Item 1A. Risk Factors
ITEM 1A—
RISK FACTORS
OUTLINE
TO ITEM 1A – RISK FACTORS
- Financial
Risks
- Product
Risks
- Regulatory
Risks
- Economic
Risks Pertaining to the Dairy and Beef Industries
- Small
Size of the Company
- Global
Risks
- Risk
Pertaining to Common Stock
- Other
Risks
Financial
Risks
Gross
margin on product sales: One of our goals is to achieve a gross margin as a percentage of total sales of 40% or more (including depreciation
expense) after the initial launch of new products. Depreciation expense will be a larger component of costs of goods sold for Re-Tain ®
than it is for the First Defense ® product line. Gross margins generally improve over time, but this anticipated
improvement may not be realized for Re-Tain ® . Many factors discussed in this Annual Report (including contaminations,
process yields, inflation, cost increases, supply-chain disruptions and the rising price of oil and other commodities and supplies) impact
our costs of goods sold. There is a risk that we are not able to achieve our gross margin goal, which would adversely affect our operating
results and could impact our future operating plans. We missed our gross margin goal during the years ended December 31, 2024 and 2023
with realized gross margins of 30% and 22%, respectively. There is a risk that our plans to maintain or improve our gross margin may
not be realized due to cost increases, production yield losses, additional manufacturing contamination events, production equipment failures,
price inelasticity or any combination of these factors. In addition, such negative events, depending on their severity, could deplete
our cash resulting in an inability to fund our business.
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Exposure
to interest rates and debt service obligations: Rising interest rates could negatively affect the operating costs of dairy and beef
producers and thus put further financial pressure on an already stressed business sector, which could indirectly, but materially and
adversely, affect our business. Increases in interest rates since 2020 have had only limited effect on our direct cost of borrowing.
During the first quarter of 2020, we refinanced our bank debt (with the exception of our line of credit) with fixed rate notes. Our mortgage
debt outstanding as of December 31, 2024 was $5.6 million bearing interest at the fixed rate of 3.53% per annum. Our equipment loans
outstanding as of December 31, 2024 were $1.9 million bearing interest at the fixed rate of 3.50% per annum. The outstanding balance
on the two State of Maine loans as of December 31, 2024 was approximately $592,000 bearing interest at the fixed rate of 5% per annum.
The $3 million in debt that we borrowed during the third quarter of 2023 (which had an outstanding balance of approximately $2.5 million
as of December 31, 2024) bears interest at the blended fixed rate of 7.33% per annum illustrating the effect of rising interest rates.
Our outstanding debt as of December 31, 2024 aggregating $10.6 million (gross of debt issuance and debt discount costs) bears interest
at the blended fixed rate of 4.51% per annum. Increasing interest rates would negatively impact the cost of any future borrowings. This
was experienced on the new debt facilities aggregating $3 million that we closed during the third quarter of 2023. The additional debt
we incurred to fund our growth objectives has significantly increased our total debt service costs. We are obligated to make principal
and interest payments aggregating approximately $2 million and $3.7 million during the years ending December 31, 2025 and 2026, respectively.
See Note 9 to the accompanying audited financial statements for more details about our debt. A decline in sales or gross margin, coupled
with this debt service burden, could impair our ability to fund our capital and operating needs and objectives.
Debt
covenants: Our debt with Maine Community Bank (formerly Gorham Savings Bank) and the Finance Authority of Maine is subject to certain
financial covenants. We are required to meet a minimum debt service coverage (DSC) ratio of 1.35. Our actual DSC ratios were 0.73, (1.10),
0.44, 2.68 and 2.03 for the years ended December 31, 2024, 2023, 2022, 2021 and 2020, respectively. During the first quarter of 2023,
the DSC ratio covenant for the year ended December 31, 2023 was preemptively waived by our lender. Instead, we were required to meet
a minimum DSC ratio requirement of 1.35 for the twelve-month periods ended June 30, 2024, September 30, 2024 and December 31, 2024, and
then again annually after that. During the first quarter of 2024, the DSC ratio covenant for the twelve-month period ended June 30, 2024
was preemptively waived by our lenders. During the third quarter of 2024, the DSC ratio covenant for the twelve-month period ended September
30, 2024 was preemptively waived by our lenders. During the fourth quarter of 2024, the DSC ratio covenant for the twelve-month period
ended December 31, 2024 was preemptively waived by our lenders. Our next compliance obligation is for the year ending December 31, 2025.
There is no assurance that we will be able to achieve the required DSC ratio going forward. If we are unable to do so or reach a favorable
agreement with our lenders regarding that requirement (including an amendment to or waiver of such requirement), we would be in violation
of that covenant, which could result in unfavorable amendments to the terms of our bank debt (including a possible bank requirement to
prepay our debt) or have other adverse impacts on our business and results of operations.
Currency
exchange fluctuation: We do not believe that currency exchange rates have had a significant effect on our revenues and expenses.
