See Note 8 for additional disclosures about
cash and non-cash activities related to the 2016 business acquisition.
Notes to Unaudited Condensed Financial
Statements
ImmuCell Corporation (the “Company”,
“we”, “us”, “our”) is an animal health company whose purpose is to create scientifically-proven
and practical products that improve the health and productivity of dairy and beef cattle. The Company was originally incorporated
in Maine in 1982 and reincorporated in Delaware in 1987, in conjunction with its initial public offering of common stock. We market
products that provide immediate immunity to newborn dairy and beef cattle. We are developing product line extensions of our existing
products and are in the late stages of developing a novel product that addresses mastitis, the most significant cause of economic
loss to the dairy industry. These products help reduce the need to use traditional antibiotics in food producing animals. The Company
is subject to certain risks associated with its stage of development including dependence on key individuals, competition from
other larger companies, the successful sale of existing products and the development and acquisition of additional commercially
viable products with appropriate regulatory approvals, where applicable. The $20,803,000 investment we are making in a Nisin production
facility is being funded from available cash and bank debt, together with cash flows from ongoing operations. As we complete the
investment in our Nisin production facility and draw down the remaining bank debt that is available to us, we are reducing our
cash reserves to a lower than normal level. We are going to be reliant on positive cash flows during our peak selling season (first
quarter) to begin to re-build these cash reserves. Based on our best estimates and projections, we believe that we have sufficient
capital resources to continue operations for at least twelve months. These and other risks to our Company are further detailed
under
Part II
- “Other Information”,
Item 1A
- “Risk Factors”.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis of Presentation
|
We have prepared the accompanying
unaudited condensed financial statements reflecting all adjustments that are, in our opinion, necessary in order to ensure that
the financial statements are not misleading. We follow accounting standards set by the Financial Accounting Standards Board (FASB).
The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition,
results of operations, earnings per share and cash flows. References to GAAP in these footnotes are to the FASB
Accounting Standards
Codification
™ (Codification). Accordingly, we believe that although the disclosures are adequate to ensure that the information
presented is not misleading, these unaudited condensed financial statements should be read in conjunction with the financial statements
for the year ended December 31, 2016 and the notes thereto, contained in our Annual Report on Form 10-K as filed with the Securities
and Exchange Commission (SEC). Certain prior year accounts have been reclassified to conform with the 2017 financial statement
presentation.
|
(b)
|
Cash, Cash Equivalents and Short-Term Investments
|
We consider all highly liquid
investment instruments that mature within three months of their purchase dates to be cash equivalents. Cash equivalents are principally
invested in securities backed by the U.S. government. Certain cash balances in excess of Federal Deposit Insurance Corporation
(FDIC) limits of $250,000 per financial institution per depositor are maintained in money market accounts at financial institutions
that are secured, in part, by the Securities Investor Protection Corporation. Amounts in excess of these FDIC limits per bank that
are not invested in securities backed by the U.S. government aggregated $2,052,985 and $4,650,044 as of September 30, 2017 and
December 31, 2016, respectively. We account for investments in marketable securities in accordance with Codification Topic 320,
Investments – Debt and Equity Securities
. Short-term investments are classified as held to maturity and are comprised
principally of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve
months from the balance sheet date. Short-term investments are held at different financial institutions that are insured by the
FDIC within the FDIC limits per financial institution. See Note 3.
Inventory includes raw materials,
work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method, or net realizable value
(determined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal
and transportation). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead. See Note
4.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Accounts receivable are carried at
the original invoice amount less an estimate made for doubtful collection. Management determines the allowance for doubtful
accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of
accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written
off are recorded as income when received. Accounts receivable are considered to be past due if a portion of the receivable
balance is outstanding for more than 30 days. Past due accounts receivable are subject to an interest charge. See Note 5.
(e)
|
Property, Plant and Equipment
|
We depreciate property, plant
and equipment on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from
the date they are first put into service to the end of the estimated useful lives of the assets. The facility we are constructing
to produce the active pharmaceutical ingredient, Nisin, will be depreciated over its useful life beginning when that facility is
placed into service, which will likely be before the Food and Drug Administration (FDA) approval of the product is achieved. This
facility is not yet placed in service. We are evaluating the estimated useful lives of the assets associated with this facility.
Significant repairs to fixed assets that benefit more than a current period are capitalized and depreciated over their useful lives.
See Note 7.
(f)
|
Intangible Assets and Goodwill
|
We amortize intangible assets
on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they
are first put into service to the end of the estimated useful lives of the assets. We have recorded intangible assets related to
customer relationships, non-compete agreements, and developed technology, each with defined useful lives. We have classified as
goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) acquired in purchase transactions.
We assess the impairment of
intangible assets and goodwill that have indefinite lives at the reporting unit level on an annual basis (as of December 31
st
)
and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We would
record an impairment charge if such an assessment were to indicate that the fair value of such assets was less than the carrying
value. Judgement is required in determining whether an event has occurred that may impair the value of goodwill or identifiable
intangible assets. Factors that could indicate that an impairment may exist include significant under-performance relative to plan
or long-term projections, significant changes in business strategy and significant negative industry or economic trends. Although
we believe intangible assets and goodwill are appropriately stated in the accompanying financial statements, changes in strategy
or market conditions could significantly impact these judgements and require an adjustment to the recorded balance. No goodwill
impairments were recorded during the nine-month period ended September 30, 2017 or the year ended December 31, 2016. See Notes
2(h), 8 and 9 for additional disclosures.
(g)
|
Fair Value Measurements
|
In determining fair value
measurements, we follow the provisions of Codification Topic 820,
Fair Value Measurements and Disclosures
. Codification
Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value
measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific
information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation
of an asset or liability as of the measurement date. At September 30, 2017 and December 31, 2016, the carrying amounts of cash
and cash equivalents, accounts receivable, inventory, other assets, accounts payable and accrued liabilities approximate fair value
because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our
accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt
facilities approximates their carrying value. The three-level hierarchy is as follows:
|
Level 1 -
|
Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement
date.
|
|
Level 2 -
|
Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly
or indirectly, for substantially the full term through corroboration with observable market data.
|
|
Level 3 -
|
Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s
own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s
level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and
considers factors specific to the investment.
