Results of Operations

Fiscal Year 2011 Compared to Fiscal Year 2010

Product Sales

Product sales for the year ended December 31, 2011 increased by 17%, or $725,000, to $5,111,000 from $4,386,000 in 2010. Domestic product sales increased by 16%, or $560,000, during the year ended December 31, 2011, and international sales increased by 21%, or $165,000, in comparison to 2010. For the three-month period ended December 31, 2011, product sales increased by 16%, or $181,000, in comparison to the three-month period ended December 31, 2010. We believe that sales of our products were influenced by the increased price of milk, cows and calves and partially offset by the increased cost of feed.

Competition for resources that dairy producers allocate to their calf enterprises has been increased by the many new products that have been introduced to the calf market. While milk prices have improved recently, much of this gain has been offset by increases in the cost of feed. Even in this challenging market, our lead product, First DefenseÒ, continues to benefit from wide acceptance by dairy and beef producers as an effective tool to prevent bovine enteritis (scours) in newborn calves. During the fourth quarter of 2011, we sold our 11,000,000th dose of First DefenseÒ. The third quarter of 2011 marked the 20th anniversary of the original USDA approval of this product in 1991. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product. It is our production and customer service objective to ship orders within one day of receipt. We have been operating in accordance with this objective since the third quarter of 2009. Sales of First DefenseÒincreased by 21% during the year ended December 31, 2011 in comparison to 2010. Domestic sales of First DefenseÒincreased by 20%, and international sales increased by 25%. Sales of First DefenseÒare normally seasonal, with higher sales expected during the first quarter. We have been experiencing consistently positive sales growth of First DefenseÒ since the fourth quarter of 2010, as demonstrated below:

21%: Fiscal Year 2011 over Fiscal Year 2010

7%: Fourth Quarter 2011 over Fourth Quarter 2010

22%: Third Quarter 2011 over Third Quarter 2010

37%: Second Quarter 2011 over Second Quarter 2010

21%: First Quarter 2011 over First Quarter 2010

13%: Fourth Quarter 2010 over Fourth Quarter 2009

We believe that the growth in sales of First DefenseÒ may reflect, at least in part, the success of our strategic decision to invest in additional sales and marketing efforts. We launched a communications campaign at the end of 2010 that is highlighting how the unique features of First DefenseÒprovide a dependable return on investment for producers. Effective for 2011 and for 2012, and renewable for 2013 and 2014 if certain sales growth objectives are met, we entered into a sales and marketing collaboration with AgriLabs, under which the AgriLabs sales and marketing teams are working with us to expand market demand for First DefenseÒ.

We are investigating additional opportunities to commercialize our whey protein purification technologies in the nutritional and feed supplement markets in different formats not regulated by the USDA. First Defense TechnologyTM is a unique whey protein concentrate that is purified utilizing our proprietary whey protein processing methods. It does not carry the claims of our USDA-licensed product. Through our First Defense TechnologyTM, we are selling whey concentrate globulin proteins in different formats. During the first quarter of 2011, we initiated sales of our First Defense TechnologyTM in a bulk powder format (no capsule), which is delivered with a scoop. During the first quarter of 2012, we initiated a limited launch of a tube delivery format of our First Defense TechnologyTM in a gel solution. Through two collaborations, we are working to expand sales of our First Defense TechnologyTM by accessing the U.S. feed market. During the first quarter of 2011, AgriLabs launched commercial sales of their product, Colostrx®, a colostrum supplement with First Defense TechnologyTM Inside. During the fourth quarter of 2011, Milk Products, LLC launched commercial sales of their product, Ultra StartÒ150 Plus, a colostrum replacer with First Defense TechnologyTM Inside.

Sales of Wipe OutÒDairy Wipes decreased by 18% during the year ended December 31, 2011 in comparison to 2010. We believe that sales growth potential for Wipe OutÒ Dairy Wipes is limited because most of our sales of this product tend to be to smaller dairies that are under continued financial pressures. Such pressures are forcing many small dairy producers out of business. While our product is a high quality tool, there are less expensive ways to sanitize a cow prior to milking, and many producers opt for a less expensive solution. We are competing aggressively on selling price to earn new business against less expensive products and alternative teat sanitizing methods.

