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 of approximately 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 the COVID-related
cost increases, supply-chain disruptions and the rising price of oil) impact our costs of goods sold. There is a risk 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.
This concern was realized during the first quarter of 2021 when our gross margin as a percentage of sales dropped to 39%. There is a risk
that our plans to continue to recover from this decrease may not be realized due to cost increases, inability to raise our selling prices,
or both.
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 affect our business. We removed the direct aspect of this particular exposure
to our business by refinancing our bank debt to fixed rate notes at 3.50% per annum during the first quarter of 2020. However, the additional
debt we incurred to fund our growth objectives has significantly increased our debt service costs. Reflecting the mortgage debt financing
we completed during the first quarter of 2022, we are obligated to make principal and interest payments aggregating approximately $1.2
million during the year ending December 31, 2022 and approximately $1.24 million during the years ending December 31, 2023 and thereafter
during the remainder of the ten-year term. See Note 10 to the accompanying audited financial statements for more information. 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 2.68 and 2.03 for the years ended December 31, 2021 and 2020, respectively. However, based on current projections
of our future financial performance, which includes a high level of ongoing product development expenses to support Re-Tain ® ,
we may not satisfy this annual requirement for the year ending December 31, 2022, and 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.
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 initiated. Additionally, this complexity and uncertainty is magnified by the
risks relating to and arising out of the duration, extent and nature of adverse effects from the COVID-19 pandemic.
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ImmuCell Corporation
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 and competition from new and existing
products sold by substantially larger competitors with greater market reach and promotional resources. 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. Our belief that peptide antimicrobial technology will be viewed positively (relative to traditional
antibiotics), if realized, 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: 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
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 to competitive products. There is no assurance
that we will continue to achieve market acceptance of the First Defense ® product line, or achieve 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.
The impact of Nisin on milk and cheese: 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. In recognition
of the safety data that we presented to the FDA for our highly purified preparation of Nisin, the FDA granted us the zero milk discard
and zero meat withhold claims that we sought. However, there is a risk that dairy producers and processors will not accept this new technology
because of the risk that a tank of milk could be discarded if it is comprised of more than 1% of milk from treated cows when tank contents
are tested for inhibitors through random testing by milk haulers and the risk that our product may negatively affect cheese making if
present in a high enough concentration in any cheese batch that utilizes a starter culture that is susceptible to Nisin. If treatment
rates exceed our usage recommendation, there is a risk that milk from treated cows will not be diluted adequately with milk from non-treated
cows to keep the tank average below this sensitivity level.
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ImmuCell Corporation
Market
launch 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 more than 1% of the milk in a bulk tank is comprised of milk from treated cows, when tested randomly by a
milk hauler. See the Risk Factor above for more detail.
2) A failed or stalled cheese tank occurs when
our recommended on-farm limit of 3% to 5% of milk from treated cows 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. See the Risk Factor above for more detail.
3) 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.
4) Lower than anticipated treatment cure rates
are 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
are 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 bother to use it or
might use it improperly, rather than follow our label instructions to administer one dose after each of three consecutive milkings, resulting
in negative treatment outcomes, and to limit use within the herd 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 and December 31, 2021 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 98% of our total product sales during both of the years ended December 31, 2021 and
2020. Our primary customers for the majority of our product sales (86% and 89% during the years ended December 31, 2021 and 2020, 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
14% and 11% of our total product sales during the years ended December 31, 2021 and 2020, respectively. The concentration of our sales
from one product into one market 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% and 71% during
the years ended December 31, 2021 and 2020, respectively) was made to two large distributors. A large portion of our trade accounts receivable
(72% and 75% as of December 31, 2021 and 2020, 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 $3.6 million 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 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 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 the third quarter
of 2021, we initiated additional investments to increase our annual production capacity for the First Defense ® product
line to approximately $35 million which we intend to complete by the end of 2022. 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.
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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.