Our held to maturity securities
are comprised of investments in bank certificates of deposit. The value of these securities is disclosed in Note 3. We also hold
money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair
value of these investments is based on their closing published net asset value.
We assess the levels of
the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change
in circumstances that caused the transfer in accordance with our accounting policy regarding the recognition of transfers between
levels of the fair value hierarchy. During the nine-month period ended September 30, 2017 and the year ended December 31, 2016,
there were no transfers between levels. As of September 30, 2017 and December 31, 2016, our Level 1 assets measured at fair value
by quoted prices in active markets consisted of bank savings accounts and money market funds. As of September 30, 2017 and December
31, 2016, our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs.
As of September 30, 2017 and December 31, 2016, our interest rate swaps were classified as Level 2 and were measured by observable
market data in combination with expected cash flows for each instrument. There were no assets or liabilities measured at fair value
on a nonrecurring basis as of September 30, 2017 or December 31, 2016.
|
|
As of September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
2,305,264
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,305,264
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
$
|
32,005
|
|
|
|
-
|
|
|
$
|
32,005
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
5,150,344
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,150,344
|
|
Bank certificates of deposit
|
|
|
-
|
|
|
$
|
5,474,013
|
|
|
|
-
|
|
|
$
|
5,474,013
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
$
|
37,346
|
|
|
|
-
|
|
|
$
|
37,346
|
|
(h)
|
Valuation of Long-Lived Assets
|
We periodically evaluate
our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance
with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived
assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events
and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the
asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely
independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances
suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash
flows. No impairment was recognized during the nine-month period ended September 30, 2017 or the year ended December 31, 2016.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
(i)
|
Concentration of Risk
|
Concentration of credit
risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce
risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit
risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced significant
credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to
significant customers that amounted to 10% or more of total product sales are detailed in the following table:
|
|
For
the Three-Month Periods Ended
September 30,
|
|
|
For
the Nine-Month Periods Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Patterson Companies, Inc.
|
|
|
44
|
%
|
|
|
40
|
%
|
|
|
42
|
%
|
|
|
39
|
%
|
AmerisourceBergen Corporation
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
23
|
%
|
|
|
20
|
%
|
ANIMART LLC
(1)
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
Accounts receivable due
from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
Patterson Companies, Inc.
|
|
|
52
|
%
|
|
|
31
|
%
|
AmerisourceBergen Corporation
|
|
|
20
|
%
|
|
|
33
|
%
|
(1)
Assumes that the acquisition of Animal
Medic by ANIMART LLC (which closed during the third quarter of 2016) had occurred as of the beginning of the periods being reported.
* Amount is less than 10%.
We believe that supplies and
raw materials for the production of our products are available from more than one vendor or farm. Our policy is to maintain more
than one source of supply for the components used in our products. However, there is a risk that we could have difficulty in efficiently
acquiring essential supplies.
(j)
|
Interest Rate Swap Agreements
|
All derivatives are recognized
on the balance sheet at their fair value. We entered into interest rate swap agreements in 2010 and 2015. On the dates the agreements
were entered into, we designated the derivatives as hedges of the variability of cash flows to be paid related to our long-term
debt. The agreements have been determined to be highly effective in hedging the variability of identified cash flows, so changes
in the fair market value of the interest rate swap agreements are recorded as comprehensive income (loss), until earnings are affected
by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).
We formally documented the relationship between the interest rate swap agreements and the related hedged items. We also formally
assess, both at the interest rate swap agreements’ inception and on an ongoing basis, whether the agreements are highly effective
in offsetting changes in cash flow of hedged items. See Note 11.
We sell products that provide
immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met. These include i) persuasive
evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii) the seller’s price is
fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time of shipment (including to
distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier
after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally
made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount
of product returns. However, during the nine-month period ended September 30, 2017, we experienced returns with an aggregated sales
value of approximately $10,720, which costs were accounted for as an increase to costs of goods sold.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Advertising costs are expensed
when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $47,863
and $88,017 during the nine-month periods ended September 30, 2017 and 2016, respectively. All product development expenses are
expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production cycle, and
these costs are charged to costs of goods sold when the inventory is sold to a customer.
We account for income taxes
in accordance with Codification Topic 740,
Income Taxes
, which requires that we recognize a current tax liability or asset
for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary
differences and carryforwards to the extent they are realizable. We believe it is more likely than not that the deferred tax assets
will be realized through future taxable income and future tax effects of temporary differences between book income and taxable
income. Accordingly, we have not established a valuation allowance for the deferred tax assets. Codification Topic 740-10 clarifies
the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must meet before being recognized
in the financial statements. In the ordinary course of business, there are transactions and calculations where the ultimate tax
outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other
taxing authorities. Our tax returns for the years 2013 through 2016 are subject to audit. We have evaluated the positions taken
on our filed tax returns. We have concluded that no uncertain tax positions exist as of September 30, 2017 or December 31, 2016.
Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 14.
(n)
|
Stock-Based Compensation
|
We account for stock-based compensation
in accordance with Codification Topic 718,
Compensation-Stock Compensation
, which generally requires us to recognize non-cash
compensation expense for stock-based payments using the fair-value-based method. The fair value of each stock option grant has
been estimated on the date of grant using the Black-Scholes option pricing model. Accordingly, we recorded compensation expense
pertaining to stock-based compensation of $46,922 and $21,360 during the three-month periods ended September 30, 2017 and 2016,
respectively, and $148,035 and $50,312 during the nine-month periods ended September 30, 2017 and 2016, respectively.
(o)
|
Net (Loss) Income Per Common Share
|
Net (loss) income per common
share has been computed in accordance with Codification Topic 260-10,
Earnings Per Share.