The other products we sell primarily into the dairy industry aggregated approximately 3% of product sales during 2011 and 2010. Sales of these products were 28% higher in 2011 than the level of sales achieved in 2010. The other products we sell outside of the dairy and beef industries, principally Isolate™ (formerly known as Crypto-Scan®), aggregated 2% and 3% of product sales during the years ended December 31, 2011 and 2010, respectively. Sales of our bulk reagents for use in a drinking water test sold by others decreased by 21% during the year ended December 31, 2011 in comparison to 2010. During 2011, these sales were recorded during the fourth quarter. During 2010, these sales were recorded during the second quarter. Our animal health sales (total product sales less sales of the water diagnostic reagents) increased by 18% during the year ended December 31, 2011 in comparison to 2010. This comparison more accurately reflects the growth of our core animal health business.

We generally held our product selling prices without increase during the seven year period ended December 31, 2007. During the first quarter of 2008, we implemented a modest increase to the selling price of First Defense®. We have implemented no significant price increases since then believing that we could benefit more from higher unit sales than through a higher average selling price per unit.

                              ImmuCell Corporation



Gross Margin



Changes in the gross margin on product sales are summarized in the following
table for the respective periods (in thousands, except for percentages):



                               Years Ended
                              December 31,             Increase
                            2011        2010        Amount       %
Gross margin               $ 2,814     $ 2,302     $    511       22 %
Percent of product sales        55 %        52 %          3 %      5 %

The gross margin as a percentage of product sales was 55% and 52% during the years ended December 31, 2011 and 2010, respectively. This compares to gross margin percentages of 53% and 45% for the years ended December 31, 2009 and 2008, respectively. We experienced an unusually low gross margin percentage during 2008 in comparison to those achieved in other periods. Our current annual target is to maintain the gross margin percentage at approximately 50%. A number of factors account for the variability in our costs. We expect some fluctuations in gross margin percentages from quarter to quarter. The gross margin on First DefenseÒis affected by biological yields from our raw material, which do fluctuate over time. More generally, costs for production of First DefenseÒ and Wipe OutÒDairy Wipes have increased due to increased labor costs and expenses associated with our efforts to sustain compliance with cGMP regulations in our production processes. Like most manufacturers in the U.S., we have been experiencing increases in the cost of raw materials that we purchase. We have been able to minimize the impact of these cost increases by implementing yield improvements. Product mix also affects gross margin in that we earn a higher gross margin on First DefenseÒand a lower gross margin on Wipe OutÒ Dairy Wipes. Our inventory balance increased by 4%, or $65,000, to $1,666,000 at December 31, 2011 from $1,601,000 at December 31, 2010. This level of investment was made in both periods to help prevent a potential back log of orders. We have not experienced a back log of orders since the third quarter of 2009.

Product Development Expenses

Product development expenses increased by 15%, or $227,000, to $1,720,000 during the year ended December 31, 2011, as compared to $1,493,000 during 2010. We expected higher product development expenses during the year ended December 31, 2011. Product development expenses aggregated 34% of product sales in 2011 and 2010. The majority of our product development budget from 2000 through 2011 has been focused on the development of Mast OutÒ. Going forward, we expect to reduce our product development expenses, which expenses will continue to be focused on Mast OutÒand other improvements, extensions or additions to our First DefenseÒproduct line. The other improvements, extensions, or additions to our current product line include the potential to prevent scours in calves caused by pathogens other than those within the current First DefenseÒdisease claims (E. coli K99 and coronavirus) such as rotavirus. We also remain interested in acquiring other new products and technologies that fit with our sales focus on the dairy and beef industries. We are currently seeking funding from a partner to complete the development of Mast OutÒ and to support the manufacturing, sales and marketing efforts.

Sales and Marketing Expenses

Sales and marketing expenses increased by approximately 34%, or $219,000, to $870,000 in 2011, increasing to 17% of product sales in 2011 from 15% in 2010. We continue to leverage the efforts of our small sales force through veterinary distributors. These expenses have increased due principally to a strategic decision to invest more to support First DefenseÒsales and to prepare for a market launch of Mast OutÒ. This investment may have created, at least in part, our recent increase in product sales. Our current budgetary objective in 2012 is to maintain the ratio of product selling expenses to product sales below 20% on an annual basis.

Administrative Expenses

Administrative expenses increased by approximately 1%, or $8,000, to $857,000 during the year ended December 31, 2011 as compared to $849,000 during 2010. We strive to be efficient with these expenses while funding costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company. At this stage in our development, we have limited our investment in investor relations spending. We provide a full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year. Additional information about our business is available in our annual Proxy Statement. All of these reports are filed with the SEC and are available on-line or upon request to the Company. Presently, our financial and time resources are committed principally to managing our commercial business and developing Mast OutÒ. Our Board of Directors is very involved with and supportive of this resource allocation. While this strategy of providing cost-effective investor relations through our SEC reporting is subject to change, we believe that this focus currently is in the best long-term interest of all stockholders.

