Item 1A. Risk Factors
ITEM 1A— RISK FACTORS
OUTLINE TO ITEM 1A – RISK FACTORS
- Financial Risks
- Product Risks
- Regulatory Risks
- Economic Risks Pertaining to the Dairy and Beef Industries
- Small Size of the Company
- Global Risks
- Risk Pertaining to Common Stock
- Other Risks
Financial Risks
Gross margin on product sales: One of our goals is to achieve a gross margin (before related depreciation
expenses) as a percentage of total sales of 45% or more after the initial launch of new products. Depreciation expense will be a larger
component of costs of goods sold for Re-Tain ® than it is for the First Defense ® product line.
Gross margins generally improve over time, but this anticipated improvement may not be realized for Re-Tain ® . Many
factors discussed in this Annual Report (including inflation, cost increases, supply-chain disruptions and the rising price of oil and
other commodities and supplies) impact our costs of goods sold. There is a risk that we are not able to achieve our gross margin goals,
which would adversely affect our operating results and could impact our future operating plans. We missed our gross margin goals in 2023
and 2022 with realized gross margins of 22% and 41%, respectively. There is also a risk that our plans to maintain or improve our gross
margin may not be realized due to cost increases, additional manufacturing contamination events, production equipment failures, the inability
to raise our selling prices, or any combination of these factors. In addition, such negative events, depending on their severity, could
deplete our cash resulting in an inability to fund our business.
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ImmuCell Corporation
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. During the first quarter
of 2020, we removed the direct aspect of this particular exposure to our business by refinancing our bank debt (with the exception of
our line of credit) with fixed rate notes. Our mortgage debt outstanding as of December 31, 2023 was $5.8 million bearing interest at
the fixed rate of 3.53% per annum. Our equipment loans outstanding as of December 31, 2023 were $2.6 million bearing interest at the fixed
rate of 3.5% per annum. The two State of Maine loans aggregating $754,000 as of December 31, 2023 bear interest at the fixed rate of 5%
per annum. The $3 million in debt that we secured during the third quarter of 2023 bears interest at the blended fixed rate of 7.33% per
annum with an outstanding balance of $2.9 million as of December 31, 2023. Our outstanding debt as of December 31, 2023 aggregating $12.1
million bears interest at the blended fixed rate of 4.51% per annum. Increasing interest rates would negatively impact the cost of any
future borrowings. This was experienced on the new debt facilities aggregating $3 million that we closed during the third quarter of 2023.
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. The additional debt we incurred to fund our growth objectives has significantly increased our total debt service
costs. We are obligated to make principal and interest payments aggregating approximately $2.0 million during both of the years ending
December 31, 2024 and 2025. See Note 10 to the accompanying audited financial statements for more details about our debt.
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. 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 our lender 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 lender 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 lender. Instead, we were 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. During
the first quarter of 2024, the DSC ratio covenant for the twelve-month period ending June 30, 2024 was preemptively waived by our lenders.
If we are unable to achieve the required DSC ratio going forward or reach a favorable agreement with our lender 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 and supply disruptions: Inflation
is having a material and adverse impact on almost all supplies we purchase and labor we hire and retain. Continuing or increasing inflationary
trends could materially reduce our gross margin on product sales if we are unable or unwilling to impose offsetting price increases on
our customers. The Consumer Price Index for All Urban Consumers (CPI-U) during the year ended December 31, 2023, improved to 3.4% for
all items before seasonal adjustment. This is down from 6.5% and 7.0% during the years ended December 31, 2022 and 2021, respectively.
We are facing significant production constraints, supply disruptions and inflationary increases which were initially triggered, in large
part directly or indirectly, by the COVID-19 pandemic. 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 since the onset of the pandemic. Market conditions have improved somewhat, but this volatility remains a concern.
Additionally, like most input costs, the cost of grain and other feed is rising, which puts a strain on the profitability of our customers.