However, future increases in the value of the U.S. dollar could affect our customers and the demand for our products. We hope to increase
the level of our future sales of products outside the United States. The cost of our products to international customers could be affected
by currency fluctuations. The decline of the U.S. dollar against other currencies could make our products less expensive to international
customers. Conversely, a stronger U.S. dollar could make our products more costly for international customers. A weaker U.S. dollar makes
international purchases more expensive for us.
Inflation,
supply disruptions, tax rates and economic downturns: Inflation is having a material and adverse impact on almost all supplies we
purchase and labor we hire and retain. Continuing or increasing inflationary trends could materially reduce our gross margin on product
sales if we are unable or unwilling to impose offsetting price increases on our customers. The extent and duration of the negative impact
on the economics of our customers and on the demand for our products going forward are very difficult to assess. The dairy market, similar
to many others, has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. The Class
III milk price has been extremely volatile since the onset of the pandemic. Market conditions have improved somewhat, but this volatility
remains a concern. Additionally, like most input costs, the cost of grain and other feed is rising, which puts a strain on the profitability
of our customers. There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected
due to closures of processing plants and reduced throughput. This is a very unusual situation for farmers who work so hard to improve
production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. The pandemic
created risk and continues to create uncertainty and challenges for us and has created or contributed to global supply-chain disruptions
and has affected international trade, while creating a worldwide health and economic crisis. Stock market valuations have declined and
recovered somewhat but remain very volatile. Inflation has increased significantly, and tax rates may increase. There is a risk of a
period of economic downturn, the severity and duration of which are difficult to know. Prior to the pandemic and the responsive federal
economic stimulus programs, many feared the United States had taken on too much national debt. Now the debt load is significantly higher.
A combination of the conditions, trends and concerns summarized above could have a corresponding negative effect on our business and
operations, including the supply of the colostrum we purchase to produce our First Defense ® product line, the demand
for our products in the U.S. market and our ability to penetrate or maintain a profitable presence in international markets. Our exposure
to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on foreign manufacturers, by our
on-going cross-training of our employees, by qualifying alternate suppliers and components and by our early and continued compliance
with recommended hygiene.
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Projection
of net (loss) income: Generally speaking, our financial performance can differ significantly from management projections, due to
numerous factors that are difficult to predict or that are beyond our control. Weaker than expected sales of the First Defense ®
product line could lead to deeper operating losses or less profits. The timing of FDA approval of Re-Tain ®
will continue to have a material impact on our net (loss) income until sufficient commercial sales are generated and sustained, unless
we adequately reduce product development expenses.
Risks
associated with our funding strategy for Re-Tain ® : The inability to maintain adequate cash and
liquidity to support the commercialization of Re-Tain ® is a risk to our business. Achieving FDA approval of our
pharmaceutical-grade Nisin produced at commercial-scale is the most critical action remaining in front of us on our path to U.S. regulatory
approval of Re-Tain ® . Having completed the construction and equipping of the DS production facility (as described
in more detail in PART I: ITEM 2 of this Annual Report) at a cost of approximately $20.8 million, we will continue to incur product
development expenses to operate and maintain this facility until commercialization, although we are reducing these expenses now that
production of inventory for our Controlled Launch is complete.
Uncertainty
of market size and product sales estimates: Estimating the size of the total addressable market and future sales growth potential
for our First Defense ® product line is based on our experience and understanding of market dynamics but is inherently
subjective. Estimating the size of the market for any new product, such as Re-Tain ® , involves more uncertainties
than do projections for established products. We do not know whether, or to what extent, our products will achieve, maintain or increase
market acceptance and profitability. Some of the uncertainties surrounding Re-Tain ® include the product’s
effectiveness against currently prevalent pathogens, market acceptance, the effect of a premium selling price on market penetration,
cost of manufacture, competition from new and existing products sold by substantially larger competitors with greater market reach and
promotional resources and other risks described under “Product Risks” – “Sales risks pertaining to Re-Tain ® ”
below. Since Re-Tain ® is a novel approach to treating mastitis, there are many uncertainties with regards to how
quickly and to what extent we can develop the subclinical mastitis treatment market. We believe that polypeptide antimicrobial technology
may be viewed positively (relative to traditional antibiotics). If realized, this may offset some of these risks and result in better
overall market acceptance.
Net
deferred tax assets: The realizability of our net deferred tax assets is a subjective estimate that is contingent upon many variables.
During the second quarter of 2018, we recorded a full valuation allowance against our net deferred tax assets that significantly increased
our net loss in comparison to other periods. This non-cash expense could be reversed, and this valuation allowance could be reduced or
eliminated, if warranted by our actual and projected profitability in the future. We will continue to assess the need for the valuation
allowance each quarter.
Product
Risks
Product
risks generally: We set objectives for our products that we believe we can achieve, but the achievement of such goals is not a certainty.
The sale of our products is subject to production, financial, efficacy, regulatory, competitive and other market risks. Elevated standards
to achieve and maintain regulatory compliance required to sell our products continue to evolve. Failure to achieve acceptable biological
yields from our production processes can materially increase our costs of goods sold and reduce our production output, leading to lower
margins and/or an order backlog that could adversely affect our customer relationships and operating results. First Defense ®
is sold, and we expect Re-Tain ® to be sold, at significant price premiums relative to competitive products.