Other (Expenses) Revenues, Net

Interest income decreased by approximately 38%, or $10,000, to $15,000 in 2011 in comparison to 2010 due principally to a decrease in interest rates. Interest expense aggregated $81,000 and $22,000 during 2011 and 2010, respectively.

Loss Before Income Taxes and Net Loss

Our loss before income taxes of $697,000 during the year ended December 31, 2011 compares to a loss before income taxes of $683,000 during 2010. We recorded income tax benefits of 41% and 44% of the losses before income taxes during the years ended December 31, 2011 and 2010, respectively. Our net loss of $410,000, or $0.14 per share, during the year ended December 31, 2011 compares to a net loss of $385,000, or $0.13 per share, during 2010.

Fiscal Year 2010 Compared to Fiscal Year 2009

Product Sales

Product sales for the year ended December 31, 2010 decreased by 3%, or $120,000, to $4,386,000 from $4,506,000 in 2009. Domestic product sales increased by 2%, or $76,000, during the year ended December 31, 2010, while international sales decreased by 20%, or $196,000, in comparison to 2009. For the three-month period ended December 31, 2010, product sales increased by 9%, or $89,000, in comparison to the three-month period ended December 31, 2009. We expect some sales volatility in our international sales. We believe that sales of our products were influenced by the price of milk, cows and calves and by the cost of feed.

Sales of First DefenseÒdecreased by 2% during the year ended December 31, 2010 in comparison to 2009. Domestic sales of First DefenseÒincreased by 2%, but international sales decreased by 18%. Sales of First DefenseÒincreased by 13% during the three-month period ended December 31, 2010 in comparison to the three-month period ended December 31, 2009. Sales of First DefenseÒ are normally seasonal, with higher sales expected during the first quarter. First DefenseÒ continued to benefit in 2010 from wide acceptance by dairy and beef producers as an effective tool to prevent bovine enteritis (calf scours).

Sales of Wipe OutÒDairy Wipes increased by 10% during the year ended December 31, 2010 in comparison to 2009. We believe that sales growth potential for Wipe OutÒ Dairy Wipes is limited because most of our sales of this product tend to be to smaller dairies that are under continued financial pressures that are forcing many small dairy producers out of business and because, while our product is a high quality tool, there are less expensive ways to sanitize a cow prior to milking.

The other products we sell primarily into the dairy industry decreased to 3% of product sales during the year ended December 31, 2010 compared to 4% of product sales during 2009. The other products we sell outside of the dairy and beef industries, principally Isolate™ (formerly known as Crypto-Scan®), aggregated 3% of product sales during the years ended December 31, 2010 and 2009.

We generally held our product selling prices without increase during the seven year period ended December 31, 2007. During the first quarter of 2008, we implemented a modest increase to the selling price of First Defense®. We have implemented no significant price increases since then.

                              ImmuCell Corporation



Gross Margin



Changes in the gross margin on product sales are summarized in the following
table for the respective periods (in thousands, except for percentages):



                               Years Ended
                              December 31,            Decrease
                            2010        2009       Amount       %
Gross margin               $ 2,302     $ 2,398     $    96       4 %
Percent of product sales        52 %        53 %         1 %     2 %

The gross margin as a percentage of product sales was 52% and 53% during the years ended December 31, 2010 and 2009, respectively. This compares to gross margin percentages of 45% and 52% for the years ended December 31, 2008 and 2007, respectively. We experienced an unusually low gross margin percentage during 2008 in comparison to those achieved in other periods. Our current annual target is to maintain the gross margin percentage at approximately 50%. A number of factors account for the variability in our costs. We expect some fluctuations in gross margin percentages from quarter to quarter. The gross margin on First DefenseÒis affected by biological yields from our raw material, which do fluctuate over time. More generally, costs for production of First DefenseÒ and Wipe OutÒDairy Wipes have increased due to increased labor costs and expenses associated with our efforts to sustain compliance with cGMP regulations in our production processes. Like most manufacturers in the U.S., we have been experiencing increases in the cost of raw materials that we purchase. We have been able to minimize the impact of these cost increases by implementing yield improvements. Product mix also affects gross margin in that we earn a higher gross margin on First DefenseÒand a lower gross margin on Wipe OutÒ Dairy Wipes. Our inventory balance increased by 47%, or $514,000, to $1,601,000 at December 31, 2010 from $1,087,000 at December 31, 2009. This investment was made to help prevent a potential back log of orders. We have not experienced a back log of orders since the third quarter of 2009. We have not implemented significant increases to our selling prices, believing that we could benefit more from higher unit sales volume than through a higher average selling price per unit.