The net (loss) per share has been
computed by dividing the net (loss) by the weighted average number of common shares outstanding during the period. All stock options
have been excluded from the denominator in the calculation of dilutive earnings per share when we are in a loss position, as the
inclusion would be anti-dilutive. The basic net income per share has been computed by dividing net income by the weighted average
number of common shares outstanding during the period. The diluted net income per share has been computed by dividing net income
by the weighted average number of shares outstanding during the period plus all outstanding stock options with an exercise price
that is less than the average market price of the common stock during the period less the number of shares that could have been
repurchased at this average market price with the proceeds from the hypothetical stock option exercises. The weighted average and
diluted number of shares outstanding consisted of the following:
|
|
For the Three-Month Periods
Ended September 30,
|
|
|
For the Nine-Month Periods
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average number of shares outstanding
|
|
|
4,992,803
|
|
|
|
4,182,529
|
|
|
|
4,896,782
|
|
|
|
4,065,243
|
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
119,751
|
|
|
|
102,463
|
|
|
|
113,938
|
|
Diluted number of shares outstanding
|
|
|
4,992,803
|
|
|
|
4,302,280
|
|
|
|
4,999,245
|
|
|
|
4,179,181
|
|
Outstanding stock options not included in the calculation because the effect would be anti-dilutive
|
|
|
367,000
|
|
|
|
20,000
|
|
|
|
63,000
|
|
|
|
22,000
|
|
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Although we regularly assess these estimates, actual amounts could differ from those
estimates. Changes in estimates are recorded during the period in which they become known. Significant estimates include our inventory
valuation, valuation of goodwill and long-lived assets, accrued expenses, costs of goods sold, and useful lives of intangible assets.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
(q)
|
New Accounting Pronouncements
|
In May 2014, the FASB issued
Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize
the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 was initially to become
effective for the Company on January 1, 2017. Early application was not permitted. In July 2015, the FASB approved a one-year deferral
in the effective date to January 1, 2018, with the option of applying the standard on the original effective date. ASU 2014-09
permits the use of either the full or modified retrospective method. We intend to utilize the modified retrospective method and
have made a preliminary evaluation of the effect that ASU 2014-09 would have on our financial statements and related disclosures
and do not expect ASU 2014-09 to have a material impact on our financial statements.
In February 2016, the FASB issued
ASU No. 2016-02,
Leases
, which requires lessees to put most leases on their balance sheet but recognize expenses on their
income statements in a manner similar to today’s accounting. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018, including interim periods therein. Early adoption is permitted. Based on our current lease agreements, we are not subject
to material lease obligations, and we do not expect ASU 2016-02 to have a material impact on our financial statements.
In January 2017, the FASB issued
ASU 2017-04,
Intangibles-Goodwill And Other (Topic 350)
:
Simplifying The Test For Goodwill Impairment
, in an effort
to simplify the subsequent measurement of goodwill and the associated procedures to determine fair value. The guidance eliminates
Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by
comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the
reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within
that reporting period. The adoption of this guidance is not expected to have a material impact on our financial statements.
In May 2017, the FASB issued
ASU 2017-09,
Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting
to provide clarity and reduce
both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions
of a stock-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based
payment award that require an entity to apply modification accounting in accordance with Topic 718. The standard is effective for
interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating
the effect this standard will have on our financial statements and related disclosures, but we do not expect the impact to be significant.
3.
|
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
|
Cash, cash equivalents and
short-term investments (at amortized cost plus accrued interest) consisted of the following:
|
|
As of
September 30,
2017
|
|
|
As of
December 31,
2016
|
|
|
(Decrease)
|
|
Cash and cash equivalents
|
|
$
|
2,305,264
|
|
|
$
|
5,150,344
|
|
|
($
|
2,845,080
|
)
|
Short-term investments
|
|
|
-
|
|
|
|
5,474,013
|
|
|
|
(5,474,013
|
)
|
Total
|
|
$
|
2,305,264
|
|
|
$
|
10,624,357
|
|
|
($
|
8,319,093
|
)
|
Held to maturity securities
(certificates of deposit) are carried at amortized cost. Short-term investments were liquidated to finance the investment in our
Nisin production facility. The cost of securities sold is determined based on the specific identification method. Realized gains
and losses, and declines in value judged to be other than temporary, are included in investment income.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
The fair value of held to maturity
securities consisted of the following:
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
(Decrease)
Increase
|
|
Amortized cost
|
|
|
-
|
|
|
$
|
5,450,000
|
|
|
($
|
5,450,000
|
)
|
Accrued interest
|
|
|
-
|
|
|
|
24,013
|
|
|
|
(24,013
|
)
|
Gross unrealized gains
|
|
|
-
|
|
|
|
2,073
|
|
|
|
(2,073
|
)
|
Gross unrealized losses
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
59
|
|
Estimated fair value
|
|
|
-
|
|
|
$
|
5,476,027
|
|
|
($
|
5,476,027
|
)
|
Inventory consisted of the
following:
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
Increase
(Decrease)
|
|
Raw materials
|
|
$
|
507,606
|
|
|
$
|
318,443
|
|
|
$
|
189,163
|
|
Work-in-process
|
|
|
1,602,861
|
|
|
|
968,810
|
|
|
|
634,051
|
|
Finished goods
|
|
|
621,558
|
|
|
|
839,646
|
|
|
|
(218,088
|
)
|
Total
|
|
$
|
2,732,025
|
|
|
$
|
2,126,899
|
|
|
$
|
605,126
|
|
Accounts receivable consisted
of the following:
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
(Decrease)
Increase
|
|
Trade accounts receivable, gross
|
|
$
|
872,602
|
|
|
$
|
1,013,716
|
|
|
($
|
141,114
|
)
|
Allowance for bad debt and product returns
|
|
|
(3,683
|
)
|
|
|
(21,326
|
)
|
|
|
17,643
|
|
Trade accounts receivable, net
|
|
$
|
868,919
|
|
|
$
|
992,390
|
|
|
($
|
123,471
|
)
|
6.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets
consisted of the following:
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
Increase
(Decrease)
|
|
Prepaid expenses
|
|
$
|
190,678
|
|
|
$
|
126,523
|
|
|
$
|
64,155
|
|
Other receivables
|
|
|
125,691
|
|
|
|
144,848
|
|
|
|
(19,157
|
)
|
Security deposits
(1)
|
|
|
45,430
|
|
|
|
333,111
|
|
|
|
(287,681
|
)
|
Total
|
|
$
|
361,799
|
|
|
$
|
604,482
|
|
|
($
|
242,683
|
)
|
(1)
