IMMUCELL CORP /DE/

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Overview

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ImmuCell Corporation, founded in 1982 and a SEC-registered public company since 1987, is an animal health biologics company focused on the development, manufacture, and commercialization of products intended to improve the survivability, health, and long-term performance of neonatal dairy and beef calves.

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Change in Accounting Estimate

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In connection with the idle status of certain property, plant and equipment, net, (related to the repurposing of certain equipment previously utilized in the manufacturing of Re-Tain®), we reassessed prior estimates of the useful lives of that manufacturing equipment. Because the equipment had seen such limited use during the period since installation, we increased the estimated remaining useful lives on certain equipment by a weighted average of five years effective January 1, 2026. The effect of this change in estimate for the three months ended March 31, 2026 was a $0.1 million decrease to depreciation expense included in costs of goods sold, and an increase in operating income and net income of $0.1 million, or $0.01 per both basic and diluted share.

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See Note 5, “Property, Plant and Equipment” of the Notes to Condensed Unaudited Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.

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Seasonality of Sales

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Sales of the First Defense® product line are seasonal, with higher sales expected during the first quarter of the calendar year, largely driven by the beef calving season, which runs primarily from January to April, unlike the dairy industry where operations generally calve year-round. Warm and dry weather conditions may reduce the producers' perceived need for disease prevention products such as the First Defense® product line. However, heat stress on calves caused by extremely hot summer weather and cold stress during the winter months can increase the incidence of scours and the need for our products.

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Results of Operations for the Three Months Ended March 31, 2026, Compared with the Three Months Ended March 31, 2025

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Product Sales

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Product sales during the three months ended March 31, 2026 were $10.4 million representing a 28.4%, or $2.3 million, increase over product sales of $8.1 million during the three months ended March 31, 2025. The increase was primarily due to higher sales volumes of Tri-Shield®and Dual Force® combined with year-over-year product price increases across most product lines.

Current report

Domestic sales during the three months ended March 31, 2026 increased by 35.7% (to $9.7 million), and international sales decreased by 30.2% (to $0.6 million), in comparison to the three months ended March 31, 2025. International sales aggregated 6.0% and 11.1% of total sales during the three months ended March 31, 2026 and 2025, respectively.

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Costs of Goods Sold

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Costs of goods sold during the three months ended March 31, 2026 were $5.7 million representing a 20.9%, or $1.0 million, increase over costs of goods sold of $4.7 million during the three months ended March 31, 2025. The increase was primarily due to higher sales of First Defense® combined with a shift of $0.3 million of costs associated with the former Re-Tain®manufacturing facility from product development expense to costs of goods sold. Cost of goods sold increased at a rate lower than sales due to price increases effective January 1, 2026 and manufacturing efficiencies obtained during the period, partially offset by the shift of depreciation and building related expenses related to our 33 Caddie facility (formerly associated with Re-Tain®) from product development expense as a result of the Company's December 2025 decision to cease its focus on obtaining FDA approval of Re-Tain® and instead refit the facility for use in producing First Defense® products.

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Sales and Marketing Expenses

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During the three months ended March 31, 2026, sales and marketing expenses increased by 43.9%, or $0.4 million, to $1.2 million in comparison to $0.9 million during the three months ended March 31, 2025. This increase was primarily due to higher wages, including share-based compensation, and expenses associated with new and backfilled sales positions, coupled with increased promotional and tradeshow related expenses. In the three months ended March 31, 2025, we restricted commercial spending due to tight product supply; however, this tight supply was alleviated in the summer of 2025.

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During the three months ended March 31, 2026, administrative expenses increased by 82.7%, or $0.5 million, to $1.1 million in comparison to $0.6 million during the three months ended March 31, 2025. The increase was primarily due to a $0.4 million increase in executive compensation (including share-based compensation).