There is no assurance that we will continue to achieve market acceptance of the First Defense ® product line, or
achieve and sustain market acceptance of Re-Tain ® , at a profitable price level or that we can continue to manufacture
our products at a low enough cost to result in a sufficient gross margin to justify their continued manufacture and sale. As we bring
Re-Tain ® to market, these risks could be heightened by the additional uncertainties associated with introducing
a new product requiring a shift in customer behavior.
Contamination
events, equipment failures and gross margin from our production process: During the first three and a half months of 2024 as well
as during 2023 and late 2022, we experienced certain contamination events and equipment failures in our production process that resulted
in scrapped inventory and a slowdown of our production process, which had a significant negative impact on our operating results. The
realization of this risk following the contamination events discussed above did result in a slowdown of our production output during
2023 to remediate this problem, which led to less sales and gross margin during the year. We are at risk of further such production contaminations
or equipment failures resulting in more scrapped inventory. Additional contamination events or equipment failures causing significantly
less production output, depending on their severity, could deplete our cash resulting in an inability to fund our business operations.
Sales
risks pertaining to Re-Tain ® : Actual or prospective Re-Tain ® customers
may decide to discontinue, reduce or avoid usage of Re-Tain ® due to the following risks:
1)
A rejection of a tank of milk by a positive milk inhibitor test because too much of the milk in a bulk tank is comprised of milk from
cows being treated with Re-Tain ® , when tested randomly for inhibitors by a milk hauler, which could create legal
liability.
2)
A failed or stalled cheese tank occurs when a Nisin susceptible cheese starter culture is impacted by residues in milk that exceed our
on-farm treatment recommendations, which aims to limit concentrations of bulk tanks or tankers to 1% of milk from cows treated with Re-Tain ®
or is not effectively diluted through the milk collection and transportation system. After we study this potential impact during
our Controlled Launch of Re-Tain ® , we may decide to seek a post-approval label change requiring a short discard
of milk, which may be limited to just the treated quarter of the cow.
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3)
Producers’ current practice generally is to treat only clinical mastitis, which has the visual indicator of abnormal milk. In order
to gain market penetration for Re-Tain ® , we will need to change that practice and increase awareness of the importance
of treating subclinical disease. This will require the producers’ ability and willingness to diagnose without visual indicators.
Users of Re-Tain ® could have unsatisfactory treatment outcomes if they lack the equipment needed to measure and
monitor somatic cell counts (SCC) of the herd or individual cows (for which data is needed). This risk limits our access to treatment
cows because about 40% of farms do not presently have access to this kind of testing at the cow level, and thus are not good candidates
for the use of Re-Tain ® .
4)
Lower than anticipated treatment cure rates could be experienced because the product is administered to cows that we would not identify
as the best treatment candidates based on SCC data or because the product is administered to cows that are infected with pathogens outside
of our label claims.
5)
Off-label use of our product in cows infected with clinical mastitis before we have run the required studies and achieved a label claim
extension for this disease state, resulting in negative treatment outcomes and potential legal liability.
6)
Producers either do not choose to use it or might use it improperly, rather than follow our label instructions to administer one dose
after each of three consecutive milkings, or they may limit use within the herd in an abundance of caution to avoid the negative outcomes
described above.
7)
Our agreement to have DP filled by our current contract manufacturer expired in November of 2024. However, this agreement does provide
for ongoing product labeling and packaging through the first quarter of 2026. Based on the anticipated best-case product expiration dating
for Re-Tain ® , we could have inventory available for sale into the first quarter of 2026. We would need to secure
a new DP manufacturing agreement, or bring the process in-house, to fill more inventory after that.
Reliance
on sales of the First Defense ® product line: We presently are reliant on the market acceptance of the First
Defense ® product line to generate product sales and fund our operations. Our business would not have been profitable
during the years ended December 31, 2012, 2013, 2015 and 2016, during the nine-month periods ended September 30, 2017 or during the three-month
periods ended March 31, 2019, December 31, 2020, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 and December 31,
2024 without the gross margin that we earned on sales of the First Defense ® product line. Our anticipated return
to profitability is contingent upon the gross margin we earn from First Defense ® and prudent management of product
development expenses.
Concentration
of sales: Sales of the First Defense ® product line aggregated 99% of our total product sales during both of
the years ended December 31, 2024 and 2023. Our primary customers for the majority of our product sales (86% and 91% during the years
ended December 31, 2024 and 2023, respectively), are in the U.S. dairy and beef industries. The concentration of our sales from one product
into just two markets (the dairy and beef markets) is a risk to our business. The animal health distribution segment has been aggressively
consolidating over the last few years, with larger distributors acquiring smaller distributors. A large portion of our product sales
(77% and 79% during the years ended December 31, 2024 and 2023, respectively), was made to two large distributors. A large portion of
our trade accounts receivable (78% and 79% as of December 31, 2024 and 2023, respectively) was due from these two distributors. We have
a good history with these distributors, but the concentration of sales and accounts receivable with a small number of customers does
present a risk to us, including risks related to such customers experiencing financial difficulties or altering the basis on which they
do business with us in a manner unfavorable to us.
