Item 1A. Risk Factors
ITEM
1A — RISK FACTORS
Financial
Risks
Gross
margin on product sales: One of our goals is to achieve a gross margin (before related depreciation expenses) as a percentage of
total sales approaching 50% 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 report (including inflation and the COVID-related and other 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 (which was experienced during 2022) that we are not
able to achieve our gross margin goals, which would adversely affect our operating results and could impact our future operating plans.
There is a risk that our plans to maintain or improve our gross margin may not be realized due to cost increases, additional manufacturing
contamination events, the inability to raise our selling prices, or any combination of these factors.
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. We removed the direct aspect of this particular exposure to our business by refinancing our bank debt
with fixed rate notes at 3.50% per annum during the first quarter of 2020. The $2 million in additional mortgage debt we secured during
the first quarter of 2022 bears interest at the fixed rate of 3.58% per annum. The two State of Maine loans aggregating $900,000 bear
interest at the fixed rate of 5% per annum. Increasing interest rates would negatively impact the cost of any future borrowings. 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 $1.4 million during both of the years ending December 31, 2023 and
2024. See Note 10 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 bank debt is subject to certain financial covenants. We are required to meet a minimum debt service coverage (DSC)
ratio of 1.35, which is measured annually. Our actual DSC ratios were 0.44, 2.68 and 2.03 for the years ended December 31, 2022, 2021
and 2020, respectively. There can be no assurance that we can exceed that required level in subsequent years. By negotiation with the
bank in connection with a mortgage debt financing during the first quarter of 2022, the required minimum DSC ratio was reduced to 1.0
for the year ending December 31, 2022. Subsequently, our bank waived the required compliance with this rate for the year ended December
31, 2022. During the first quarter of 2023, the DSC ratio covenant for the year ending December 31, 2023 was waived by our bank. Instead,
we are required to meet a minimum DSC ratio requirement of 1.35 for the twelve-month periods ending June 30, 2024, September 30, 2024
and December 31, 2024 and then again annually after that. If we are unable to achieve the required DSC ratio going forward or reach a
favorable agreement with our bank 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 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. The current devaluation
of the dollar makes Euro-based purchases more expensive for us.
Inflation:
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. According to the Consumer Price Index for All Urban Consumers (CPI-U) during the year ended December
31, 2022, the all items index increased 6.5% before seasonal adjustment.
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 less profits or deeper operating losses. The timing of FDA approval of Re-Tain ®
will have a material impact on our net (loss) income until sufficient commercial sales are generated and sustained.
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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 Drug Substance production facility
described elsewhere in this 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. Absent sufficient sales of Re-Tain ® at a profitable
gross margin, we would be required to fund all debt service costs from available cash and sales of the First Defense ®
product line, which would reduce, and could eliminate, our expected profitability going forward and significantly reduce our cash flows.
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 in our production process: Around the end of the third quarter of 2022 and during the first quarter of 2023, we experienced
certain contamination events in our production process. We are at risk of further such production contaminations resulting in more scrapped
inventory if we do not achieve an adequate level of sanitization and quality controls in our production process from farms to finished
goods. These risks could result in a slowdown or shutdown of our production capacity if not managed effectively.
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.
2)
A failed or stalled cheese tank occurs when our recommended on-farm limit of 3% to 5% of milk from cows being treated with Re-Tain ®
is exceeded or not effectively diluted through the milk transportation and collection system, if a cheese starter culture is used
that is susceptible to Nisin.
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 access this kind of testing at the cow level, and thus are not good candidates for the
use of Re-Tain ® .
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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.
5)
Lower than anticipated treatment cure rates could be experienced because the product is administered to cows that are infected with pathogens
outside of our label claims.
6)
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.
7)
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.
Reliance
on sales of the First Defense ® product line: We 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 and March 31, 2022 without the gross margin
that we earned on sales of the First Defense ® product line.
Concentration
of sales: Sales of the First Defense ® product line aggregated 99% and 98% of our total product sales during
the years ended December 31, 2022 and 2021, respectively. Our primary customers for the majority of our product sales (92% and 86% during
the years ended December 31, 2022 and 2021, respectively) are in the U.S. dairy and beef industries. Product sales to international customers,
who are also in the dairy and beef industries, aggregated 8% and 14% of our total product sales during the years ended December 31, 2022
and 2021, respectively. 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 (73% during both of the years ended December 31, 2022 and 2021)
was made to two large distributors. A large portion of our trade accounts receivable (69% and 72% as of December 31, 2022 and 2021, 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 approximately $3.7 million from 2019 to the first quarter of 2022 to increase our production capacity
(in terms of annual sales dollars) for the First Defense ® product line from approximately $16.5 million to approximately
$23 million based on current selling prices and estimated production yields. During the fourth quarter of 2021, we reached this new,
higher level of production output on an annualized basis. While this capacity expansion investment has 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. During 2021, we initiated three additional
investments aggregating approximately $4.7 million to increase our annual production capacity for the First Defense ®
product line to approximately $30 million, which we completed at the end of 2022. We are making initial plans and investments to further
increase our production capacity in 2024 and after. Our plan to continue to expand the First Defense ® product line
requires ongoing review of equipment capacity and utilization across the manufacturing value stream at the 56 Evergreen Drive facility
and our leased facility at 175 Industrial Way, as well as assessment of 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 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.
