand but also to replenish the distribution chain with the necessary buffer stock. This target would surpass our total product sales of approximately $17.5 million and $18.6 million achieved during the years ended December 31, 2023 and 2022, respectively. Our longer-term goal is to exceed $35 million of annual total product sales as soon as possible during the four-year period after the market launch ofRe-Tain®. We do not solely benchmark our sales expectations off trailing twelve-month sales results. Instead, we look at the sales of competitive products to assess the size of the addressable market and plan for growth when projecting our future production capacity needs.

Current wording

Our near-term goal is to increase and stabilize supply ofFirst Defense®, regain lost business and continue our growth curve. This goal not only aims to meet end-user demand but also to replenish our distributors with the necessary buffer stock. The significant increase in sales recognized during the fourth quarter of 2024 and first quarter of 2025 results from our higher production output. 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. By increasing production capacity and mitigating contamination events, we were able to significantly increase sales during the most recent periods compared to the year prior. Sales since 2023 are displayed in the following table (in thousands, except for percentages):

Previous wording

An increase in selling price and product supply allowed us to capture an 11% increase in sales revenue during the third quarter of 2024 compared to the third quarter of 2023. Domestic sales during the three-month period ended September 30, 2024 increased by 6%, and international sales increased by 68%, in comparison to the three-month period ended September 30, 2023. International sales aggregated 13% and 9% of total sales during the three-month periods ended September 30, 2024 and 2023, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

Current wording

We captured an 11% increase in sales revenue during the first quarter of 2025 compared to the first quarter of 2024. Domestic sales during the quarter ended March 31, 2025 increased by 13%, and international sales decreased by 3%, in comparison to the quarter ended March 31, 2024. This international sales decrease was largely related to the timing of shipping around the end of the quarter. International sales aggregated 11% and 13% of total sales during the quarters ended March 31, 2025 and 2024, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

Previous wording

An increase in selling price and product supply allowed us to capture a 51% increase in sales revenue during the nine-month period ended September 30, 2024 compared to the nine-month period ended September 30, 2023. Domestic sales during the nine-month period ended September 30, 2024 increased by 47%, and international sales increased by 91%, in comparison to the nine-month period ended September 30, 2023. International sales aggregated 12% and 10% of total sales during the nine-month periods ended September 30, 2024 and 2023, respectively. The sales results for the nine-month periods are summarized in the following table (in thousands, except for percentages):

Current wording

We captured a 28% increase in sales revenue during the six-month period ended March 31, 2025 compared to the six-month period ended March 31, 2024. Domestic sales during the six-month period ended March 31, 2025 increased by 23%, and international sales increased by 78%, in comparison to the six-month period ended March 31, 2024. International sales aggregated 14% and 10% of total sales during the six-month periods ended March 31, 2025 and 2024, respectively. The sales results for these six-month periods are summarized in the following table (in thousands, except for percentages):

Previous wording

An increase in selling price and product supply allowed us to capture a 46% increase in sales revenue during the trailing twelve-month period ended September 30, 2024 compared to the trailing twelve-month period ended September 30, 2023. Domestic sales during the trailing twelve-month period ended September 30, 2024 increased by 43%, and international sales increased by 84%, in comparison to the trailing twelve-month period ended September 30, 2023. International sales aggregated 11% and 9% of total sales during the trailing twelve-month periods ended September 30, 2024 and 2023, respectively. The sales results for the trailing twelve-month periods are summarized in the following table (in thousands, except for percentages):

Current wording

We captured a 28% increase in sales revenue during the twelve-month period ended March 31, 2025 compared to the twelve-month period ended March 31, 2024. Domestic sales during the twelve-month period ended March 31, 2025 increased by 23%, and international sales increased by 80%, in comparison to the twelve-month period ended March 31, 2024. International sales aggregated 13% and 9% of total sales during the twelve-month periods ended March 31, 2025 and 2024, respectively. The sales during these twelve-month periods are summarized in the following table (in thousands, except for percentages):

Previous wording

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

Current wording

Sales of theFirst Defense® product line made up 99% to 100% of our total sales during the three-month, six-month and twelve-month periods ended March 31, 2025 and 2024. Our sales are generally seasonal with highest demand expected during the first quarter of each year. The compound annual growth rate (CAGR) of our total product sales was 52%, 14% and 16% during the year, five-year and six-year periods ended December 31, 2024, respectively.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