Production
capacity constraints: We invested $9.9 million from 2019 to December 31, 2024 to increase our annual production capacity (in terms
of annual sales dollars) for the First Defense ® product line from approximately $16.5 million to approximately
$30 million or more based on current selling prices and estimated production yields. We are making initial plans to further increase
our production capacity. While previous capacity expansion investments have proceeded very close to budget, there is a risk of cost overruns
in our ongoing projects and any future production expansions that we may undertake, and a risk that we will not be able to achieve our
production capacity growth objectives on a timely basis, resulting in a continuing or increasing shortfall in supply to the market. The
inability to meet market demand for our products is a risk to our business. The historically large backlog of orders, as well as any
ongoing order backlog, presents a risk that we could lose customers during this period that are not easily regained thereafter, when
our production capacity is expected to meet or exceed sales demand. Our long-term capital plan to continue to expand the First Defense ®
product line requires ongoing review of equipment capacity and utilization across the manufacturing value stream at Building
56 and our leased facilities at Building 175A and 175B , as well as assessment of costs, functional obsolescence and
reliability of equipment. This review and assessment could identify a need to fund unexpected equipment maintenance or replacement costs.
Product
liability: The manufacture and sale of our products entails a risk of product liability. Our exposure to product liability is mitigated
to some extent by the fact that our products are directed towards the animal health market. We have maintained product liability insurance
in an amount which we believe is reasonable in relation to our potential exposure in this area. We have no history of claims of this
nature being made.
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Regulatory
Risks
Regulatory
requirements for the First Defense ® product line: First Defense ® is sold in the United
States subject to a product license from the Center for Veterinary Biologics, USDA, which was first obtained in 1991, with subsequent
approvals of line extensions in 2017 and 2018. As a result, our operations are subject to periodic inspection by the USDA, and we are
at risk of an unfavorable outcome from such inspections. The potency of serial lots is directly traceable to the original serial used
to obtain the product performance claims (the Reference Standard). Due to the unique nature of the label claims, host animal re-testing
is not required as long as periodic laboratory analyses continue to support the stability of the stored Reference Standard. To date,
these analyses have demonstrated strong stability. However, if the USDA were not to approve requalification of the Reference Standard,
additional clinical studies could be required to meet regulatory requirements and allow for continued sales of the product, which could
interrupt sales and adversely affect our operating results. Territories outside of the United States may require additional regulatory
oversight that we may not be able to meet with our current facilities, processes and resources. There is a risk that we will become subject
to regulatory actions in the future, including actions that result in our inability to ship product. In these cases, the resulting interruption
in sales could have a material and adverse effect on our operating results.
Regulatory
requirements for Re-Tain ® : Commercial introduction of this product in the United States requires
us to obtain FDA approval. Completing the process of obtaining FDA approval of the pending NADA involves risk. The regulatory development
process timeline has been extensive (approximately 17 years from when the product rights were returned to us by a former partner in 2007)
and has involved multiple commercial production strategies and multiple submissions of the Chemistry, Manufacturing and Controls (CMC)
Technical Section. We received an Incomplete Letter from the FDA regarding this CMC Technical Section during the third quarter of 2022
that clarified the required path to product approval. During May of 2024, we received an Incomplete Letter from the FDA in response to
our November of 2023 re-submission. To reduce the risk associated with this process, we are working with a qualified contract manufacturer
(Norbrook) for alignment of the required validations and DP manufacture and have met with the FDA to clarify filing strategy and requirements.
Early during the first quarter of 2024, the FDA conducted another pre-approval inspection of our DS facility. This resulted in the issuance
of one deficiency as identified on the FDA’s Form 483. Since then, we have cleared the inspectional observation with the FDA. However,
our efforts continue to be subject to inspection and approval by the FDA and other factors outside of our control, and there remains
a risk that the required FDA approvals of our product and facilities could be further delayed or not obtained. The facility of our contract
manufacturer is subject to similar inspectional obligations and is currently working to resolve certain inspectional observations at
their facility and is subject to re-inspection by the FDA. International regulatory approvals would be required for sales of Re-Tain ®
outside of the United States, and there is a risk that these approvals would be or become too costly to pursue or be delayed
or not obtained.
Regulatory requirements limiting access to
suppliers and customer base: Maine, where our principal executive office and manufacturing facilities are located, has adopted product
reporting and phase-out requirements for per- and polyfluoroalkyl substances (“PFAS”). Maine’s statute establishes a
phased ban for products that contain intentionally added PFAS, with all products (subject to certain exceptions) other than cooling, heating,
ventilation, air conditioning or refrigeration equipment being banned by 2032 unless the Maine Department of Environmental Protection
(“DEP”) has determined that the use of PFAS within the product is a “currently unavoidable use.” Beginning January
1, 2032, the sale of products containing intentionally added but “currently unavoidable” PFAS also is banned if the manufacturer
of such products has failed to report to the DEP information concerning the presence of PFAS in those products. The phased bans may limit
our ability to access supplies and may limit those customers to whom we may sell our products. The U.S. Environmental Protection Agency
also has adopted a PFAS reporting law, which requires that importers of articles that contain PFAS report the presence of such substances
to the extent such information is known or reasonably ascertainable. This reporting requirement may limit our ability to import supplies.