As of September 30, 2017 and December 31, 2016, this amount is comprised of $45,430 and $308,375, respectively, related to
the current portion of escrow funds held against certain construction performance requirements.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
7.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted
of the following:
|
|
Estimated Useful Lives
(in years)
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
(Decrease)
Increase
|
|
Laboratory and manufacturing equipment
|
|
3-10
|
|
$
|
5,512,098
|
|
|
$
|
5,562,938
|
|
|
($
|
50,840
|
)
|
Building and improvements
|
|
10-33
|
|
|
5,387,614
|
|
|
|
5,037,512
|
|
|
|
350,102
|
|
Office furniture and equipment
|
|
3-10
|
|
|
697,585
|
|
|
|
653,462
|
|
|
|
44,123
|
|
Construction in progress
|
|
|
|
|
17,111,445
|
|
|
|
3,694,509
|
|
|
|
13,416,936
|
|
Land
|
|
|
|
|
518,998
|
|
|
|
347,114
|
|
|
|
171,884
|
|
Property, plant and equipment, gross
|
|
|
|
|
29,227,740
|
|
|
|
15,295,535
|
|
|
|
13,932,205
|
|
Accumulated depreciation
|
|
|
|
|
(5,684,250
|
)
|
|
|
(5,449,242
|
)
|
|
|
(235,008
|
)
|
Property, plant and equipment, net
|
|
|
|
$
|
23,543,490
|
|
|
$
|
9,846,293
|
|
|
$
|
13,697,197
|
|
Construction
in progress consisted principally of costs incurred in connection with the building and equipping of our Nisin production plant.
Approximately $431,970 and $0 of property, plant and equipment was disposed of during the nine-month periods ended September 30,
2017 and 2016, respectively.
On January 4, 2016, we acquired certain business
assets and processes from DAY 1™ Technology, LLC of Minnesota. The acquired rights and know-how are primarily related to
formulating our bovine antibodies into a gel solution for an oral delivery option to newborn calves via a syringe (or tube). This
product format offers customers an alternative delivery option to the bolus (the standard delivery format of the bivalent
First
Defense
®
product since first approval by the U.S. Department of Agriculture (USDA) and product launch in 1991)
and could allow more market penetration. The formulation was developed for us and has been sold as a feed product without disease
claims since 2012. Additionally, subject to USDA approval, our new product,
First Defense
®
Tri-Shield™
,
will be sold in this format because the additional antibodies would not fit in the bolus. This purchase also includes certain
other related private-label products. The total purchase price was approximately $532,000. Approximately $368,000 of this amount
was paid as of the closing date. A technology transfer payment of $97,000 was made during the third quarter of 2016. There are
also royalty payments owed based on a percentage of sales made through December 31, 2018, which are due semi-annually in January
and July. There is no limit to the royalty amount. As of January 4, 2016, we estimated the aggregate royalties to be paid would
be approximately $67,000, which was recorded in accounts payable and accrued expenses. The amount due was estimated to be approximately
$25,000 and $30,000 as of September 30, 2017 and December 31, 2016, respectively, which was recorded in accounts payable and accrued
expenses as of those dates. Royalty payments of $4,892 and $8,200 were made for sales recorded during the six-month period ended
June 30, 2017 and the year ended December 31, 2016, respectively. The estimated fair values of the assets purchased in this transaction
included inventory of approximately $113,000, machinery and equipment of approximately $132,000, a developed technology intangible
of approximately $191,000 (which includes an immaterial amount of value associated with customer relationships and a non-compete
agreement, and was valued using the relief from royalty method) and goodwill of approximately $96,000. The intangible assets and
goodwill are deductible for tax return purposes. The goodwill arising from the acquisition consists largely of the estimated value
of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction was closed
as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies. The impact
of the acquisition on our pro forma prior year operations is not material. As of December 31, 2016, we vacated the rented facility
in Minnesota that had been used to produce the gel solution format of our product and certain other related private-label products.
This resulted in the termination of employment of four employees, as these production functions were consolidated into our Portland
facility, which enables us to better utilize existing infrastructure and larger scale equipment to improve operating efficiencies.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
The intangible assets described in Note
8 are being amortized to cost of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization
expense was $4,776 and ($133) during the three-month periods ended September 30, 2017 and 2016 and $14,328 and $15,309 during the
nine-month periods ended September 30, 2017 and 2016, respectively. The net value of these intangibles was $157,608 as of September
30, 2017. A summary of intangible amortization expense estimated for the periods subsequent to September 30, 2017 is as follows:
Period
|
|
Amount
|
|
Three months ending December 31, 2017
|
|
$
|
4,776
|
|
Year ending December 31, 2018
|
|
|
19,104
|
|
Year ending December 31, 2019
|
|
|
19,104
|
|
Year ending December 31, 2020
|
|
|
19,104
|
|
Year ending December 31, 2021
|
|
|
19,104
|
|
After December 31, 2021
|
|
|
76,416
|
|
Total
|
|
$
|
157,608
|
|
Intangible assets as of September
30, 2017 consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(32,218
|
)
|
|
$
|
151,882
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(227
|
)
|
|
|
1,073
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(987
|
)
|
|
|
4,653
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(33,432
|
)
|
|
$
|
157,608
|
|
Intangible assets as of December
31, 2016 consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(18,410
|
)
|
|
$
|
165,690
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(130
|
)
|
|
|
1,170
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(564
|
)
|
|
|
5,076
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(19,104
|
)
|
|
$
|
171,936
|
|
10.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts
payable and accrued expenses consisted of the following:
|
|
As of
September 30, 2017
|
|
|
As of
December 31,
2016
|
|
|
Increase
|
|
Accounts payable – capital
|
|
$
|
2,536,151
|
|
|
$
|
1,249,862
|
|
|
$
|
1,286,289
|
|
Accounts payable – trade
|
|
|
300,167
|
|
|
|
257,397
|
|
|
|
42,770
|
|
Accrued payroll
|
|
|
233,045
|
|
|
|
200,477
|
|
|
|
32,568
|
|
Accrued professional fees
|
|
|
106,525
|
|
|
|
82,500
|
|
|
|
24,025
|
|
Accrued other
|
|
|
255,773
|
|
|
|
101,527
|
|
|
|
154,246
|
|
Total
|
|
$
|
3,431,661
|
|
|
$
|
1,891,763
|
|
|
$
|
1,539,898
|
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
We
have in place five credit facilities and a line of credit with TD Bank N.A. The first note (Loan #1) is not to exceed 80% of the
appraised value of our corporate headquarters and production and research facility at 56 Evergreen Drive in Portland. Proceeds
of $1.0 million were received during the third quarter of 2010 with monthly principal and interest payments due for ten years.