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Product Development Expenses

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During the three months ended March 31, 2026, product development expenses decreased by 58.0%, or $0.4 million, to $0.3 million in comparison to $0.8 million during the three months ended March 31, 2025. This decrease was driven by the $0.3 million shift to costs of goods sold of depreciation and building related expenses related to our 33 Caddie facility (formerly associated with Re-Tain®) as part of our recently announced strategy to utilize the facility for the production of First Defense®as a result of the Company's December 2025 decision to cease its focus on obtaining FDA approval of Re-Tain® and instead refit the facility for use in producing First Defense® products, coupled with a reduction of wages associated with Re-Tain® product development.

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Other (Expense) Income, Net

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During the three months ended March 31, 2026, other expense, net was $15,187 in comparison to $0.3 million of other income, net during the three months ended March 31, 2025. The year-over-year net shift of 104.6% or $0.3 million was primarily due to a one-time insurance settlement of $0.4 million which occurred in the three months ended March 31, 2025.

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Income Tax Expense

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During both the three months ended March 31, 2026 and 2025, we recorded insignificant amounts of income tax expense.

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Our sources of liquidity and capital resources are cash flows from operations, proceeds from our sale of common stock, and borrowings available under our bank line of credit.

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In April of 2024, we entered into our ATM Agreement, which allows us to offer and sell up to $11 million of shares of our common stock. As of March 31, 2026, we have the capacity to sell $6 million of shares under the ATM Agreement but no pending plan to issue additional shares under that arrangement.

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(1)There were 1,076,260 and 801,760 shares of common stock reserved for issuance for stock options that were outstanding as of March 31, 2026 and December 31, 2025, respectively.

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Net cash provided by operating activities increased $2.0 million during the three months ended March 31, 2026 as compared to the three months ended March 31, 2025. The increase was primarily due to a $0.5 million increase in net income, $0.8 million less cash used for inventory, $0.4 million less cash used for accounts payable and accrued expenses, and $0.3 million additional cash provided by accounts receivable.

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Net cash used for investing activities decreased $0.2 million during the three months ended March 31, 2026 as compared to the three months ended March 31, 2025. The decrease was primarily due to a reduction in capital expenditures.

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Net cash used for financing activities decreased an insignificant amount during the three months ended March 31, 2026 as compared to the three months ended March 31, 2025.

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Commitments, Contingencies and Contractual Obligations

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For disclosures on contingencies, see Note 9 “Commitments and Contingencies,” of the Notes to Condensed Unaudited Financial Statements included in Part I, Item 1 of this Form 10-Q.

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Our Financial Statements are prepared in accordance with U.S. GAAP, which require us to make certain complex estimates in the application of our accounting policies based on the best assumptions, judgments, and opinions of our management. There have been no significant changes to our critical accounting policies and estimates. For a description of our critical accounting policies, see Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2025.

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

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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 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 our business; future compliance with, or waivers of, bank debt covenant…

Excerpt shortened here; the source contains the full paragraph.

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During the second half of 2024, we began reducing product development expenses, as we await approval ofRe-Tain®** by the Food and Drug Administration (FDA). After an investment of about 26 years and approximately $53 million in the development of this technology, we are eager to see this product through to regulatory approval and initial market acceptance. At the same time, we are also in the very early stages of exploring potential partnerships forRe-Tain**® to offset some of our product development expenses.

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Net cash (used for) investing activities was approximately ($1 million) and ($265,000) during the nine-month periods ended September 30, 2025 and 2024, respectively, consisting of cash spent to fund the purchase of property, plant and equipment, net of proceeds from disposals of property, plant and equipment. To conserve cash, we deferred all large dollar capital expenditure projects starting around the first quarter of 2023. We increased capital expenditures to approximately $1.1 million during the nine-month period ended September 30, 2025 from approximately $270,000 during the nine-month period ended September 30, 2024. We are currently evaluating an investment of approximately $3 million to increase our annual production capacity forFirst Defense® from approximately $30 million or more to approximately $40 million or more.