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. We have disclosed a timeline
of events that could lead to product approval during the fourth quarter of 2022. 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 13 years from the first FDA submission) and has involved multiple commercial production strategies.
The first-phased Chemistry, Manufacturing and Controls Technical Section was submitted for the Nisin Drug Substance during the first quarter
of 2019, and the FDA response was received during the third quarter of 2019. We filed the second-phased Drug Substance and Drug Product
submission during the first quarter of 2021 and received a Technical Section Incomplete Letter from the FDA during the third quarter of
2021. We made a new submission during the first quarter of 2022 and expect to have the FDA’s response six months later. To reduce
the risk associated with this process, we worked with a qualified contract manufacturer for alignment of the required validations and
Drug Product manufacture and have met with the FDA to clarify filing strategy and requirements. Our efforts are subject to inspection
and approval by the FDA. 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.
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 to reach 94,800,000 as of January 1, 2019 before declining to 93,800,000 as of both January 1, 2020
and January 1, 2021. As of January 1, 2022, this figure decreased to 91,900,000. Reflecting seasonal trends, this figure was equal to
101,000,000 and 102,000,000 as of July 1, 2021 and 2020, respectively.
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ImmuCell Corporation
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.
Milk price and feed costs: The dairy market,
similar to many others, has been unstable as a result of the pandemic. The price paid to producers for milk has been very volatile. Milk
was dumped on farms during the first half of 2020 largely because of the loss of demand for dairy products from closed restaurants and
school lunch programs and other negative impacts of the pandemic, but conditions have improved since then. 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 2019, this milk price average increased by 16% over 2018 to $16.96. The low price level during 2018 and into the beginning
of 2019 was very challenging to the profitability of our customers. 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 average price increased significantly during the first two months of 2022 to $20.65. 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 )%
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. This ratio varies
farm-to-farm based on individual operating parameters. The highest annual average this ratio has reached since this ratio was first reported
in 1985 was 3.64 in 1987. The annual average for this ratio of 1.52 in 2012 was the lowest recorded since it was first reported in 1985.
Since this ratio reached 3.24 in 2005, it has not exceeded 3.00. The annual average of 2.54 for 2014 was the highest this ratio has been
since it was 2.81 in 2007. This ratio averaged 1.76 for 2021, amounting to a significant decline of 22% from the 2020 average of 2.31.
This average has not been lower since 2013. During January of 2022, this ratio improved to 2.18. 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
2.31
3 %
2021
1.76
(22 )%
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.
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ImmuCell Corporation
Market volatility : While the number of
cows in the U.S. herd and the production of milk per cow directly influence the supply of milk, the price for milk is also influenced
by very volatile international demand for milk products. Given our focus on the dairy and beef industries, the volatile market conditions
and the resulting financial insecurities of our primary end users are risks to our ability to maintain and grow sales at a profitable
level. These factors also heighten the challenge of selling premium-priced animal health products (such as Tri-Shield First Defense ®
and Re-Tain ® ) into the dairy market.
Small Size of Company
Dependence on key personnel: We are a
small company with 67 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. With increased manufacturing staffing required to operate our expanded First Defense ® production capacity
and to operate our Re-Tain ® production facility, we anticipate that our employment level could grow to approximately
80 employees during 2022.
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.
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 2022
to align with the new supply from our own formulation and aseptic filling facility, which we currently expect to be operational during
the fourth quarter of 2023 or the second quarter of 2024. Because Norbrook has elected to terminate this supply agreement effective as
of the end of 2022, we are investing approximately $4 million of the additional capital we raised during the first quarter of 2019 to
construct and equip our own DP formulation and aseptic filling capability for Re-Tain ® inside our existing Drug
Substance facility. 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.