Based on a fifteen-year amortization schedule, a balloon principal payment of $451,885 will be due during the third quarter of
2020. As of September 30, 2017, $643,368 was outstanding under this first note. Proceeds from a $2.5 million second mortgage on
this first note (Loan #2) were received during the third quarter of 2015 with monthly principal and interest payments due for
ten years. Based on a twenty-year amortization schedule, a balloon principal payment of approximately $1.55 million will be due
during the third quarter of 2025. As of September 30, 2017, $2,341,144 was outstanding under Loan #2. During the first quarter
of 2016, we entered into two additional credit facilities aggregating up to approximately $4.5 million. As a result of loan amendments
entered into the during the first quarter of 2017, these two credit facilities were increased to up to $6.5 million, subject to
certain restrictions set forth in the agreements. The third note (Loan #3) is comprised of a construction loan of up to $3.94
million and not to exceed 80% of the cost of the equipment to be installed in our commercial-scale Nisin production facility at
33 Caddie Lane in Portland. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin
of 2.25% (which was equal to 3.485% as of September 30, 2017) through September 2018, at which time the loan converts to a seven-year
term loan facility at the same variable interest rate with monthly principal and interest payments due based on a seven-year amortization
schedule. As of September 30, 2017, $2,684,343 was outstanding under this third note, and $1,255,657 was available to be drawn
generally at the same time as when the remaining project disbursements are made. The fourth note (Loan #4) is comprised of a construction
loan of up to $2.56 million and not to exceed 80% (75% prior to the 2017 amendments) of the appraised value of our commercial-scale
Nisin production facility. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin
of 2.25% (which was equal to 3.485% as of September 30, 2017) through March 2018, at which time the loan converts to a term loan
facility at the same variable interest rate with monthly principal and interest payments due for ten years. Based on a twenty-year
amortization schedule, a balloon principal payment of approximately $1.62 million will be due during the first quarter of 2027.
As of September 30, 2017, there were no proceeds outstanding under this fourth note, and $2.56 million was available to be drawn
generally at the same time as when the remaining project disbursements are made. The fifth note (Loan #5) is a mortgage that is
secured by the 4,114 square foot warehouse and storage facility we acquired adjacent to our Nisin production facility. Proceeds
of $340,000 were received during the first quarter of 2017. This note bears interest at a variable rate equal to the one-month
LIBOR plus a margin of 2.25% (which was equal to 3.485% as of September 30, 2017) with monthly principal and interest payments
due for ten years. Based on a twenty-year amortization schedule, a balloon principal payment of approximately $199,000 will be
due during the first quarter of 2027. As of September 30, 2017, $334,216 was outstanding under this fifth note.
We
hedged our interest rate exposures on Loan #1 and Loan #2 with interest rate swap agreements that effectively converted floating
interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to the fixed rates of 6.04% and 4.38%, respectively.
As of September 30, 2017, the variable rates on these two mortgage notes were 4.49% and 3.49%, respectively. All derivatives are
recognized on the balance sheet at their fair value. At the time of the closings and thereafter, the agreements were determined
to be highly effective in hedging the variability of the identified cash flows and have been designated as cash flow hedges of
the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreements are recorded in
other comprehensive (loss) income, net of taxes. The original notional amounts of the interest rate swap agreements of $1,000,000
and $2,500,000 amortize in accordance with the amortization of the mortgage notes. The notional amount of the interest rate swaps
was $2,984,512 as of September 30, 2017. The fair values of the interest rate swaps have been determined using observable market-based
inputs or unobservable inputs that are corroborated by market data. Accordingly, the interest rate swaps are classified as level
2 within the fair value hierarchy provided in Codification Topic 820,
Fair Value Measurements and Disclosures
.
|
|
For
the Three-Month Periods Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Payments required by interest rate swaps
|
|
$
|
8,115
|
|
|
$
|
14,470
|
|
Other comprehensive income, net of taxes
|
|
$
|
1,824
|
|
|
$
|
15,523
|
|
|
|
For
the Nine-Month Periods Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Payments required by interest rate swaps
|
|
$
|
29,834
|
|
|
$
|
44,653
|
|
Other comprehensive income (loss), net of taxes
|
|
$
|
3,419
|
|
|
($
|
79,767
|
)
|
In
connection with the credit facilities entered into during the third quarters of 2010 and 2015, we incurred debt issue costs of
$26,489 and $34,125, respectively. In connection with the credit facilities entered into during the first quarters of 2016 and
2017, we incurred debt issue costs of $46,734 and $63,358, respectively. The 2017 amendments to the 2016 agreements were accounted
for as modifications. All debt issuance costs are being recorded as a component of other expenses and are being amortized over
the terms of the respective credit facilities.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
These
five credit facilities are secured by substantially all of our assets and are subject to certain restrictions and financial covenants.