We likely lost some business beginning in late 2022, as a result of the backlog. During the first quarters of 2023 and 2024, the impact of tight supplies hit even harder, leaving our customers without product during their busiest calving season. Our inability to timely meet the needs of our customers resulted in the loss of some customers who seek alternative scours management products during this period of short supply, and some of these customers may not resume purchasing our product when we have eliminated the backlog. While we worked to allocate product directly to certain large customers during this period of short supply, we likely lost some customers that could not procure product. While backlog is a better problem to have than seeing product expiring on our shelves, it is nonetheless a significant challenge when we do not get our customers everything that they want. Our sales team has resumed more normal sales growth initiatives now, in response to the increasing product supply. We will work to regain end-user customers that we may have lost while we were short on product and will aggressively compete for new business. As we emerge from an extended period of time on backlog, we anticipate higher than normal sales fluctuations quarter to quarter. What is most important to us at this time is that we achieve sales growth over the longer periods of time, even if we experience some quarter-to-quarter fluctuations.

Previous wording

The production slowdown during the first ten months of 2023, in part, caused an increase in the amount of our order backlog. We cannot be certain that this backlog will be converted to sales. 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. We are reporting this figure because it reflects the orders on our books presently that we cannot ship. Quantification of the backlog during the current periods has become far less comparable to prior periods. At times, customers have placed orders for more than a month’s worth of their demand, perhaps in reaction to our ongoing backlog situation, whereas in the past they ordered more closely in line with their current demand. We are concerned that this backlog amount may not be highly relevant at this time as it includes very old orders, redundancy in demand and orders that may be cancelled given the time that has passed since they were originally placed.

Current wording

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. We are reporting this figure because it reflects the orders on our books presently that we cannot ship. Quantification of the backlog during the current periods has become far less comparable to prior periods. At times, customers have placed orders for more than a month’s worth of their demand, perhaps in reaction to our ongoing backlog situation, whereas in the past they ordered more closely in line with their current demand. We are concerned that this backlog amount may not be highly relevant at this time as it includes very old orders, redundancy in demand and orders that may be cancelled given the time that has passed since they were originally placed. The backlog was reduced from approximately $2.4 million as of December 31, 2021 to approximately $205,000 as of September 30, 2022. In part because of a first contamination event experienced around the end of the third quarter of 2022, our backlog increased to approximately $2.5 million as of December 31, 2022. In part because of a second contamination event experienced during the first quarter of 2023, the backlog continued to increase to approximately $7.5 million as of March 31, 2023, to approximately $8 million as of June 30, 2023, to approximately $8.9 million as of September 30, 2023 and to approximately $9.4 million as of December 31, 2023. We were able to reduce this backlog modestly to approximately $9.1 million as of March 31, 2024 and then reduce it further to approximately $8.9 million as of June 30, 2024. We were able to reduce this backlog further to approximately $7.3 million as of September 30, 2024 and then further to $4.4 million as of December 31, 2024. The increased level of sales during the first quarter of 2025 helped us decrease the backlog to $4 million as of March 31, 2025. The backlog of orders was further reduced to approximately $3.4 million as of May 6, 2025.

Previous wording

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

Current wording

Effective January 1, 2022, we increased our selling price of theFirst Defense®product line by approximately 5% andCMT by approximately 7%. Effective January 1, 2023, we increased our selling price of theFirst Defense®product line by approximately 4% (a range of 2% to 8%) andCMT by approximately 5%. Effective November 15, 2023, we increased our selling price of theFirst Defense®product line by approximately 8%. Also, effective November 15, 2023, we increased our selling price forCMT by approximately 12%. Effective January 1, 2025, we increased our selling price of theFirst Defense®product line by approximately 6% (a range of 5% to 7.5%). At the same time, we also increased our selling price forCMT by approximately 7%.