Competition from others: Many of our competitors
are significantly larger and more diversified in the relevant markets than we are and have substantially greater financial, marketing,
manufacturing and human resources and more extensive product development and sales/distribution capabilities than we do, including greater
ability to withstand adverse economic or market conditions and declining revenues and/or profitability. Merck and Zoetis, among other
companies, sell products that compete directly with the First Defense ® product line in preventing scours in newborn
calves. The scours product sold by Zoetis sells for approximately half the price of our product, although it does not have an E. coli
claim (which ours does). With Tri-Shield First Defense ® , we can now compete more effectively against vaccines that
are given to the mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf. Elanco, Merck and Zoetis
provide these dam vaccine products to the market. There are many companies competing in the mastitis treatment market, most notably Boehringer
Ingelheim, Merck and Zoetis. The subclinical mastitis products sold by these large companies are well established in the market and are
priced lower than what we expect for 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
Russia’s military invasion of Ukraine:
Russia’s military invasion of Ukraine and attack on its people is already having a significant negative impact on the world economy.
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 (most plastics etc.). Further, the increasing cost
of grain is a risk to our customers’ profitability.
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Global COVID-19 pandemic (novel coronavirus,
technically known as SARS-CoV-2): The global COVID-19 pandemic has created, 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 early 2022 has been a more recent concern. The COVID-19 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,
is very uncertain at this time. Stock market valuations have declined and recovered and remain volatile. Inflation has begun to increase
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. 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. There is also economic uncertainty for beef producers, as the supply
chain is interrupted or otherwise adversely affected due to closures of processing plants and reduced throughput caused by, among other
things, restaurants closing or curtailing their operations. This is a very unusual situation for farmers that work so hard to improve
production quality and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. A combination
of the conditions, trends and concerns summarized above could have a corresponding negative effect on our business and operations, including
the supply of the colostrum we purchase to produce our First Defense ® product line, the demand for our products
in the U.S. market and our ability to penetrate or maintain a profitable presence in international markets. We 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 our implementation of remote work practices (where feasible) and by our early and continued compliance
with recommended hygiene and social distancing practices. Despite our best efforts and intentions, there is a risk that an employee could
become infected and could infect others.
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 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 18,
2022 was $8.88. Most companies in the animal health sector have market capitalization values that greatly exceed our current market capitalization
of approximately $68.8 million as of March 18, 2022. Our product sales during the year ended December 31, 2021 were $19.2 million. This
means that our market valuation as of March 18, 2022 was equal to approximately 3.57 times our sales during the year ended December 31,
2021. 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;
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ImmuCell Corporation
● 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.
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 are currently dependent on one manufacturer for the supply of the syringes used for our gel tube formats of Dual-Force First Defense ®
and Tri-Shield First Defense ® . We are actively investigating a second supplier. We will be dependent on one other
manufacturer for the supply of syringes for Re-Tain ® . We are dependent on a contract with Norbrook for the Drug
Product formulation and aseptic filling of our Nisin Drug Substance for orders scheduled for delivery in 2022. We expect to complete the
investment to perform these services in-house during 2022 and achieve the required regulatory approval for use by the fourth quarter of
2023 or the second quarter of 2024. 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. 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.
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Failure to protect intellectual property:
In some cases, we have chosen (and may choose in the future) not to seek patent protection for certain products or processes. Instead,
we have sought (and may seek in the future) to maintain the confidentiality of any relevant proprietary technology through trade secrets,
operational safeguards and contractual agreements. Reliance upon trade secret, rather than patent, protection may cause us to be vulnerable
to competitors who successfully replicate (knock off) our manufacturing techniques and processes. Additionally, there can be no assurance
that others may not independently develop similar trade secrets or technology or obtain access to our unpatented trade secrets or proprietary
technology. Other companies may have filed patent applications and may have been issued patents involving products or technologies potentially
useful to us or necessary for us to commercialize our products or achieve our business goals. If that were to be the case, there can be
no assurance that we will be able to obtain licenses to such patents on terms that are acceptable to us. There is also a risk that competitors
could challenge the claims in patents that have been issued to us.
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 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
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