Product Development Expenses

Product development expenses decreased by 9%, or $152,000, to $1,493,000 during the year ended December 31, 2010, as compared to $1,645,000 during 2009. We expect higher product development expenses during the year ending December 31, 2011. If a partner agrees to fund the completion of the Mast OutÒ product development effort, these expenses would be expected to increase even higher, but only if they are off set, in part, by the funds expected to be received from a potential strategic collaboration. Product development expenses aggregated 34% and 37% of product sales in 2010 and 2009, respectively. The majority of our product development budget from 2000 through 2010 has been focused on the development of Mast OutÒ. Going forward, we expect to focus our product development expenses on Mast OutÒand other improvements, extensions or additions to our First DefenseÒproduct line. The other improvements, extensions, or additions to our current product line include the potential to prevent scours in calves caused by pathogens other than those within the current First DefenseÒdisease claims (E. coli K99 and coronavirus) such as rotavirus. We also remain interested in acquiring other new products and technologies that fit with our sales focus on the dairy and beef industries.

Administrative Expenses

Administrative expenses decreased by approximately 3%, or $23,000, to $849,000 during the year ended December 31, 2010 as compared to $873,000 during 2009. We strive to be efficient with these expenses while funding costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company. At this stage in our development, we have limited our investment in investor relations spending. We provide a full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year. Additional information about our business is available in our annual Proxy Statement. All of these reports are filed with the SEC and are available on-line or upon request to the Company. Presently, our financial and time resources are committed principally to managing our commercial business and developing Mast OutÒ. Our Board of Directors is very involved with and supportive of this resource allocation. While this strategy of providing cost-effective investor relations through our SEC reporting is subject to change, we believe that this focus currently is in the best long-term interest of all stockholders.

Product Selling Expenses

Product selling expenses increased by approximately 58%, or $240,000, to $651,000 in 2010, increasing to 15% of product sales in 2010 from 9% in 2009. We continue to leverage the efforts of our small sales force through veterinary distributors. These expenses have increased due principally to a strategic decision to invest more to support First DefenseÒsales and to prepare for a market launch of Mast OutÒ. Our objective in 2011 was to maintain the ratio of product selling expenses to product sales below 20% on an annual basis.

Other Revenues (Expenses), Net

Interest income decreased by approximately 74%, or $71,000, to $25,000 in 2010 in comparison to 2009 due principally to a decrease in interest rates. We did not incur interest expense during 2009 or 2008. Interest expense during 2010 aggregated $22,000.

Loss Before Income Taxes and Net Loss

Our loss before income taxes of $683,000 during the year ended December 31, 2010 compares to a loss before income taxes of $429,000 during the year ended December 31, 2009. We recorded income tax benefits of 44% and 49% of the losses before income taxes during the years ended December 31, 2010 and 2009, respectively. Our net loss of $385,000, or $0.13 per share, during the year ended December 31, 2010 compares to a net loss of $216,000, or $0.07 per share, during the year ended December 31, 2009.

Liquidity and Capital Resources

Since 1999, our strategy has been focused on selling and developing products that improve animal health and productivity in the dairy and beef industries. These product opportunities are generally less expensive to develop than the human health product opportunities that we had worked on during the 1990's. We funded most of our product development expenses principally from product sales and were profitable for each of the nine years in the period ended December 31, 2007. During the nine years of profitability from 1999 through 2007, our cumulative investment in product development expenses of $9,894,000 was supported, in small part, by $975,000 in grant awards. The investment of an additional $6,604,000 in product development expenses during 2011, 2010, 2009 and 2008 brings our cumulative investment to $16,498,000 during the thirteen-year period ended December 31, 2011. We may, on occasion, seek additional research grant support as a means of leveraging the funds that we are able to spend developing new products.