There is also economic uncertainty for beef producers, as the supply chain is interrupted or otherwise adversely affected due to closures
of processing plants and reduced throughput. This is a very unusual situation for farmers who work so hard to improve production quality
and efficiency in order to help feed a growing population with high-quality and cost-effective proteins. The pandemic created risk and
continues to create uncertainty and challenges for us and has created or contributed to global supply-chain disruptions and has affected
international trade, while creating a worldwide health and economic crisis. Stock market valuations have declined and recovered somewhat
but remain very volatile. Inflation has increased significantly, and tax rates may increase. There is a risk of a period of economic downturn,
the severity and duration of which are difficult to know. Prior to the pandemic and the responsive federal economic stimulus programs,
many feared the United States had taken on too much national debt. Now the debt load is significantly higher. A combination of the conditions,
trends and concerns summarized above could have a corresponding negative effect on our business and operations, including the supply of
the colostrum we purchase to produce our First Defense ® product line, the demand for our products in the U.S. market
and our ability to penetrate or maintain a profitable presence in international markets. 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.
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ImmuCell Corporation
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.
Risks associated with our funding strategy
for Re-Tain ® : The inability to maintain adequate cash and liquidity to support the
commercialization of Re-Tain ® is a risk to our business. Achieving FDA approval of our pharmaceutical-grade Nisin
produced at commercial-scale is the most critical action remaining in front of us on our path to U.S. regulatory approval of Re-Tain ® .
Having completed the construction and equipping of the DS production facility (as described in more detail in ITEM 7 of this Annual
Report) at a cost of approximately $20.8 million, we will continue to incur product development expenses to operate and maintain this
facility until commercialization. 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.
13
ImmuCell Corporation
Contamination events and equipment failures
in our production process: During 2023 and 2022, we experienced certain contamination events and equipment failures in our production
process that resulted in scrapped inventory and a slowdown of our production process and had a significant impact on our operating results.
We are at risk of further such production contaminations or equipment failures resulting in more scrapped inventory if we do not continue
to improve our farm operations and implement other necessary improvements from farms to finished goods. The realization of this risk following
the above-mentioned contamination events did result in a slowdown of our production output during 2023 to remediate this problem, which
led to less sales and gross margin during the year. Additional contamination events or equipment failures causing significantly less production
output, depending on their severity, could deplete our cash resulting in an inability to fund our business operations.
Sales
risks pertaining to Re-Tain ® : Actual
or prospective Re-Tain ® customers may decide to
discontinue, reduce or avoid usage of Re-Tain ® due
to the following risks:
1)
A rejection of a tank of milk by a positive milk inhibitor test because too much of the milk in a bulk tank is comprised of milk from
cows being treated with Re-Tain ® , when tested randomly
for inhibitors by a milk hauler, which could create legal liability.
2) A failed or stalled cheese tank occurs when
a Nisin susceptible cheese starter culture is impacted by residues in milk that exceed our on-farm treatment recommendations, which aims
to limit concentrations of bulk tanks or tankers to 1% of milk from cows treated with Re-Tain ® or is not effectively
diluted through the milk collection and transportation system. After we study this potential impact during our Controlled Launch of Re-Tain ® ,
we may decide to seek a post-approval label change requiring a short discard of milk, which may be limited to just the treated quarter
of the cow.
3)
Producers’ current practice generally is to treat only clinical mastitis, which has the visual indicator of abnormal milk. In order
to gain market penetration for Re-Tain ® , we will need to change that practice and increase awareness of the importance
of treating subclinical disease. This will require the producers’ ability and willingness to diagnose without visual indicators.
Users of Re-Tain ® could have unsatisfactory treatment outcomes if they lack the equipment needed to measure and
monitor somatic cell counts (SCC) of the herd or individual cows (for which data is needed). This risk limits our access to treatment
cows because about 40% of farms do not presently have access to this kind of testing at the cow level, and thus are not good candidates
for the use of Re-Tain ® .
4) Lower than anticipated treatment cure rates
could be experienced because the product is administered to cows that we would not identify as the best treatment candidates based on
SCC data.
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 and potential legal liability.
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. Our anticipated return to more consistent profitability is contingent upon the gross margin we earn from First Defense ® .