Economic
Risks Pertaining to the Dairy and Beef Industries
Immigration:
The U.S. government is stepping up deportation efforts, resulting in a rising rate of deportations of criminals that are in our country
illegally. Many farms employ hard-working, non-criminal employees who have not yet achieved legal citizenship. Significant deportations
of these individuals could have a negative impact on the operations of our customers and of our source farms.
The
industry data referred to below is compiled from USDA databases.
Cattle
count: The January count of all cattle and calves in the United States had steadily declined from 97,000,000 as of January 1, 2007
to 88,500,000 as of January 1, 2014. Then this figure increased each year, reaching 94,800,000 as of January 1, 2019 before declining
to 93,800,000 as of both January 1, 2020 and January 1, 2021. This count continued to decline to 92,100,000 as of January 1, 2022 and
to 88,800,000 as of January 1, 2023 and to 87,200,000 as of January 1, 2024. This count dropped to 86,700,000 as of January 1, 2025.
The cattle count has not been this low since it was 82,100,000 in 1951. Reflecting seasonal trends, this figure was equal to 102,000,000,
101,000,000, 98,600,000 and 95,900,000 as of July 1, 2020, 2021, 2022 and 2023, respectively. The USDA did not make this data point available
as of July 1, 2024. A significant decline in the cattle count could negatively affect the size of our addressable market.
Herd
size: Prior to 1957, there were over 20,000,000 cows in the U.S. dairy herd. Prior to 1986, there were over 10,000,000 cows in the
U.S. dairy herd. From 1998 through 2021, the size (annual average) of the U.S. dairy herd ranged from the low of 9,011,000 in 2004 to
the high of 9,448,000 in 2021. This average declined to 9,402,000 during the year ended December 31, 2022 and then declined to 9,386,000
during the year ended December 31, 2023. This average declined slightly to 9,342,000 during the year ended December 31, 2024. A significant
decline in the herd size could negatively affect the size of our addressable market.
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Milk
cow price: The all-time high value (annual average) for a milk cow was $1,993 during 2015. Since then, this annual average value
steadily declined to $1,205 during 2019 before increasing to $1,300 during 2020 and to $1,363 during 2021. This price for 2022 increased
significantly to an average of $1,598, which is a 17% increase over 2021. The 2023 average price of $1,763 represents a 10% increase
over prior year. This price for 2024 increased to an average of $2,243, which is a 27% increase over 2023. A significant decline in the
milk cow price could negatively affect the size of our addressable market.
Milk
price: The dairy market, similar to many others, has been unstable for several reasons including as a result of the pandemic. The
price paid to producers for milk has been very volatile. This market volatility, and the resulting impact on our primary end users, could
negatively impact our ability to maintain and grow sales at a profitable level. The Class III milk price (an industry benchmark that
reflects the value of product used to make cheese) is an important indicator because it defines our customers’ revenue level. This
annual average milk price level (measured in dollars per hundred pounds of milk) reached its highest point (since these prices were first
reported in 1980) during 2014 at $22.34 (peaking at $24.60 in September of 2014), which price level has never been repeated. During the
year ended December 31, 2020, this average milk price was equal to $18.16, but it was extremely volatile during the year due largely
to disruption in demand related to the COVID-19 pandemic. The one-month fluctuation of 73% from a low of $12.14 in May of 2020 to $21.04
in June of 2020 set an all-time record for variability. The average price for 2021 decreased by 6% to $17.08. This price average increased
by 29% to $21.96 during the year ended December 31, 2022. The average price decreased by 22% to $17.02 during the year ended December
31, 2023. This average price increased by 11% to $18.89 during the year ended December 31, 2024. The annual fluctuations in this milk
price level are demonstrated in the following table:
Average Class III Milk Price During the Years
Ended December 31,
(Decrease) Increase
2014
$ 22.34
2015
$ 15.80
(29)%
2016
$ 14.87
(6)%
2017
$ 16.17
9%
2018
$ 14.61
(10)%
2019
$ 16.96
16%
2020
$ 18.16
7%
2021
$ 17.08
(6)%
2022
$ 21.96
29%
2023
$ 17.02
(22)%
2024
$ 18.89
11%
Feed
Costs: The actual level of milk prices may be less important than its level relative to feed costs. One measure of this relationship
is known as the milk-to-feed price ratio, which represents the amount of feed that one pound of milk can buy. An increase in feed costs
also has a negative impact on the beef industry and therefore could have a resulting negative impact on our business and results of operations.
This ratio varies farm-to-farm based on individual operating parameters. Since this ratio reached 3.24 in 2005, it has not exceeded 3.00.