Principal payments (net of debt issuance costs) due under bank loans outstanding as of September 30, 2017 (excluding our $500,000
line of credit) are reflected in the following table by the year that payments are due:
|
|
Three-month
period ending 12/31/2017
|
|
|
Year
ending
12/31/2018
|
|
|
Year
ending
12/31/2019
|
|
|
Year
ending
12/31/2020
|
|
|
Year
ending
12/31/2021
|
|
|
After
12/31/2021
|
|
|
Total
|
|
Loan #1
|
|
$
|
15,888
|
|
|
$
|
64,876
|
|
|
$
|
68,908
|
|
|
$
|
493,696
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
643,368
|
|
Loan #2
|
|
|
21,279
|
|
|
|
86,097
|
|
|
|
89,997
|
|
|
|
94,005
|
|
|
|
98,538
|
|
|
|
1,951,228
|
|
|
|
2,341,144
|
|
Loan #3
(1)
|
|
|
-
|
|
|
|
85,036
|
|
|
|
347,638
|
|
|
|
359,949
|
|
|
|
372,695
|
|
|
|
1,519,025
|
|
|
|
2,684,343
|
|
Loan #4
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loan #5
(1)
|
|
|
3,005
|
|
|
|
12,283
|
|
|
|
12,718
|
|
|
|
13,169
|
|
|
|
13,635
|
|
|
|
279,406
|
|
|
|
334,216
|
|
Debt Issuance Costs
|
|
|
(4,122
|
)
|
|
|
(16,489
|
)
|
|
|
(16,489
|
)
|
|
|
(15,855
|
)
|
|
|
(14,841
|
)
|
|
|
(63,077
|
)
|
|
|
(130,873
|
)
|
|
|
$
|
36,050
|
|
|
$
|
231,803
|
|
|
$
|
502,772
|
|
|
$
|
944,964
|
|
|
$
|
470,027
|
|
|
$
|
3,686,582
|
|
|
$
|
5,872,198
|
|
(1)
These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table
are estimated using an interest rate of approximately 3.485%. The actual interest rate and principal payments will be different.
During
the third quarter of 2010, we entered into a $500,000 line of credit with TD Bank N.A., which is secured by substantially all
of our assets and is subject to certain restrictions and financial covenants. This line of credit has been renewed approximately
annually since then and is available as needed and has been extended through May 31, 2018. There was no outstanding balance under
this line of credit as of September 30, 2017 or December 31, 2016. Interest on borrowings against the line of credit are variable
at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.
On
October 28, 2015, we filed a registration statement on Form S-3 (File No. 333-207635) with the Securities and Exchange Commission
(SEC) for the potential issuance of up to $10,000,000 in equity securities (subject to certain limitations). This registration
statement became effective on November 10, 2015. Under this form of registration statement, we are limited within a twelve-month
period to raising gross proceeds of no more than one-third of the market capitalization of our common stock (as determined by
the high price or our common stock within the preceding 60 days leading up to a sale of securities) held by non-affiliates (non-insiders)
of the Company.
On
February 3, 2016, we sold 1,123,810 shares of common stock at a price to the public of $5.25 per share in an underwritten public
offering pursuant to our effective shelf registration statement on Form S-3, raising gross proceeds of approximately $5,900,000
and resulting in net proceeds to the Company of approximately $5,313,000 (after deducting underwriting discounts and offering
expenses incurred in connection with the equity financing).
On
October 21, 2016, we closed on a private placement of 659,880 shares of common stock to nineteen institutional and accredited
investors at $5.25 per share, raising gross proceeds of approximately $3,464,000 and resulting in net proceeds to the Company
of approximately $3,161,000 (after deducting placement agent fees and other expenses incurred in connection with the equity financing).
On
July 27, 2017, we issued 200,000 shares of our common stock at a price of $5.25 per share to two related investors pursuant to
our effective shelf registration statement on Form S-3, raising gross proceeds of $1,050,000 and resulting in net proceeds of
approximately $1,037,000 (after deducting estimated expenses incurred in connection with the equity financing).
At
the June 15, 2016 Annual Meeting of Stockholders, we reported that our stockholders voted to approve an amendment to the Company’s
Certificate of Incorporation to increase the number of shares of common stock authorized for issuance from 8,000,000 to 10,000,000.
After careful consideration, we determined that the method of voting instructions described in our Proxy Statement was not consistent
with the way the votes were actually recorded in accordance with stock exchange rules. Therefore, during the second quarter of
2017, we elected to treat the amendment as ineffective, and there was no increase in our authorized common stock. As of September
30, 2017, we had 8,000,000 authorized shares of common stock.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
In
June 2000, our stockholders approved the 2000 Stock Option and Incentive Plan (the “2000 Plan”) pursuant to the provisions
of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares
of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options
and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. Vesting requirements
are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. Originally, 250,000
shares of common stock were reserved for issuance under the 2000 Plan. The stockholders of the Company approved an increase in
this number to 500,000 shares in June 2001. All options granted under the 2000 Plan expire no later than ten years from the date
of grant. The 2000 Plan expired in February 2010, after which date no further options could be granted under the 2000 Plan. However,
outstanding options under the 2000 Plan may be exercised in accordance with their terms.
In
June 2010, our stockholders approved the 2010 Stock Option and Incentive Plan (the “2010 Plan”) pursuant to the provisions
of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares
of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options
and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. At that time, 300,000
shares of common stock were reserved for issuance under the 2010 Plan and subsequently no additional shares have been reserved
for the 2010 Plan. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors
on a case by case basis. All options granted under the 2010 Plan expire no later than ten years from the date of grant. The 2010
Plan expires in June 2020, after which date no further options could be granted under the 2010 Plan. However, options outstanding
under the 2010 Plan at that time could be exercised in accordance with their terms.