Our strategic decision to continue developing Mast OutÒ after the product rights were returned to us in 2007 has caused us to increase our spending on product development expenses that were previously funded by Pfizer from late 2004 to mid-2007. After the nine consecutive years of profitability that we recorded during the years ended December 31, 1999 to December 31, 2007, we incurred net losses of $410,000, $385,000, $216,000, and $469,000 during the years ended December 31, 2011, 2010, 2009, and 2008, respectively. As we reduce product development spending on Mast OutÒ, we expect to return to profitable operations. We have not invested the time and resources to carefully make an exact projection about the timing or extent of our anticipated return to profitability. We believe that the three key indicators that investors should watch going forward will be the gross margin on our product sales, our net operating income (loss) and our net income (loss).

We estimate that it will require approximately $13,000,000 to complete the development of Mast OutÒ and bring the product to market, sales of which are subject to FDA approval. This budget is comprised of costs primarily related to the manufacture of commercial inventory. We are seeking to finance this investment with a combination of available cash, partner funding and debt. Outside funding is required to pay for the larger financial commitments required for manufacturing scale-up and preparation of full-scale validation batches of Mast OutÒ. By the second quarter of 2011, we had advanced the product development effort internally to the point where we could begin earnest negotiations with prospective partners. All anticipated initial discussions are now complete, and some prospective partners are conducting their due diligence. It is difficult to predict when or if this partnering effort will be successful. Although these partnering discussions are taking longer than we would like or had initially anticipated, we believe that the commercial prospects for Mast OutÒ warrant our continued efforts and patience with the process.

We had approximately $4,960,000 in available cash and short-term investments as of December 31, 2011. We are using some of this cash to fund product development, principally Mast Out®. We continue to look for new product acquisition opportunities that would have a strategic fit with the products that we currently sell. The table below summarizes the changes in selected, key balance sheet items (in thousands, except for percentages):

                                                                                   Increase
                                           Balance at December 31,                (Decrease)
                                            2011              2010             $              %
Cash, cash equivalents and short-term
investments                             $      4,960       $     4,626     $      334              7 %
Net working capital                            6,516             6,441             75              1
Total Assets                                  10,991            10,751            240              2
Stockholders' equity                    $      9,020       $     9,282     $     (262 )           (3 )%

Cash, cash equivalents and short-term investments increased by 7%, or $334,000, to $4,960,000 at December 31, 2011 from $4,626,000 at December 31, 2010. Net cash used for operating activities amounted to $37,000 during the year ended December 31, 2011 as compared to net cash used for operating activities of $809,000 during the year ended December 31, 2010. Capital investments of $244,000 during 2011 compared to capital investments of $117,000 during 2010. Net working capital increased by 1%, or $75,000, to $6,516,000 at December 31, 2011 from $6,441,000 at December 31, 2010. Proceeds from bank debt received during 2011 aggregated $455,000, net of debt repayments made during 2011. Proceeds from bank debt received during 2010 aggregated $986,000, net of debt repayments made during 2010. Total assets increased by 2%, or $240,000, to $10,991,000 at December 31, 2011 from $10,751,000 at December 31, 2010. Stockholders' equity decreased by 3%, or $262,000, to $9,020,000 at December 31, 2011 from $9,282,000 at December 31, 2010. We believe that we have sufficient capital resources to meet our working capital requirements and to finance our ongoing business operators during at least the next twelve months. We expect to return to positive net operating income (before other revenues (expenses), net and income taxes) during 2012.

During the third quarter of 2010, we agreed to terms of certain credit facilities with TD Bank, N.A. aggregating up to approximately $2,100,000, which are secured by substantially all of our assets. These credit facilities are comprised of a $1,000,000 ten-year mortgage loan, a $600,000 fifty-four month note and a $500,000 line of credit. Proceeds from the $1,000,000 mortgage loan were received during the third quarter of 2010. Proceeds from the $600,000 note were received during the first quarter of 2011. The $500,000 line of credit is available as needed. We believe that this debt financing (together with available cash and gross margin from ongoing product sales) provides us with sufficient funding to finance our working capital requirements while completing the first submissions to the FDA of all Technical Sections pertaining to Mast OutÒ. We chose debt financing because we believe that in this market environment, the option to generate funds through the sale of equity securities at an acceptable level of stockholder dilution is very unlikely.

As part of our sustained investment in compliance with cGMP regulations across our product lines and as we make other process improvements, we are investing in personnel, equipment and facility modifications to increase the efficiency and quality of our operations. In 2008, our Board of Directors authorized an investment of approximately $1,314,000 for capital expenditures (facility . . .