This ratio averaged 1.74 for 2021, amounting to a significant decline of 25% from the 2020 average of 2.32. This average has not been
lower since 2012. During 2022, this ratio improved by 10% to 1.91. This ratio dropped by 12% to 1.67 during the year ended December 31,
2023. This ratio increased to 2.49 during the year ended December 31, 2024, representing an increase of 49%. The following table demonstrates
the annual volatility and the low values of this ratio recently:
Average Milk-To-Feed Price Ratio During the Years Ended December 31,
(Decrease) Increase
2014
2.54
2015
2.14
(16)%
2016
2.26
6%
2017
2.42
7%
2018
2.05
(15)%
2019
2.25
10%
2020
2.32
3%
2021
1.74
(25)%
2022
1.91
10%
2023
1.67
(12)%
2024
2.49
49%
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Volatility
of the dairy market : While the number of cows in the U.S. herd and the production of milk per cow directly influence the supply of
milk, the price for milk is also influenced by very volatile international demand for milk products. Given our focus on the dairy and
beef industries, the volatile market conditions and the resulting financial insecurities of our primary end users are risks to our ability
to maintain and grow sales at a profitable level. These factors also heighten the challenge of selling premium-priced animal health products
(such as Tri-Shield ® and Re-Tain ® ) into the dairy market.
Small
Size of the Company
Dependence
on key personnel: We are a small company with approximately 75 employees (including 6 part-time employees). As such, we rely on certain
key employees to support multiple operational functions, with limited redundancy in capacity. The loss of any of these key employees
could adversely affect our operations until a qualified replacement is hired and trained, which could be even more challenging in the
present difficult labor market. Our competitive position will be highly influenced by our ability to attract, retain and motivate key
scientific, manufacturing, managerial and sales and marketing personnel. The cost of attracting and retaining the needed additional personnel
in this current job market and inflationary environment could adversely affect our margins and profitability.
Reliance
on outside party to provide certain services under contract for us: We are exposed to additional regulatory compliance risks through
the subcontractors that we choose to work with to produce Re-Tain ® , who also need to satisfy certain regulatory
requirements in order to provide us with the products and services we need. One example of this outside reliance is Norbrook, our DP
contract manufacturer. Because Norbrook notified us of its intent to terminate its supply agreement with us, we initiated an investment
of approximately $4 million during 2022 to construct and equip our own DP formulation and aseptic filling capability for Re-Tain ®
in our existing DS facility. Due to the loss in gross margin during 2023 caused by the slowdown in production output necessary
to remediate product contamination events, we have decided to defer spending of approximately $2 million of these funds for the near
term. The objective of this investment is to end our reliance on an outside party to perform these services for us. Actual project costs
could exceed our current estimates. Completion of this project could be delayed due to a number of factors outside our control, including
delays in equipment fabrication, equipment delivery or facility construction. In addition, there is a risk that we fail to achieve regulatory
approval of the new facility or that such approval is delayed or requires significant additional expenditures to obtain. We are evaluating
alternatives for DP supply going forward, which include the resumption of the investment in our own in-house DP services (when prudent
based on our cash reserves) or another contract manufacturing agreement or a further extension with Norbrook. We anticipate a supply
interruption under our Controlled Launch of Re-Tain ® after the DP supply provided from our contract manufacturer
is consumed and until new supply from a new contract manufacturing agreement or our own formulation and aseptic filling facility is implemented.
Competition
from others: Many of our competitors are significantly larger and more diversified in the relevant markets than we are and have substantially
greater financial, marketing, manufacturing and human resources and more extensive product development and sales/distribution capabilities
than we do, including greater ability to withstand adverse economic or market conditions and declining revenues and/or profitability.
Merck and Zoetis, among other companies, sell products that compete directly with the First Defense ® product line
in preventing scours in newborn calves. The scours product sold by Zoetis sells for approximately half the price of our product, although
it does not have an E. coli claim (which ours does). With Tri-Shield ® , we can compete more effectively against
vaccines that are given to the mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf. Elanco,
Merck and Zoetis provide these dam vaccine products to the market. There are many companies competing in the mastitis treatment market,
most notably Boehringer Ingelheim, Merck and Zoetis. The mastitis products sold by these large companies are well established in the
market and are priced lower than what we expect for Re-Tain ® , but all of them involve traditional antibiotics and
are sold subject to a requirement to discard milk during and for a period of time after treatment (unlike our product which does not
carry an FDA-required milk discard or pre-slaughter withdrawal period). There is no assurance that our products will compete successfully
in these markets. We may not be aware of other companies that compete with us or intend to compete with us in the future.
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Global
Risks
Tariffs
and Trade Policies: Changes in tariffs or cross-border trade policies could affect our ability to expand sales of our products into
foreign markets. The businesses of some of our U.S. dairy and beef customers could be significantly affected by changes in tariffs or
trade policies, thus negatively affecting demand for our products. Additionally, tariffs on products and materials that we import could
increase our costs of goods sold.
International
Conflicts: International conflicts, including ongoing wars in Ukraine and the Middle East, give rise to uncertainties and stress
on the global economy, which in turn can affect the demand for our products and our costs of operation.
Climate
change: Our business, and our activities and the activities of our customers and suppliers, could be disrupted by climate change.