Regulatory
requirements for Re-Tain ® : The commercial introduction of this product in the United States requires
us to obtain FDA approval. Completing the development through to approval of the NADA by the FDA involves risk. While four of the five
required Technical Sections have been approved, the regulatory development process timeline has been extensive (approximately 15 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. Most recently, we received an Incomplete
Letter from the FDA regarding this CMC Technical Section during the third quarter of 2022. The principal issue remaining is a successful
pre-approval re-inspection of our manufacturing facility. We are completing preparations for this re-inspection. This clarifies the required
path to product approval. To reduce the risk associated with this process, we are working with a qualified contract manufacturer (Norbrook)
for alignment of the required validations and Drug Product manufacture and have met with the FDA to clarify filing strategy and requirements.
Our CMC Technical Section submission will be subject to a statutory six-month review period by the FDA. We believe we can successfully
complete the pre-approval re-inspection inside of this time frame. 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 delayed or not obtained. 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.
Sales in these international territories would also be subject to milk discard and meat withhold restrictions, thereby reducing the competitive
advantage of Re-Tain ® in those territories.
Economic
Risks Pertaining to the Dairy and Beef Industries
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 and to 89,300,000 as of January
1, 2022 and 2023, respectively. Reflecting seasonal trends, this figure was equal to 102,000,000, 101,000,000 and 98,800,000 as of July
1, 2020, 2021 and 2022, respectively. 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 approximately 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. A significant decline
in the herd size could negatively affect the size of our addressable market.
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. This price as of January 2023 increased by another 8% to $1,720.
A significant decline in the milk cow price could negatively affect the size of our addressable market.
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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 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 2020 to $21.04
in June 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 15% to $18.61 during the first two months of
2023. 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 %
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 1.92. This ratio dropped to 1.73 in January 2023. The following table demonstrates
the annual volatility and the low values of this ratio recently:
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
1.92
10 %
Market
volatility : While the number of cows in the U.S. herd and the production of milk per cow directly influence the supply of milk, the
price for milk is also influenced by very volatile international demand for milk products. Given our focus on the dairy and beef industries,
the volatile market conditions and the resulting financial insecurities of our primary end users are risks to our ability to maintain
and grow sales at a profitable level. These factors also heighten the challenge of selling premium-priced animal health products (such
as Tri-Shield ® and Re-Tain ® ) into the dairy market.
Small
Size of Company
Dependence
on key personnel: We are a small company with 74 employees (including 7 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 very difficult
labor market. Our competitive position will be highly influenced by our ability to attract, retain and motivate key scientific, manufacturing,
managerial and sales and marketing personnel. We will require increased staffing levels to operate our expanded First Defense ®
production capacity and to operate our Re-Tain ® production facility. The cost of attracting and retaining
the needed additional personnel in this current job market and inflationary environment could adversely affect our margins and profitability.
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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 Drug
Product (DP) contract manufacturer. Because Norbrook has elected to terminate its supply agreement with us effective as of the end of
2022 (with final deliveries anticipated during the middle of 2023), we are investing approximately $4 million to construct and equip
our own DP formulation and aseptic filling capability for Re-Tain ® inside our existing Drug Substance facility.
Due to the loss in gross margin during the first quarter of 2023 caused by the slowdown in production output necessary to remediate a
product contamination event, we have decided to defer spending of approximately 42% of these funds for the time being. We face the risk
of potential supply interruption and adverse effects on the market launch of Re-Tain ® if we do not effectively
manage the end of the DP supply provided from our contract manufacturer for orders scheduled for delivery during the second half of 2023
(with product expiries during the second half of 2025) to align with the new supply from our own formulation and aseptic filling facility,
which we currently expect to be operational during 2025. The objective of this investment is to end our reliance on an outside party
to perform these services for us. Actual project costs could exceed our current estimates. 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.
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 now compete more effectively
against vaccines that are given to the mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf.