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Capital Expenditure Investments

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Our production process is complex and difficult to scale up quickly. We began significant investments in facilities, equipment and staffing necessary 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 or more 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.)

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Operating at very close to 100% of available capacity was not efficient or sustainable. With our increased capacity, we now operate at output levels that allow us to cover sales with adequate buffer stock, while also allowing adequate time for necessary preventative maintenance. To accommodate future increases in demand, we will need to meet or exceed our production yield assumptions. We remain deeply committed to meeting ongoing demand forFirst Defense®.

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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.

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The second phase of our 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 30% or more from approximately $23 million to approximately $30 million or more. Despite delays in the installation of certain equipment, we completed these capacity-expanding investments around the end of 2022.

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The third phase of 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 will involve the purchase of new equipment to further increase our estimated annualFirst Defense® production capacity from approximately $30 million to approximately $40 million with options for further expansion. We made this lease commitment because of the unique proximity of the land adjacent to our currently leased space and the high level of demand for properties of this type in the Portland market. We did not want to risk losing this opportunity to others. The anticipated benefits to us from this new lease include: i) space for the potential to install Freeze-Dryers #5, #6, #7 and #8 if justified by market demand in the future, ii) improved space and quality for our powder milling operations by separating our upstream processes (liquid processing) atBuilding 56 from our clean downstream processes (milling, formulation, filling and packaging) atBuilding 175A and iii) much needed additional warehouse space. Freeze-Dryer #5 is the key piece of equipment required to allow us to increase our estimated annual production capacity to $40 million or more. 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 deferred most of this investment. 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. The new facilities are built to current Good Manufacturing Practices (cGMP) regulations and allow for efficient material and people flow.

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We made some additional investments inRe-Tain® 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 aseptic filling equipment during the first quarter of 2022, and then we paused this installation work to better preserve cash while awaiting regulatory approval.

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The amount and timing of these additional investments inFirst Defense® andRe-Tain®began in 2019 and are detailed in the following table (in thousands):

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Production Contamination Events

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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 during the third quarter of 2023 impacting two lots of work in progress inventory, likely related to process changes implemented to run our increased level of liquid processing that were not optimized. 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 during April of 2024 in response to this fourth event appear to have been productive. We were able to offset some of the related losses with insurance, as previously outlined in Note 14 Other (Expenses) Income, Net, of the unaudited financial statements. However, during the second and third quarters of 2025, we did experience minor contaminations at a Work-in-Process stage of production that were likely again related to the quality of our incoming milk supply. With bioprocessing of this nature, our plans do anticipate that contamination events may arise from time to time despite our ongoing prevention efforts. Throughout these contamination events, all product sold by us has met all required in-process and final release testing under USDA quality standards.

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Although we produced far less than we needed during 2023 and 2024 to meet demand, our remediation efforts and expansion investments have allowed us to steadily ramp back up to full production capacity. 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 before fully completing our in-process quality control tests. 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 and severity of further contaminations.

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As we look back at these prior contamination events, we believe that the root cause was associated with the rapid growth in our hyperimmunized colostrum supply and with processing challenges associated with rapidly increasing our production output. Our proprietary production process does allow us to create an effective product out of a non-aseptic starting raw material. These types of losses are expected to happen from time to time in the production of a biological product such as ours. 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. Our efforts to address those events did ultimately succeed in restoring production and improved gross margins. Given the biological nature of our manufacturing process, the possibility of contamination is an inherent risk. We do believe that our prior remediation efforts have improved our ability to monitor for and mitigate future contamination. We think the key to success is about optimizing and controlling critical process parameters and multiple production inputs and process steps. To meet our goals, we must run without significant equipment failures or contamination losses, and we must continue to improve our production yields.