In
June 2017, our stockholders approved the 2017 Stock Option and Incentive Plan (the “2017 Plan”) pursuant to the provisions
of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares
of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options
and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. At that time, 300,000
shares of common stock were reserved for issuance under the 2017 Plan. Vesting requirements are determined by the Compensation
and Stock Option Committee of the Board of Directors on a case by case basis. All options granted under the 2017 Plan expire no
later than ten years from the date of grant. The 2017 Plan expires in March 2027, after which date no further options could be
granted under the 2017 Plan. However, options outstanding under the 2017 Plan at that time could be exercised in accordance with
their terms. Activity under the stock option plans described above was as follows:
|
|
2000 Plan
|
|
|
2010 Plan
|
|
|
2017 Plan
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Outstanding at December 31, 2015
|
|
|
131,500
|
|
|
|
106,500
|
|
|
|
-
|
|
|
$
|
3.57
|
|
|
$
|
945,000
|
|
Grants
|
|
|
-
|
|
|
|
46,000
|
|
|
|
-
|
|
|
$
|
6.98
|
|
|
|
|
|
Terminations
|
|
|
(5,000
|
)
|
|
|
(12,000
|
)
|
|
|
-
|
|
|
$
|
6.16
|
|
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
(16,000
|
)
|
|
|
-
|
|
|
$
|
5.59
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
126,500
|
|
|
|
124,500
|
|
|
|
-
|
|
|
$
|
3.89
|
|
|
$
|
517,000
|
|
Grants
|
|
|
-
|
|
|
|
138,000
|
|
|
|
-
|
|
|
$
|
5.85
|
|
|
|
|
|
Terminations
|
|
|
(5,000
|
)
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
$
|
5.58
|
|
|
|
|
|
Exercises
|
|
|
(3,000
|
)
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
$
|
4.13
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
118,500
|
|
|
|
248,500
|
|
|
|
-
|
|
|
$
|
4.54
|
|
|
$
|
718,000
|
|
Vested at September 30, 2017
|
|
|
118,500
|
|
|
|
42,500
|
|
|
|
-
|
|
|
$
|
2.64
|
|
|
$
|
621,000
|
|
Vested and expected to vest at September 30, 2017
|
|
|
118,500
|
|
|
|
248,500
|
|
|
|
-
|
|
|
$
|
4.54
|
|
|
$
|
718,000
|
|
Reserved for future grants
|
|
|
-
|
|
|
|
30,500
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
(1)
Intrinsic value is the difference between the fair market value as of the date indicated and as of the date of the option
grant.
During
the nine-month period ended September 31, 2017, three employees exercised stock options covering 4,000 shares for cash, resulting
in total proceeds of $16,500. During the year ended December 31, 2016, one employee and one director exercised stock options covering
the aggregate of 16,000 shares, of which 6,000 were exercised for cash, resulting in total proceeds of $31,900, and 10,000 of
these options were exercised by the surrender of 7,334 shares of common stock with a fair market value of $57,425 at the time
of exercise and $75 in cash. As of September 30, 2017, 367,000 shares of common stock were reserved for future issuance under
all outstanding stock options described above, an additional 30,500 shares of common stock were reserved for the potential issuance
of stock option grants in the future under the 2010 Plan and an additional 300,000 shares of common stock were reserved for the
potential issuance of stock option grants in the future under the 2017 Plan.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
The
weighted average remaining life of the options outstanding under the 2000 Plan and the 2010 Plan as of September 30, 2017 was
approximately five years and eight months. The weighted average remaining life of the options exercisable under these plans as
of September 30, 2017 was approximately one year and nine months. The exercise prices of the options outstanding as of September
30, 2017 ranged from $1.70 to $8.21 per share. The 138,000 stock options granted during the nine-month period ended September
30, 2017 had exercise prices between $5.33 and $6.23 per share. The 46,000 stock options granted during 2016 had exercise prices
between $6.27 and $8.21 per share. The aggregate intrinsic value of options exercised during 2017 and 2016 approximated $7,340
and $32,000, respectively. The weighted-average grant date fair values of options granted during 2017 and 2016 were $3.47 and
$4.16 per share, respectively. As of September 30, 2017, total unrecognized stock-based compensation related to non-vested stock
options aggregated $484,575, which will be recognized over a weighted average period of two years and six months. The fair value
of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model, for the purpose
discussed in Note 2(n), with the following weighted-average assumptions for the three-month and nine-month periods ended September
30, 2017 and for the year ended December 31, 2016:
|
|
For the Three-Month Period
Ended September 30, 2017
|
|
For the Nine-Month Period
Ended September 30, 2017
|
|
For the Year
Ended December 31, 2016
|
Risk-free interest rate
|
|
1.9%
|
|
1.9%
|
|
1.2%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected volatility
|
|
61%
|
|
61%
|
|
63%
|
Expected life
|
|
6.5 years
|
|
6.5 years
|
|
6.5 years
|
The
risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected option term, while the other
assumptions are derived from averages of our historical data.
Common
Stock Rights Plan
In
September 1995, our Board of Directors adopted a Common Stock Rights Plan (the “Rights Plan”) and declared a dividend
of one common share purchase right (a “Right”) for each of the then outstanding shares of the common stock of the
Company. Each Right entitles the registered holder to purchase from the Company one share of common stock at an initial purchase
price of $70.00 per share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement
between the Company and American Stock Transfer & Trust Co., as Rights Agent.
The
Rights (as amended) become exercisable and transferable apart from the common stock upon the earlier of i) 10 days following a
public announcement that a person or group (Acquiring Person) has, without the prior consent of the Continuing Directors (as such
term is defined in the Rights Agreement), acquired beneficial ownership of 20% or more of the outstanding common stock or ii)
10 days following commencement of a tender offer or exchange offer the consummation of which would result in ownership by a person
or group of 20% or more of the outstanding common stock (the earlier of such dates being called the Distribution Date).
Upon
the Distribution Date, the holder of each Right not owned by the Acquiring Person would be entitled to purchase common stock at
a discount to the initial purchase price of $70.00 per share, effectively equal to one half of the market price of a share of
common stock on the date the Acquiring Person becomes an Acquiring Person. If, after the Distribution Date, the Company should
consolidate or merge with any other entity and the Company were not the surviving company, or, if the Company were the surviving
company, all or part of the Company’s common stock were changed or exchanged into the securities of any other entity, or
if more than 50% of the Company’s assets or earning power were sold, each Right would entitle its holder to purchase, at
the Rights’ then-current purchase price, a number of shares of the acquiring company’s common stock having a market
value at that time equal to twice the Right’s exercise price.