Elanco, Merck and Zoetis provide these dam vaccine products to the market. There are many companies competing in the mastitis treatment
market, most notably Boehringer Ingelheim, Merck and Zoetis. The subclinical mastitis products sold by these large companies are well
established in the market and are priced lower than what we expect for 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 carries zero milk discard and zero milk withhold claims). There is no assurance that our products will compete successfully in
these markets. We may not be aware of other companies that compete with us or intend to compete with us in the future.
Global
Risks
Impact
of global COVID-19 pandemic and Russia’s unprovoked military invasion of Ukraine: We are facing significant production constraints,
supply disruptions and inflationary increases which appear to have been caused, in large part directly or indirectly, by the pandemic
and Russia’s unprovoked military invasion of Ukraine. The extent and duration of the negative impact of the pandemic on the economics
of our customers and on the demand for our products going forward are very difficult to assess. The dairy market, similar to many others,
has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. The Class III milk price
has been extremely volatile during the pandemic. Initially, stay at home orders disrupted the food service supply system as schools closed
and restaurants were shut down. In response, producers were forced to reduce the supply of milk to the market by drying off cows early,
culling cows from the herd and dumping milk, among other tactics. Market conditions have improved somewhat, but this volatility remains
a concern. Additionally, like most input costs, the cost of grain and other feed is rising, which puts a strain on the profitability
of our customers. There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected
due to closures of processing plants and reduced throughput. This is a very unusual situation for farmers that work so hard to improve
production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. The pandemic
has created risk and continues to create uncertainty and challenges for us. The emergence of the Delta and Omicron variants and the resulting
rising number of positive cases during the latter part of 2021 and into 2022 has been a more recent concern. The pandemic has created
or contributed to global supply-chain disruptions and has affected international trade, while creating a worldwide health and economic
crisis. While presently there are some indications that suggest the situation may be improving, the full impact of this viral outbreak
on the global economy, and the duration of such impact, remains very uncertain at this time. 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. We are experiencing
shortages in key components and needed products, backlogs and production slowdowns due to difficulties accessing needed supplies and
labor and other restrictions which increase our costs and affect our ability to consistently deliver our products to market in a timely
manner. Our exposure to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on foreign manufacturers,
by our on-going cross-training of our employees, by qualifying alternate suppliers and components and by our early and continued compliance
with recommended hygiene. Despite our best efforts and intentions, there is a risk that an employee could become infected and could infect
others. Russia’s unprovoked military invasion of Ukraine and attack on its people is having a significant negative impact on the
world economy, worsening trends that were already moving in an unfavorable direction. Among other exposures, the increasing price of
oil is already impacting our transportation-related expenses materially, and we expect this supply stress to increase the cost of petroleum-based
products that we purchase (mostly plastics).
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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, through climate-related
impacts such as increased air and water temperatures, rising water levels and increased incidence of disease in livestock. In addition,
concerns regarding greenhouse gas emissions and other potential environmental impacts of livestock production 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 Foot and Mouth Disease, Bovine Tuberculosis, Brucellosis and Bovine
Spongiform Encephalopathy (BSE) presents a risk to us and our customers. Documented cases of BSE in the United States have led to an
overall tightening of regulations pertaining to ingredients of animal origin, especially bovine. The First Defense ®
product line is manufactured from bovine milk (colostrum), which is not considered a BSE risk material. Future regulatory action to increase
protection of the human food supply could affect the First Defense ® product line, although presently we do not
anticipate that this will be the case.
Risks
Pertaining to Common Stock
Stock
market valuation and liquidity: Our common stock trades on The Nasdaq Stock Market (Nasdaq: ICCC). Our average daily trading volume
(which was approximately 6,612 shares per day during the 20-day period ended March 10, 2023) is lower, our bid/ask stock price spread
can be larger and our share price can be more volatile than what other companies experience, which could result in investors facing difficulty
selling their stock for proceeds that they may expect or desire. Our share price as of March 10, 2023 was $5.49. Most companies in the
animal health sector have market capitalization values that greatly exceed our current market capitalization of approximately $43 million
as of March 10, 2023. Our product sales during the year ended December 31, 2022 were approximately $19 million. This means that our market
valuation as of March 10, 2023 was equal to approximately 2 times our sales during the year ended December 31, 2022. Before gross margin
from the sale of new products is achieved, our market capitalization may be heavily dependent on the perceived potential for growth from
our product under development and may therefore be negatively affected by the related uncertainties and risks.