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During the second quarter of 2025, we experienced our first new production contamination event since April of 2024 and additional production process losses. During the third quarter of 2025, we incurred additional production process losses. If we had avoided this aggregate scrap cost of approximately $410,000, our gross margin during the nine-month period ended September 30, 2025 would have been approximately 44.7% in comparison to the reported value of 42.6%. If we had avoided the aggregate scrap cost of approximately $369,000, our gross margin during the nine-month period ended September 30, 2024 would have been approximately 29.2% in comparison to the reported value of 27.3%. Gross margin percentage of product sales adjusted to remove scrap is a non-GAAP estimate that is based on the removal of specific manufacturing scrap costs from total costs and recalculating the gross margin as a percentage of product sales. The production contamination events and other production process losses experienced resulted in scrapped inventory valued as shown in the following table (in thousands):

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Results of Operations

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a)** **Product Sales

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Due primarily to disruptions from a series of contamination events between late 2022 and early 2024, we experienced a prolonged period of unusual backlogs. Our backlog of orders was approximately $9.1 million as of March 31, 2024, and then we reduced it 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 inventory availability, during the six-month period ended June 30, 2025 helped us decrease the backlog to less than $100,000 as of June 30, 2025, with no significant change as of September 30, 2025. Through restored and expanded production levels, distributor inventories have been replenished, and we have intentionally built up our own buffer stocks. Our top priorities moving forward are recovering lost business, caused by prolonged supply shortages, and capturing increased market share.

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Refilling the distribution pipeline after an extended backlog provided a one-time boost to sales during the first half of 2025. Because this inventory rebuild was not expected to recur, we had previously stated that we might experience a softening in outbound sales during the second half of 2025. That has turned out to be the case. Sales during the third quarter of 2025 were 15% less than the second quarter of 2025 and 8% less than the third quarter of 2024.

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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 sought alternative scours management products during this period of short supply, and some of these customers may not resume purchasing our product now that 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. 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.

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Sales revenue decreased by 8% during the third quarter of 2025 compared to the third quarter of 2024. Domestic sales during the quarter ended September 30, 2025 increased by 2%, and international sales decreased by 79% (largely driven by timing of backlog fulfillment), in comparison to the quarter ended September 30, 2024. International sales aggregated 3% and 13% of total sales during the quarters ended September 30, 2025 and 2024, respectively. The quarterly sales results are summarized in the following table (in thousands, except for percentages):

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We captured a 7% increase in sales revenue during the nine-month period ended September 30, 2025 compared to the nine-month period ended September 30, 2024. Domestic sales during the nine-month period ended September 30, 2025 increased by 6%, and international sales increased by 15%, in comparison to the nine-month period ended September 30, 2024. International sales aggregated 13% and 12% of total sales during the nine-month periods ended September 30, 2025 and 2024, respectively. The sales results for these nine-month periods are summarized in the following table (in thousands, except for percentages):

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We captured a 16% increase in sales revenue during the trailing twelve-month period ended September 30, 2025 compared to the trailing twelve-month period ended September 30, 2024. Domestic sales during the trailing twelve-month period ended September 30, 2025 increased by 12%, and international sales increased by 51%, in comparison to the trailing twelve-month period ended September 30, 2024. International sales aggregated 14% and 11% of total sales during the trailing twelve-month periods ended September 30, 2025 and 2024, respectively. The sales during these trailing twelve-month periods are summarized in the following table (in thousands, except for percentages):

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Sales of theFirst Defense® product line made up 99% of our total sales during the three-month, nine-month and twelve-month periods ended September 30, 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 14% and 16% during the five-year and six-year periods ended December 31, 2024, respectively.

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We have expanded theFirst Defense® product line to include a functional feed platform alongside our established USDA-approved biologic products. Currently manufactured by a contract manufacturing organization (CMO), the functional feed line requires fewer processing steps and thereby retains more colostral fat and bioactive proteins. It is specifically designed to meet the needs of large dairies and calf ranches seeking a cost-effective solution for their calves. The functional feed product will not fit in a capsule or tube and is intended as a bulk powder additive to liquid feed without USDA-approved claims. The functional feed product is spray-dried. The biologics line is lyophilized (freeze-dried). We obtained USDA approval ofTri-Shield First Defense® (the trivalent format of our biologic product delivered via a gel tube, which provides broader protection to calves) near the end of 2017.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. 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. This new product format has become the highest revenue contributor, as demonstrated in the table below (in thousands, except for percentages):

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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%.