Previous wording

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

Current wording

The change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales during the three-month, six-month and twelve-month periods ended March 31, 2025 and 2024 are summarized in the following tables (in thousands, except for percentages):

Previous wording

The gross margin during recent periods was significantly less than what we anticipate going forward. The 2023 reduction in production output was largely the result of our decision to slow down our production rate while remediating the production contamination events discussed above. During 2023, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. As we build back sales during 2024, we are increasing the amount of gross margin earned compared to prior periods and improving the gross margin as a percentage of sales compared to 2023. The gross margin as a percentage of product sales was 22%, 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The 22% gross margin percentage during the year ended December 31, 2023 (including even lower gross margin percentages during the three-month period ended March 31, 2023 and the six-month period ended June 30, 2023) was our lowest ever. Achieving process yield improvements (in addition to running without significant equipment failures or product contaminations) will be essential to increasing our gross margin in future periods. Some of the critical process parameters that we are investigating include optimizing: 1) the time and temperature for pasteurization steps, 2) a critical filtration step and 3) the antibody content of incoming Work-in-Process inventory. As we fully integrate and utilize our increased capacity and evaluate our product costs and selling price, we believe we could increase our gross margin by approximately 8 to 13 percentage points in comparison to the 27% gross margin reported for the nine-month period ended September 30, 2024. Our immediate goal is to resume a 35% gross margin as soon as possible with the next goal being to achieve a 40% gross margin. This goal has been reduced from prior projections given the lower rates experienced during 2023 and to date in 2024.

Current wording

The 2023 reduction in production output was largely the result of our decision to slow down our production rate while remediating the production contamination events discussed above. During 2023, we did not benefit from spreading our fixed costs over higher volumes as we normally do. Further, we did not furlough any labor during this production slowdown. As we build back sales, we are increasing the amount of gross margin earned compared to prior periods and improving the gross margin as a percentage of sales. The gross margin as a percentage of product sales was 30%, 22%, 41%, 45%, 45%, 49%, 47% and 50% during the years ended December 31, 2024, 2023, 2022, 2021, 2020, 2019, 2018 and 2017, respectively. The 22% gross margin percentage during the year ended December 31, 2023 (including even lower gross margin percentages during the three-month period ended March 31, 2023 and the six-month period ended June 30, 2023) was our lowest ever. Achieving process yield improvements (in addition to running without significant equipment failures or product contaminations) will be essential to increasing our gross margin in future periods. Some of the critical process parameters that we are investigating include optimizing: 1) the time and temperature for pasteurization steps, 2) a critical filtration step and 3) the antibody content of incoming Work-in-Process inventory. We were able to increase our gross margin as a percentage of product sales to 42% and 37% during the most recent quarters ended March 31, 2025 and December 31, 2024, respectively. As we fully integrate and utilize our increased capacity and evaluate our product costs and selling price, we believe we could increase our gross margin to approximately 45% or more of sales.

Previous wording

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

Current wording

While our biological and process yields continue to be variable, we have seen a favorable improvement to our finished goods yield recently. TheTri-Shield® product format is more complex (i.e., three antibodies versus two antibodies forDual-Force®) making it more costly to produce, and both the bivalent and trivalent gel product formats are more expensive to produce than the bolus format. These new formats earn a higher selling price and are creating sales growth for us. A number of other factors contribute to the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter and from year to year. We also invest to sustain compliance with cGMP regulations in our production processes. Increasing production can be more expensive in the initial stages. Additionally, the biological yields from our raw material are always variable, which affects our costs of goods sold in a similar way. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on the time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. As is the case with any vaccine program, animals respond less effectively to their first exposure to a new vaccine, and thereafter the effectiveness of their immune response improves in response to subsequent immunizations. While this variability impacts our costs of producing inventory, one of the key commercial benefits of ourFirst Defense® product line is that we compensate for the variability in a cow’s immune response by standardizing each dose of finished product. This ensures that every calf is equally protected, which is something that dam-level commercial scours vaccines cannot offer. We continue to work on processing and yield improvements and other opportunities to reduce costs, while enhancing process knowledge and robustness.