Concentration of sales: Sales of the First
Defense ® product line aggregated 99% of our total product sales during both of the years ended December 31, 2023 and
2022. Our primary customers for the majority of our product sales (91% and 92% during the years ended December 31, 2023 and 2022, 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
9% and 8% of our total product sales during the years ended December 31, 2023 and 2022, 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 (79% and 73% during the years ended December 31, 2023 and 2022, respectively) was made to two large distributors. A large portion
of our trade accounts receivable (79% and 69% as of December 31, 2023 and 2022, 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.
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ImmuCell Corporation
Production capacity constraints: We invested
$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. During 2021, we initiated three additional investments aggregating $4.7 million to increase our estimated 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. 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. Our
long-term capital plan to continue to expand the First Defense ® product line requires ongoing review of equipment
capacity and utilization across the manufacturing value stream at the 56 Evergreen Drive facility and our leased facilities at 175 Industrial
Way, as well as assessment of costs, functional obsolescence and reliability of equipment. This review and assessment could identify a
need to fund unexpected equipment maintenance or replacement costs.
Product liability: The manufacture and
sale of our products entails a risk of product liability. Our exposure to product liability is mitigated to some extent by the fact that
our products are directed towards the animal health market. We have maintained product liability insurance in an amount which we believe
is reasonable in relation to our potential exposure in this area. We have no history of claims of this nature being made.
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. During July 2023,
the USDA issued a Voluntary Stop Distribution and Sale (VSDS) and a Hold Release on First Defense ® preventing us
from shipping product (while not restricting us from continuing to produce inventory) until two inspectional observations were resolved.
We promptly responded to the inspectional observations involved. On August 1, 2023, the USDA verbally rescinded the VSDS, and on August
4, 2023, the USDA verbally rescinded the Hold Release, allowing us to resume normal shipping during the week of August 7, 2023. There
is a risk that we will become subject to similar or additional regulatory actions in the future. In these cases, the resulting interruption
in sales could have a material and adverse effect on our operating results.
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 16 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. 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 DP manufacture and have met with the FDA to clarify filing strategy and requirements. Our CMC Technical
Section submission is currently under review by the FDA as discussed in greater detail in ITEM 7 of this Annual Report under the
caption, “Product Development Expenses and Strategy” , below. Early during the first quarter of 2024, the FDA conducted
another pre-approval inspection of our DS facility. This resulted in the issuance of one deficiency as identified on the FDA’s Form
483. Since then, we have fully responded with data addressing the inspectional observation. 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. The facility of our contract manufacturer is subject to similar inspectional
obligations. 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.
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ImmuCell Corporation
Regulatory requirements limiting access to
suppliers and customer base : Maine, where our principal executive office and manufacturing facilities are located, has adopted product
reporting and phase-out requirements for per- and polyfluoroalkyl substances (“PFAS”). Maine’s statute requires that
effective as of January 1, 2025 manufacturers of products with intentionally-added PFAS report the presence of such substances (and requires
that such products cannot be sold in Maine unless the required reporting is made) and specifies that (subject to certain exceptions to
be promulgated by the Maine Department of Environmental Protection) no product containing intentionally-added PFAS may be sold in Maine
after January 1, 2030. This reporting requirement may limit our ability to access supplies from companies which are not in compliance
with the state reporting requirements and may limit those customers to whom we may sell our products. The U.S. Environmental Protection
Agency also has adopted a PFAS reporting law, which requires that importers of articles that contain PFAS report the presence of such
substances to the extent such information is known or reasonably ascertainable. This reporting requirement may limit our ability to import
supplies.
Economic Risks Pertaining to the Dairy and Beef Industries
The industry data referred to below is compiled
from USDA databases.
Cattle count: The January count of all
cattle and calves in the United States had steadily declined from 97,000,000 as of January 1, 2007 to 88,500,000 as of January 1, 2014.