Certain
provisions might discourage, delay or prevent a change in control of our Company or changes in our management: Provisions of our
certificate of incorporation, our bylaws, our Common Stock Rights Plan or Delaware law may discourage, delay or prevent a merger, acquisition
or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive
a premium for their shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace
or remove our management. These provisions include:
● 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;
● the
ability of our Board of Directors to refuse to redeem rights issued under our Common Stock Rights Plan or otherwise to limit or suspend
its operation that would work to dilute the stock ownership of a potential hostile acquirer, potentially preventing acquisitions that
have not been approved by our Board of Directors; and
● 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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Corporation
The existence
of the foregoing provisions and anti-takeover measures could depress the trading price of our common stock or limit the price that investors
might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby
reducing the likelihood of obtaining a premium for our common stock in an acquisition.
No expectation
to pay any dividends or repurchase stock for the foreseeable future: We do not anticipate paying any dividends to, or repurchasing
stock from, our stockholders for the foreseeable future. Instead, we expect to use cash to fund product development costs and investments
in our facilities and production equipment, and to increase our working capital and to reduce debt. Stockholders must be prepared to rely
on market sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination
to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our financial condition, results
of operations, contractual restrictions, restrictions imposed by applicable laws, current and anticipated needs for liquidity and other
factors our Board of Directors deems relevant.
Possible
dilution: We may need to access the capital markets again and issue additional common stock in order to fund our growth objectives,
as described elsewhere in this report. Such issuances could have a dilutive effect on our existing stockholders.
Other Risks
Access to raw
materials and contract manufacturing services: Our objective is to maintain more than one source of supply for the components used
to manufacture and test our products that we obtain from third parties. However, we are experiencing difficulty in efficiently acquiring
essential supplies. We have significantly increased the number of farms from which we purchase colostrum for the First Defense ®
product line. A significant reduction in farm capacity could make it difficult for us to produce enough inventory to meet customer demand.
The specific antibodies that we purify from colostrum for the First Defense ® product line are not readily available
from other sources. We are and will be dependent on our manufacturing facilities and operations in Portland for the production of the
First Defense ® product line and Re-Tain ® .
We will be dependent on one manufacturer for the supply of syringes for Re-Tain ® . We are currently dependent on
a contract with Norbrook for the Drug Product (DP) formulation and aseptic filling of our Nisin DP for orders scheduled for delivery during
the second half of 2023. The facility we are constructing to perform these services in-house will be subject to FDA inspection and approval,
the outcome and timing of which are not within our control. We expect to achieve FDA approval for use of our DP facility during 2025.
The potential alternative options for these services are narrowed considerably because our product cannot be formulated or filled in a
facility that also processes traditional antibiotics (i.e., beta lactams). Any significant damage to or other disruption in the services
at any of these third-party facilities or our own facilities (including due to regulatory issues or non-compliance) would adversely affect
the production of inventory and result in significant added expenses and potential loss of future sales.
Failure to protect intellectual property:
The protection and enforcement of our intellectual property rights may require the expenditure of significant financial, managerial
and operational resources. We rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with
our employees and others to protect our proprietary rights. However, we may be unable to adequately protect our intellectual property
rights or prevent third parties from infringing or misappropriating our intellectual property rights. We may not be able to obtain registration
for all intellectual property we seek to register, and effective intellectual property protection may not be available in every country
in which our products are sold. In some cases, we have chosen (and may choose in the future) not to seek patent protection for certain
products or processes. Instead, we have sought (and may seek in the future) to maintain the confidentiality of any relevant proprietary
technology through trade secrets, operational safeguards and contractual agreements. Reliance upon trade secret, rather than patent, protection
may cause us to be vulnerable to competitors who successfully replicate (knock off) our manufacturing techniques and processes. 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
during the COVID-19 pandemic. Russia’s unprovoked military invasion of Ukraine may elevate the risk of such cyberattacks. Any such
attack or breach could compromise our networks and the information stored thereon could be accessed, publicly disclosed, lost, or stolen.
While we have invested in our data and information technology infrastructure (including working with an information security technology
consultant to assess and enhance our security systems and procedures, and periodically training our employees in such systems and procedures),
there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system
disruptions and security breaches from a cyberattack remains. We have not experienced any material adverse effect on our business or operations
as a consequence of any such attack or breach but may incur increasing costs in performing the tasks described above. Given the unpredictability
of the timing, nature and scope of such disruptions and the evolving nature of cybersecurity threats, which vary in technique and sources,
if we or our business partners or suppliers were to experience a system disruption, attack or security breach that impacts any of our
critical functions, or our customers were to experience a system disruption, attack or security breach via any of our connected products
and services, we could potentially be subject to production downtimes, operational delays or other detrimental impacts on our operations.
Furthermore, any access to, public disclosure of, or other loss of data or information, 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.
ITEM 1B — UNRESOLVED STAFF COMMENTS
None