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b) Gross Margin

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The change in our gross margin (product sales less costs of goods sold) and our gross margin as a percentage of product sales during the three-month, nine-month and trailing twelve-month periods ended September 30, 2025 and 2024 are summarized in the following tables (in thousands, except for percentages):

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Manufacturing with biologicals is complex and production yields can be variable. TheTri-Shield® product format is more complex (i.e., three antibodies versus two antibodies forDual-Force®) making it more costly to produce, and both the bivalent and trivalent gel product formats are more expensive to produce than the bolus format. These new formats 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 our competitors’ products, which are vaccines, cannot offer. We continue to work on processing and yield improvements and other opportunities to reduce costs, while enhancing process knowledge and robustness.

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The disruption in output during 2023 and 2024 due to contamination events did not allow us to benefit from spreading our fixed costs over higher volumes as we normally do. In more recent quarters, we’ve benefitted from process improvements. We were able to increase our gross margin as a percentage of product sales to 43%, 44%, 42% and 37% during the most recent quarters ended September 30, 2025, June 30, 2025, March 31, 2025 and December 31, 2024, respectively. The following table displays the relationship between sales and gross margin during recent periods (in thousands except for percentages):

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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 hyperimmunized 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. We increased purchases of hyperimmunized colostrum as part of our investment to double our production capacity from approximately $16.5 million to more than $30 million per year. From late 2022 to early 2024, we reduced production output to remediate certain related production contamination events. This resulted in the buildup of more colostrum than we needed to produce at the $30 million per year level of output. We intend to sell some of this inventory without further processing at market rate, which is less than our cost. During the third quarter of 2025, we recorded a non-cash write-down to cost of goods sold in the amount of $156,000 to reduce the value of this hyperimmunized colostrum to approximate market value for raw colostrum. We expect cash to be received during the fourth quarter of 2025 or the first quarter of 2026 from any sale of this colostrum, if successful, going forward. While having sufficient inventory levels of critical components 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. The change in Work-in-Process inventory is demonstrated in the following table (in thousands, except for percentages):

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c)* Sales and Marketing Expenses and Selling Strategy*

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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 derived from hyperimmunized colostrum (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.

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During the quarter ended September 30, 2025, sales and marketing expenses increased by 9%, or $75,000, to $919,000 in comparison to $844,000 during the quarter ended September 30, 2024, amounting to 17% and 14% of product sales during the quarters ended September 30, 2025 and 2024, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $35,000 and $44,000 during the quarters ended September 30, 2025 and 2024, respectively. During the nine-month period ended September 30, 2025, sales and marketing expenses decreased by 6%, or $158,000 to $2.5 million in comparison to $2.6 million during the nine-month period ended September 30, 2024, amounting to 12% and 14% of product sales during the nine-month periods ended September 30, 2025 and 2024, respectively. Sales and marketing expenses included non-cash depreciation and stock-based compensation expenses of $64,000 and $131,000 during the nine-month period ended September 30, 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 sales force by using animal health distributors.