Then this figure increased each year, reaching 94,800,000 as of January 1, 2019 before declining to 93,800,000 as of both January 1, 2020
and January 1, 2021. This count continued to decline to 92,100,000 as of January 1, 2022 and to 88,800,000 as of January 1, 2023. This
count dropped to 87,200,000 as of January 1, 2024. Reflecting seasonal trends, this figure was equal to 102,000,000, 101,000,000, 98,600,000
and 95,900,000 as of July 1, 2020, 2021, 2022, and 2023, respectively. A significant decline in the cattle count could negatively affect
the size of our addressable market.
Herd size: Prior to 1957, there were over
20,000,000 cows in the U.S. dairy herd. Prior to 1986, there were over 10,000,000 cows in the U.S. dairy herd. From 1998 through 2021,
the size (annual average) of the U.S. dairy herd ranged from the low of 9,011,000 in 2004 to the high of 9,448,000 in 2021. This average
declined to 9,402,000 during the year ended December 31, 2022 and then declined to 9,386,000 during the year ended December 31, 2023.
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. The 2023 average price of $1,763 represents a 10% increase over prior year. A significant decline in
the milk cow price could negatively affect the size of our addressable market.
Milk price: The dairy market, similar
to many others, has been unstable for several reasons including as a result of the pandemic. The price paid to producers for milk has
been very volatile. This market volatility, and the resulting impact on our primary end users, could negatively impact our ability to
maintain and grow sales at a profitable level. The Class III milk price (an industry benchmark that reflects the value of product used
to make cheese) is an important indicator because it defines our customers’ revenue level. This annual average milk price level
(measured in dollars per hundred pounds of milk) reached its highest point (since these prices were first reported in 1980) during 2014
at $22.34 (peaking at $24.60 in September 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 22% to $17.02 during the year ended December 31, 2023. The annual fluctuations in this
milk price level are demonstrated in the following table:
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ImmuCell Corporation
Average Class III Milk Price During the Years
Ended December 31,
(Decrease) Increase
2014
$ 22.34
2015
$ 15.80
(29 )%
2016
$ 14.87
(6 )%
2017
$ 16.17
9 %
2018
$ 14.61
(10 )%
2019
$ 16.96
16 %
2020
$ 18.16
7 %
2021
$ 17.08
(6 )%
2022
$ 21.96
29 %
2023
$ 17.02
(22 )%
Feed Costs: The actual level of milk prices
may be less important than its level relative to feed costs. One measure of this relationship is known as the milk-to-feed price ratio,
which represents the amount of feed that one pound of milk can buy. An increase in feed costs also has a negative impact on the beef industry
and therefore could have a resulting negative impact on our business and results of operations. This ratio varies farm-to-farm based on
individual operating parameters. Since this ratio reached 3.24 in 2005, it has not exceeded 3.00. This ratio averaged 1.74 for 2021, amounting
to a significant decline of 25% from the 2020 average of 2.32. This average has not been lower since 2012. During 2022, this ratio improved
by 10% to 1.91. This ratio dropped to 1.69 during the year ended December 31, 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
1.91
10 %
2023
1.69
(12 )%
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 the Company
Dependence on key personnel: We are a
small company with approximately 79 employees (including 5 part-time employees). As such, we rely on certain key employees to support
multiple operational functions, with limited redundancy in capacity. The loss of any of these key employees could adversely affect our
operations until a qualified replacement is hired and trained, which could be even more challenging in the present difficult labor market.
Our competitive position will be highly influenced by our ability to attract, retain and motivate key scientific, manufacturing, managerial
and sales and marketing personnel. 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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ImmuCell Corporation
Reliance on outside party to provide certain
services under contract for us: We are exposed to additional regulatory compliance risks through the subcontractors that we choose
to work with to produce Re-Tain ® , who also need to satisfy certain regulatory requirements in order to provide us
with the products and services we need. One example of this outside reliance is Norbrook, our DP contract manufacturer. Because Norbrook
notified us of its intent to terminate its supply agreement with us, we initiated an investment of approximately $4 million during 2022
to construct and equip our own DP formulation and aseptic filling capability for Re-Tain ® in our existing DS facility.