Previous wording

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

Current wording

As demonstrated in the table below, Work-in-Process inventory as a percentage of total inventory has ranged from 57% to 81%, and the dollar value of Work-in-Process inventory has changed significantly since December 31, 2021. The hyper-immunized colostrum we purchase for use in the production ofFirst**** Defense® is the largest component of Work-in-Process inventory. As we began to increase our production capacity, we also increased the supplier base that we work with in order to increase the availability of this critical ingredient. As certain contamination events discussed above slowed the implementation of our increased capacity, we accumulated more colostrum than originally planned. While this is a good safety measure to have in place to ensure that we do not run short of colostrum, we do expect to reduce this use of cash as we move forward with our increased production rate. Also, we are developing what could potentially be a spray-dried alternative format of ourFirst Defense Technology® feed products that may not require the liquid processing and freeze-drying production steps used to produceFirst Defense® in a capsule or gel tube. If successful, this effort could expand our product portfolio with a bulk product designed to meet the needs of large dairy and calf-ranch customers at a lower cost. This would help us turn some of this inventory to cash sooner. In a frozen state, this colostrum has a 30-month useable shelf life. The change in Work-in-Process inventory is demonstrated in the following table (in thousands, except for percentages):

Previous wording

We see ourselves as the “non-pharma” pharma company. Rather than offering variations of “copy-cat” technology like vaccines and antibiotics, we have taken the path less traveled by developing first-of-their kind products fueled by novel active ingredients such as polyclonal antibodies (forFirst Defense®) and bacteriocins (forRe-Tain®). While we expect thatRe-Tain® could be a significant market disrupter, we project theFirst Defense®market could be larger, especially during the first years of our Controlled Launch ofRe-Tain®. We anticipate that these category developing innovations will drive greater value for the livestock industry and, in turn, for our stockholders.

Current wording

We see ourselves as the “non-Pharma” pharma company. Rather than offering variations of “copy-cat” technology like vaccines and antibiotics, we have taken the path less traveled by developing first-of-their kind products fueled by novel active ingredients such as polyclonal antibodies (forFirst Defense®) and bacteriocins (forRe-Tain®). While we expect thatRe-Tain® could be a significant market disrupter, we project theFirst Defense® market could be larger.

Previous wording

During the three-month period ended September 30, 2024, sales and marketing expenses increased by 3%, or $27,000, to $844,000 in comparison to $817,000 during the three-month period ended September 30, 2023, amounting to 14% and 15% of product sales during the three-month periods ended September 30, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $44,000 and $35,000 during the three-month period ended September 30, 2024 and 2023, respectively. During the nine-month period ended September 30, 2024, sales and marketing expenses increased by 9%, or $213,000, to $2.6 million in comparison to $2.4 million during the nine-month period ended September 30, 2023, amounting to 14% and 20% of product sales during the nine-month periods ended September 30, 2024 and 2023, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $131,000 and $121,000 during the nine-month period ended September 30, 2024 and 2023, respectively. Our current budgetary guideline is to keep sales and marketing expenses under 20% of total sales. We continue to leverage the efforts of our small sales force by using animal health distributors.

Current wording

During the quarter ended March 31, 2025, sales and marketing expenses increased by 7%, or $56,000, to $857,000 in comparison to $801,000 during the quarter ended March 31, 2024, amounting to 11% of product sales during both of the quarters ended March 31, 2025 and 2024. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $11,000 and $44,000 during the quarters ended March 31, 2025 and 2024, respectively. Our current budgetary guideline is to keep sales and marketing expenses under 20% of total sales. We continue to leverage the efforts of our small sales force by using animal health distributors.

Previous wording

During the twelve-month period ended December 31, 2023, we treated more calves than our next largest calf-level competitive product, which is a vaccine administered to the newborn at birth. Compared to the dam-level competitive products (which are vaccines given to the cow pre-calving), we are second in sales dollars to the market leader. Despite these successes, there remains significant opportunity to displace more competition within North America. There is also opportunity to grow our sales by expanding into international markets. We are being strategic in how we invest in international market development in order not to divert our limited resources away from achieving domestic growth, which is often more efficient to obtain.

Current wording

During the years ended December 31, 2024 and 2023, we treated more calves than our next largest calf-level competitive product, which is a vaccine administered to the newborn at birth. Compared to the dam-level competitive products (which are vaccines given to the cow pre-calving), we are second in sales dollars to the market leader. Despite these successes, there remains significant opportunity to displace more competition within North America. There is also opportunity to grow our sales by expanding into international markets. We are being strategic in how we invest in international market development in order not to divert our limited resources away from achieving domestic growth, which is often more efficient to obtain.