Potential physical risks from climate change may include altered distribution and intensity of rainfall, prolonged droughts or flooding,
increased frequency of wildfires and other natural disasters, rising sea levels, and a rising heat index, any of which could cause negative
impacts to our and our customers’ and suppliers’ businesses. Increased temperatures and rising water levels may negatively
impact our dairy and beef livestock customers by increasing the prevalence of parasites and diseases that affect food animals. The physical
changes caused by climate change may also prompt changes in regulations or consumer preferences which in turn could have negative consequences
for our and our customers’ businesses. Climate change may negatively impact our customers’ operations. In addition, concerns
regarding greenhouse gas emissions and other potential environmental impacts of livestock production have led to some consumers opting
to limit or avoid consuming animal products. If such events affect our customers’ businesses, they may purchase fewer of our products,
and our revenues may be negatively impacted. Climate driven changes could have a material adverse impact on the financial performance
of our business and on our customers. In addition, increased frequency of natural disasters and adverse weather conditions may disrupt
our manufacturing processes or our supply chain. These disruptions may have a material adverse effect on our business, financial condition,
results of operations and/or cash flows.
Bovine
diseases: The potential for epidemics of bovine diseases such as Highly Pathogenic Avian Influenza (HPAI), Foot and Mouth Disease,
Bovine Tuberculosis, Brucellosis and Bovine Spongiform Encephalopathy (BSE) presents a risk to us and our customers. We have seen a severe
negative impact of bird flu on the U.S. poultry flock causing a significant increase in the price of eggs. We have seen a cross-over
to cows in the dairy industry. Documented cases of BSE in the United States have led to an overall tightening of regulations pertaining
to ingredients of animal origin, especially bovine. The First Defense ® product line is manufactured from concentrated
bovine colostrum, which is not considered a BSE risk material. Future regulatory action to increase protection of the human food supply
could affect the First Defense ® product line, although presently we do not anticipate that this will be the case.
Risks
Pertaining to Common Stock
Stock
market valuation and liquidity: Our common stock trades on The Nasdaq Capital Market (Nasdaq: ICCC). Our average daily trading volume
(which was 7,100 shares per day during the 20-day period ended March 21, 2025) is lower, our bid/ask stock price spread can be larger
and our share price can be more volatile than what other companies experience. Those factors could result in investors facing difficulty
selling their stock for proceeds that they may expect or desire. Our share price as of March 21, 2025 was $4.91. Most companies in the
animal health sector have market capitalization values that greatly exceed our market capitalization of approximately $44.1 million as
of March 21, 2025. Our product sales during the year ended December 31, 2024 were $26.5 million. This means that our market capitalization
as of March 21, 2025 was equal to approximately 1.66 times our sales during the year ended December 31, 2024. Before adequate gross margin
from the sale of new products is achieved, our market capitalization may be heavily dependent on the perceived potential for growth from
our product under development and may therefore be negatively affected by the related uncertainties and risks.
Certain
provisions might discourage, delay or prevent a change in control of our Company or changes in our management: Provisions of our
certificate of incorporation, our bylaws or Delaware law may discourage, delay or prevent a merger, acquisition or other change in control
that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares
of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
These provisions include:
● limitations
on the removal of directors;
● advance
notice requirements for stockholder proposals and nominations;
● the
ability of our Board of Directors to alter or repeal our bylaws;
● Section
203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested stockholder (generally defined
as a person which together with its affiliates owns, or within the last three years has owned,
15% of our voting stock, for a period of three years after the date of the transaction in
which the person became an interested stockholder) unless the business combination is approved
in a prescribed manner.
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The
existence of the foregoing provisions and anti-takeover measures could depress the trading price of our common stock or limit the price
that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our
Company, thereby reducing the likelihood of obtaining a premium for our common stock in an acquisition.
No
expectation to pay any dividends or repurchase stock for the foreseeable future: We do not anticipate paying any dividends to, or
repurchasing stock from, our stockholders for the foreseeable future. Instead, we expect to use cash to fund product development costs
and investments in our facilities and production equipment, and to increase our working capital. Stockholders must be prepared to rely
on market sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination
to pay dividends or repurchase stock in the future will be made at the discretion of our Board of Directors and will depend on our financial
condition, results of operations, contractual restrictions, restrictions imposed by applicable laws, current and anticipated needs for
liquidity and other factors our Board of Directors deems relevant.
Possible
dilution: We are accessing the capital markets and issuing additional common stock, from time to time, under an ATM Offering in order
to fund our operations, as described elsewhere in this Annual Report. Such issuances have a dilutive effect on our existing stockholders.