Due to the loss in gross margin during 2023 caused by the slowdown in production output necessary to remediate product contamination events,
we have decided to defer spending of approximately $2 million of these funds for the near term. The objective of this investment is to
end our reliance on an outside party to perform these services for us. Actual project costs could exceed our current estimates. Completion
of this project could be delayed due to a number of factors outside our control, including delays in equipment fabrication, equipment
delivery or facility construction. In addition, there is a risk that we fail to achieve regulatory approval of the new facility or that
such approval is delayed or requires significant additional expenditures to obtain. We are evaluating alternatives for DP supply going
forward, which include the resumption of the investment in our own in-house DP services (when prudent based on our cash reserves) or another
contract manufacturing agreement or a further extension with Norbrook. We face a supply interruption and adverse effects on the Controlled
Launch of Re-Tain ® after the DP supply provided from our contract manufacturer is consumed and until new supply
from a new contract manufacturing agreement or our own formulation and aseptic filling facility is implemented.
Competition from others: Many of our competitors
are significantly larger and more diversified in the relevant markets than we are and have substantially greater financial, marketing,
manufacturing and human resources and more extensive product development and sales/distribution capabilities than we do, including greater
ability to withstand adverse economic or market conditions and declining revenues and/or profitability. Merck and Zoetis, among other
companies, sell products that compete directly with the First Defense ® product line in preventing scours in newborn
calves. The scours product sold by Zoetis sells for approximately half the price of our product, although it does not have an E. coli
claim (which ours does). With Tri-Shield ® , we can compete more effectively against vaccines that are given to the
mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf. Elanco, Merck and Zoetis provide these
dam vaccine products to the market. There are many companies competing in the mastitis treatment market, most notably Boehringer Ingelheim,
Merck and Zoetis. The 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 does not carry an FDA-required milk discard
or meat withhold. 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 unprovoked military invasion
of Ukraine and the war in the Middle East: Russia’s unprovoked military invasion of Ukraine (and attack on its people) and the
war in the Middle East are 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). Both of these military
actions could cause more stress on the global economy.
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.
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ImmuCell Corporation
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 7,950 shares per day during the 20-day period ended March 8, 2024) 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 8, 2024 was $5.20. Most companies in the animal health
sector have market capitalization values that greatly exceed our market capitalization of approximately $40 million as of March 8, 2024.
Our product sales during the year ended December 31, 2023 were $17.5 million. This means that our market capitalization as of March 8,
2024 was equal to approximately 2.3 times our sales during the year ended December 31, 2023. 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.
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 Annual Report. Such issuances could have a dilutive
effect on our existing stockholders.
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ImmuCell Corporation
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 DP formulation and aseptic filling for supply of our Nisin DP through 2024.
The facility we may resume 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 approximately two years from
when this project is restarted. The potential alternative options for these services are narrowed considerably because our product cannot
be formulated or filled in a facility that also processes traditional antibiotics (i.e., beta lactams). Any significant damage to or other
disruption in the services at any of these third-party facilities or our own facilities (including due to lack of financing, regulatory
issues or non-compliance) would adversely affect the production of inventory and result in significant added expenses and potential loss
of future sales. We 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 through
the end of 2024 (with product expiries that could be approximately between September of 2025 and March of 2026) to align with the new
supply from a new contract manufacturing agreement or our own formulation and aseptic filling facility.
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.
Increasing dependence on the continuous and
reliable operation of our information technology systems: We rely on information systems throughout our company. Any disruption of
these systems or significant security breaches could adversely affect our business. Although we maintain information security policies
and employ system backup measures and engage in information system redundancy planning and processes, such policies, measures, planning
and processes, as well as our current disaster recovery plan may be ineffective or inadequate to address all eventualities. As information
systems and the use of software and related applications by us, our business partners, suppliers, and customers become more cloud-based,
we become inherently more susceptible to cyberattacks. There has been an increase in global cybersecurity vulnerabilities and threats,
including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks
and the confidentiality, availability and integrity of data and information. There are reports of increased activity by hackers and scammers
since the COVID-19 pandemic. 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.
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ImmuCell Corporation