Previous wording

We believe thatRe-Tain® could revolutionize the way that mastitis is managed by making earlier treatment of subclinical infections (while these cows are still producing saleable milk) economically feasible without an FDA-required milk discard or a meat withhold during, or for a period of time after, treatment. No other FDA-approved mastitis treatment product on the market can offer this value proposition. We believe we can demonstrate a return on investment to the dairy producer and the milk processor that will justify a premium over other mastitis treatments on the market today, which are all sold subject to milk discard and meat withhold requirements. By creating this value for our customers, we believe we can, in turn, create value for our stockholders.

Current wording

We believe thatRe-Tain® could revolutionize the way that mastitis is managed by making earlier treatment of subclinical infections (while these cows are still producing saleable milk) economically feasible without an FDA-required milk discard or pre-slaughter withdrawal label restrictions during, or for a period of time after, treatment. No other FDA-approved mastitis treatment product on the market can offer this value proposition. We believe we can demonstrate a return on investment to the dairy producer and the milk processor that will justify a premium over other mastitis treatments on the market today, which are all sold subject to milk discard and pre-slaughter withdrawal period requirements.

Previous wording

**Re-Tain®**could increase the lifetime profitability of a cow and reduce disease transfer to herd mates. It is common practice to move sick cows from their regular herd group to a sick cow group for treatment and the related milk discard. This movement causes stress on the cow and a reduction in milk production. While practices may vary farm-to-farm, there would be no requirement to move cows treated with our product, allowing this costly drop in production to be avoided. It is generally current practice to treat mastitis only when the disease has progressed to the clinical stage where the milk from an infected cow cannot be sold, leaving most subclinically infected cows untreated. Without a milk discard cost, we expect producers to be more motivated to identify and treat cows at the subclinical stage. This creates a substantial animal welfare benefit. By treating mastitis early at the subclinical level, producers could preserve optimal milk yields. We also know that animals infected with subclinical mastitis have higher abortion rates and often progress to the clinical disease state requiring antibiotic treatment and milk discard. We believe that societal animal welfare objectives will put more and more pressure on the industry to treat cows with subclinical infections.

Current wording

Re-Tain® could increase the lifetime profitability of a cow and reduce disease transfer to herd mates. It is common practice to move sick cows from their regular herd group to a sick cow group for treatment and the related milk discard. This movement causes stress on the cow and a reduction in milk production. While practices may vary farm-to-farm, there would be no requirement to move cows treated with our product, allowing this costly drop in production to be avoided. It is generally current practice to treat mastitis only when the disease has progressed to the clinical stage where the milk from an infected cow cannot be sold, leaving most subclinical infections untreated. Without a milk discard cost, we expect producers to be more motivated to identify and treat cows at the subclinical stage. This creates a substantial animal welfare benefit. By treating mastitis early at the subclinical level, producers could preserve optimal milk yields. We also believe that animals infected with subclinical mastitis often progress to the clinical disease state requiring antibiotic treatment and milk discard and can experience higher abortion rates.

Previous wording

The over-use of antibiotics that are medically important to human healthcare is a growing public health concern of our society and an active issue with the FDA, largely because of the growing evidence that this over-use contributes to antibiotic resistance and the rise of “super-bugs”. Sustainability objectives require that less antibiotics be used in food producing animals, yet a new FDA-approved drug to treat mastitis has not been developed in years. Our product improves sustainability by utilizing a bacteriocin as an alternative to traditional antibiotics that are used in human medicine. In the big picture, we are introducing an entirely new class of antimicrobial as an animal drug, a bacteriocin, that does not promote resistance against antibiotics used in human medicine making it more socially responsible. The industry could keep treating this very significant disease with traditional antibiotics, but it takes innovation to bring a bacteriocin like Nisin to market.Re-Tain® would, when introduced, offer a needed alternative to these traditional antibiotics, while at the same time improving milk quality and the quantity of milk produced by treated cows. We believe our product fits very well with where the industry is going to be in the coming years.