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TheFirst Defense® product line serves dairy and beef producers by protecting their calf crop from scours, the leading cause of pre-weaning mortality and morbidity. When calves are healthy during this crucial development period right after birth, they mature into more productive milking cows and more efficient beef generators. Our primary competition in this category is vaccines that are also regulated for effectiveness and safety by the USDA. However, animal responses to vaccines are inherently variable. COVID breakthrough infections in humans reminded us that a vaccine does not guarantee immunity. That is true for our competitors as well. In the most controlled research settings, only 80% of animals respond to a vaccine. This leaves 20% of the calf crop unprotected when the scour prevention program relies on vaccines. Those unprotected calves can be disease carriers. Not only are they more susceptible to death or likely to require life-saving treatment (sometimes with antibiotics), but they also shed pathogens into the environment creating a greater disease pressure for their herd mates. TheFirst Defense® product line removes the inconsistency inherent with vaccine protection. We sell the only USDA-licensed products in the scour prevention category that are therapeutic multi-valent polyclonal antibodies. This technology eliminates a producer’s reliance on a variable vaccine response to generate antibodies and, instead, can protect every calf equally with a measured dose of antibody-driven immunity against both bacterial and viral scour pathogens. In 2025, we expanded our line to include a functional feed platform utilizing our hyperimmunized colostrum technology which contains colostral fat and bioactive proteins. It is specifically designed for large dairies and calf ranches seeking a cost-effective product. 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.

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We believeRe-Tain® has the potential to enhance mastitis management by shifting the industry approach from treating at the clinical stage to intervening earlier – at the subclinical stage – while cows are still producing saleable milk.Re-Tain® is being developed specifically to treat subclinical mastitis in lactating dairy cows and, upon anticipated FDA approval, could represent a first-of-its-kind new animal drug that is unrelated to antibiotics used in human medicine. 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. We expect producers to be more motivated to identify and treat cows at the subclinical stage withRe-Tain®. 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. The success of this product will depend largely on our ability to implement treatment protocols in a way that the Nisin that we deliver to treated cows does not interfere with starter cultures that are used in some milk processing methods to make cheese or yogurt, for example, from the milk of cows treated withRe-Tain®. We hope that milk processors will engage in this evaluation with us in order to help the dairy industry improve the health of certain sick cows (that often go untreated) while, at the same time, improving the quality of milk that is a vital food component for people around the world. We believe that treating subclinically infected cows could enhance best practices in the industry. It is very common practice for cows to be treated with traditional antibiotics that are also used in the prevention of certain diseases in humans. This use of antibiotics allows for the growth of pathogens that are resistant to these antibiotics. Because our active ingredient (Nisin) is not used in human healthcare,Re-Tain®would not contribute to the significant public health concern related to overuse of antibiotics.

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Our product could help the industry address important sustainability objectives. 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 offer a needed alternative to these traditional antibiotics, while at the same time improving the quantity and quality 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.

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While mindful of being prudent with how much cash we invested in inventory that would have short expiry dating if market launch were delayed, we did build DS inventory during 2022 and 2023 to support potential initial sales ofRe-Tain®. During the second half of 2025, we are testing market acceptance ofRe-Tain®*** in collaboration with Michigan State University through Investigational Product use with inventory on hand that now has a relatively short shelf life. We do not anticipate the Investigational Product use to generate sales or gross margin. Although the FDA in 2018 granted a zero milk-discard period forRe-Tain*®, we are introducing a short discard period in these studies out of an abundance of caution. This is due to the possibility that Nisin levels – while considered safe for adult human consumption – could impact certain milk processing applications. If we determine that a milk discard period is required by milk processors at launch, we expect it to be significantly shorter than those associated with traditional antibiotics currently on the market. It is our objective to complete the study and data analysis during the first quarter of 2026. Our go-to-market strategy forRe-Tain® has evolved in response to FDA approval delays and cash constraints. A full commercial launch will not proceed until three key conditions are met: 1) FDA approval is obtained; 2) a validated aseptic fill solution for DP is in place; and 3) adequate cash is available to produce commercial inventory. In the meantime, we are focused on three key projects: 1) conducting in-field demonstration trials under Investigational Product use status, which could provide valuable insights into how producers perceive this product’s benefits and integrate the product into their herd health protocols; 2) evaluating strategies that could offset some cash requirements and enable a mass-market launch ofRe-Tain®; and 3) investigating alternative uses for theRe-Tain® manufacturing plant and equipment. This disciplined approach is intended to protect shareholder value, ensure regulatory compliance and support a successful market entry.