Other
Risks
Access
to raw materials and contract manufacturing services: Our objective is to maintain more than one source of supply for the components
used to manufacture and test our products that we obtain from third parties. However, we may experience difficulty in efficiently acquiring
essential supplies. We have significantly increased the number of farms from which we purchase colostrum for the First Defense ®
product line. A significant reduction in farm capacity could make it difficult for us to produce enough inventory to meet customer
demand. The specific antibodies that we purify from colostrum for the First Defense ® product line are not readily
available from other sources. We are and will be dependent on our manufacturing facilities and operations in Portland, Maine for the
production of the First Defense ® product line and Re-Tain ® . We will be dependent on one manufacturer
for the supply of syringes for Re-Tain ® . We were dependent on a contract with Norbrook for the DP formulation and
aseptic filling for supply of our Nisin DP through 2024. Any facility used to perform these services will be subject to FDA inspection
and approval, the outcome and timing of which are not within our control. We anticipate that this FDA approval process would take at
least two years. The potential alternative options for these services are narrowed considerably because our product cannot be formulated
or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). Any significant damage to or other disruption
in the services at any of these third-party facilities or our own facilities (including due to lack of financing, regulatory issues or
non-compliance) would adversely affect the production of inventory and result in significant added expenses and potential loss of future
sales. We anticipate a supply interruption and adverse effects on our Controlled Launch of Re-Tain ® beginning during
the first quarter of 2026 (subject to confirmation of final product shelf-life disposition by the FDA). These goods represent the initial
DP production from our contract manufacturer. The extent of the interruption will be subject to the supply timeline from a new contract
manufacturing agreement or from our own formulation and aseptic filling facility for DP.
Failure
to protect intellectual property: The protection and enforcement of our intellectual property rights may require the expenditure
of significant financial, managerial and operational resources. We rely on trademark, copyright and patent law, trade secret protection,
agreements and other methods with our employees and others to protect our proprietary rights. However, we may be unable to adequately
protect our intellectual property rights or prevent third parties from infringing or misappropriating our intellectual property rights.
We may not be able to obtain registration for all intellectual property we seek to register, and effective intellectual property protection
may not be available in every country in which our products are sold. In some cases, we have chosen (and may choose in the future) not
to seek patent protection for certain products or processes. Instead, we have sought (and may seek in the future) to maintain the confidentiality
of any relevant proprietary technology through trade secrets, operational safeguards and contractual agreements. Reliance upon trade
secrets, rather than patent protection may cause us to be vulnerable to competitors who successfully replicate (knock off) our manufacturing
techniques and processes. Further, our confidentiality agreements may not effectively prevent disclosure of our proprietary information,
technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information. Others
may independently develop similar trade secrets or technology or obtain access to our unpatented trade secrets or proprietary technology.
Others may have filed patent applications and may have been issued patents involving products or technologies potentially useful to us
or necessary for us to commercialize our products or achieve our business goals. If that were to be the case, there can be no assurance
that we will be able to obtain licenses to such patents on terms that are acceptable to us. Any of our intellectual property rights may
be challenged by others or invalidated through administrative process or litigation. Third parties may claim in the future, that we have
infringed their intellectual property rights, which could result in significant costs and potential damages and license requirements.
We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights
or other proprietary rights or to establish the validity of such rights. However, we may be unable to discover or determine the extent
of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. In addition,
we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights
and other proprietary rights.
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Increasing
dependence on the continuous and reliable operation of our information technology systems: We rely on information systems throughout
our company. Any disruption of these systems or significant security breaches could adversely affect our business. Although we maintain
information security policies and employ system backup measures and engage in information system redundancy planning and processes, such
policies, measures, planning and processes, as well as our current disaster recovery plan may be ineffective or inadequate to address
all eventualities. As information systems and the use of software and related applications by us, our business partners, suppliers, and
customers become more cloud-based, we become inherently more susceptible to cyberattacks. There has been an increase in global cybersecurity
vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our
information systems and networks and the confidentiality, availability and integrity of data and information. There are reports of increased
activity by hackers and scammers since the COVID-19 pandemic. Any such attack or breach could compromise our networks and the information
stored thereon could be accessed, publicly disclosed, lost, or stolen. While we have invested in our data and information technology
infrastructure (including working with an information security technology consultant to assess and enhance our security systems and procedures,
and periodically training our employees in such systems and procedures), there can be no assurance that these efforts will prevent a
system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains.
We have not experienced any material adverse effect on our business or operations as a consequence of any such attack or breach but may
incur increasing costs in performing the tasks described above. Given the unpredictability of the timing, nature and scope of such disruptions
and the evolving nature of cybersecurity threats, which vary in technique and sources, if we or our business partners or suppliers were
to experience a system disruption, attack or security breach that impacts any of our critical functions, or our customers were to experience
a system disruption, attack or security breach via any of our connected products and services, we could potentially be subject to production
downtimes, operational delays or other detrimental impacts on our operations. Furthermore, any access to, public disclosure of, or other
loss of data or information, including any of our (or our customers’ or suppliers’) confidential or proprietary information
or personal data or information, as a result of an attack or security breach could result in governmental actions or private claims or
proceedings, which could damage our reputation, cause a loss of confidence in our products and services, damage our ability to develop
(and protect our rights to) our proprietary technologies and have a material adverse effect on our business, financial condition, results
of operations or prospects. While this exposure is common to all companies, larger companies with greater resources may be better able
to mitigate this risk than we can. See also PART I, ITEM 1C – CYBERSECURITY below.