Current wording

The over-use of antibiotics that are medically important to human healthcare is a growing public health concern of our society and an active issue with the FDA, largely because of the growing evidence that this over-use contributes to antibiotic resistance and the rise of “superbugs”. Sustainability objectives require that less antibiotics be used in food producing animals, yet a new FDA-approved drug to treat mastitis has not been developed in years. Our product improves sustainability by utilizing a bacteriocin as an alternative to traditional antibiotics that are used in human medicine. In the big picture, we are introducing an entirely new class of antimicrobial as an animal drug, a bacteriocin, that does not promote resistance against antibiotics used in human medicine making it more socially responsible. The industry could keep treating this very significant disease with traditional antibiotics, but it takes innovation to bring a bacteriocin like Nisin to market.Re-Tain® would, when introduced, offer a needed alternative to these traditional antibiotics, while at the same time improving milk quality and the quantity of milk produced by treated cows. We believe our product fits very well with where the industry is going to be in the coming years.

Previous wording

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

Excerpt shortened here; the source contains the full paragraph.

Current wording

Overview: The majority of our product development expenses pertain to the development ofRe-Tain®. During the quarter ended March 31, 2025, product development expenses decreased by 40%, or $506,000, to $757,000 in comparison to $1.3 million during the quarter ended March 31, 2024. Product development expenses aggregated 9% and 17% of product sales during the quarters ended March 31, 2025 and 2024, respectively. Product development expenses included non-cash depreciation and stock-based compensation expenses of $364,000 and $367,000 during the three-month periods ended March 31, 2025 and 2024, respectively. Approximately $336,000 and $340,000 of these non-cash expenses were comprised of depreciation expenses pertaining largely to our DS facility and equipment for**Re-Tain®**during the quarters ended March 31, 2025 and 2024, respectively. We began depreciating this asset when the Certificate of Occupancy for the new construction was issued during the fourth quarter of 2017, but sales of our new product cannot be realized until we achieve FDA approval. Product development expenses (excluding depreciation expense of $1.4 million) were $3 million during the year ended December 31, 2023 when we were in production mode. Product development expenses (excluding depreciation expense of $1.4 million) were $2.5 million during the year ended December 31, 2024.

Previous wording

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

Current wording

Re-Tain® Development Objective: Our product,Re-Tain®, could be the first mastitis product to be marketed without FDA-required milk discard or pre-slaughter withdrawal label restrictions. As we work to change the way that mastitis is managed in the dairy industry, we aim to demonstrate that our bacteriocin, Nisin A, which is designed specifically for subclinical mastitis, can provide producers the freedom to change when and how mastitis is treated.**Re-Tain®is not a broad-spectrum antibiotic used in human health. Rather, it consists of a highly targeted active ingredient without an FDA-required milk discard or pre-slaughter withdrawal label restriction. While milk prices vary, the cost of the milk discard associated with traditional antibiotics ranges from approximately $53.00 (for 4 days of milk at 70 pounds per day at the Class III milk price average of $18.89 per hundredweight during 2024) to approximately $145.00 (for 11 days of milk at 70 pounds per day at the Class III milk price average of $18.89 per hundredweight during 2024) per treated animal. These high milk discard costs associated with traditional antibiotic treatments lead producers to only treat mastitis after clinical signs develop. We expect thatRe-Tain®**will be a first-of-its-kind product that can be used to economically treat at the earliest stage of infection, giving producers the ability to get ahead of mastitis before clinical signs develop so the best cows stay at their best performance level and in the herd longer.

Previous wording

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

Current wording

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

Previous wording

Effectiveness: During the third quarter of 2012, we received the Effectiveness Technical Section Complete Letter from the FDA. The anticipated product label (which remains subject to FDA approval) carries claims for the treatment of subclinical mastitis associated with Streptococcus agalactiae, Streptococcus dysgalactiae, Streptococcus uberis, and coagulase-negative staphylococci in lactating dairy cattle.

Current wording

Effectiveness: During the first quarter of 2013, we received the Effectiveness Technical Section Complete Letter from the FDA. The anticipated product label (which remains subject to FDA approval) carries claims for the treatment of subclinical mastitis associated with Streptococcus agalactiae, Streptococcus dysgalactiae, Streptococcus uberis, and coagulase-negative staphylococci in lactating dairy cattle.