At
any time after a person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more
of the outstanding common stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such
person or group which have become void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject
to adjustment). At any time prior to 14 days following the date that any person or group becomes an Acquiring Person (subject
to extension by the Board of Directors), the Board of Directors of the Company may redeem the then outstanding Rights in whole,
but not in part, at a price of $0.005 per Right, subject to adjustment.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
On
June 8, 2005, our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date
by an additional three years, to September 19, 2008. As of June 30, 2005, we entered into an amendment to the Rights Agreement
with the Rights Agent reflecting such extension. On June 6, 2008 our Board of Directors voted to authorize an amendment of the
Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2011 and to increase the ownership
threshold for determining “Acquiring Person” status from 15% to 18%. As of June 30, 2008, we entered into an amendment
to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On August 5, 2011, our Board of
Directors voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date by an additional three years
to September 19, 2014 and to increase the ownership threshold for determining “Acquiring Person” status from 18% to
20%. As of August 9, 2011, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension
and threshold increase. On June 10, 2014, our Board of Directors voted to authorize an amendment to the Rights Agreement to extend
the Final Expiration Date by an additional three years to September 19, 2017. As of June 16, 2014, we entered into an amendment
to the Rights Agreement with the Rights Agent reflecting such extension. During the second quarter of 2015, we amended our Common
Stock Rights Plan by removing a provision that prevented a new group of directors elected following the emergence of an Acquiring
Person (an owner of more than 20% of our stock) from controlling the Rights Plan by maintaining exclusive authority over the Rights
Plan with pre-existing directors. We did this because such provisions have come to be viewed with disfavor by Delaware courts.
On June 15, 2017, our Board of Directors voted to authorize an amendment to the Rights Agreement to extend the Final Expiration
Date by an additional five years to September 19, 2022. As of August 10, 2017, we entered into an amendment to the Rights Agreement
with the Rights Agent reflecting such extension. No other changes have been made to the terms of the Rights or the Rights Agreement.
Other
expenses, net, consisted of the following:
|
|
For the Three-Month Periods
Ended September 30,
|
|
|
For the Nine-Month Periods
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest expense
|
|
$
|
53,168
|
|
|
$
|
41,452
|
|
|
$
|
136,563
|
|
|
$
|
123,292
|
|
Interest income
|
|
|
(2,983
|
)
|
|
|
(16,980
|
)
|
|
|
(15,358
|
)
|
|
|
(43,725
|
)
|
Other gains
|
|
|
(947
|
)
|
|
|
2,038
|
|
|
|
(5,328
|
)
|
|
|
1,628
|
|
Other expenses, net
|
|
$
|
49,238
|
|
|
$
|
26,510
|
|
|
$
|
115,877
|
|
|
$
|
81,195
|
|
Our
income tax (benefit) aggregated ($192,303) and ($10,913) (amounting to 36% and 46% of our (loss) income before income taxes, respectively)
for the three-month periods ended September 30, 2017 and 2016, respectively. Our income tax expense aggregated $28,108 and $211,537
(amounting to 51% and 31% of our income before income taxes, respectively) for the nine-month periods ended September 30, 2017
and 2016, respectively. As of September 30, 2017, we had federal general business tax credit carryforwards of approximately $285,000
that expire in 2032 through 2037 (if not utilized before then) and state tax credit carryforwards of approximately $184,000 that
expire in 2023 through 2037 (if not utilized before then). The $965,000 licensing payment that we made during the fourth quarter
of 2004 was treated as an intangible asset and is being amortized over 15 years, for tax return purposes only. Approximately $1,112,000
of our investment in a small-scale facility to produce the Drug Substance (our Active Pharmaceutical Ingredient, Nisin) was expensed
as incurred for our books. Included in this amount is approximately $820,000 that was capitalized and is being depreciated over
statutory periods for tax return purposes only.
The
provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach,
deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and
liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able
to realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance
would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize
all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the
period such determination was made.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Net
operating loss carryforwards, credits, and other tax attributes are subject to review and possible adjustment by the Internal
Revenue Service. Section 382 of the Internal Revenue Code contains provisions that could place annual limitations on the future
utilization of net operating loss carryforwards and credits in the event of a change in ownership of the Company, as defined.
The
Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. With few exceptions, the Company
is no longer subject to income tax examinations by tax authorities for years before 2013. We currently have no tax examinations
in progress. We also have not paid additional taxes, interest or penalties as a result of tax examinations nor do we have any
unrecognized tax benefits for any of the periods in the accompanying financial statements.
15.
|
CONTINGENT
LIABILITIES AND COMMITMENTS
|
Our
bylaws, as amended, in effect provide that the Company will indemnify its officers and directors to the maximum extent permitted
by Delaware law. In addition, we make similar indemnity undertakings to each director through a separate indemnification agreement
with that director. The maximum payment that we may be required to make under such provisions is theoretically unlimited and is
impossible to determine. We maintain directors’ and officers’ liability insurance, which may provide reimbursement
to the Company for payments made to, or on behalf of, officers and directors pursuant to the indemnification provisions. Our indemnification
obligations were grandfathered under the provisions of Codification Topic 460
, Guarantees
. Accordingly, we have recorded
no liability for such obligations as of September 30, 2017. Since our incorporation, we have had no occasion to make any indemnification
payment to any of our officers or directors for any reason.
The
development, manufacturing and marketing of animal health care products entails an inherent risk that liability claims will be
asserted against us during the normal course of business. We are aware of no such claims against us as of the date of this filing.
We feel that we have reasonable levels of liability insurance to support our operations.
We
enter into agreements with third parties in the ordinary course of business under which we are obligated to indemnify such third
parties from and against various risks and losses. The precise terms of such indemnities vary with the nature of the agreement.
In many cases, we limit the maximum amount of our indemnification obligations, but in some cases those obligations may be theoretically
unlimited. We have not incurred material expenses in discharging any of these indemnification obligations, and based on our analysis
of the nature of the risks involved, we believe that the fair value of the liabilities potentially arising under these agreements
is minimal. Accordingly, we have recorded no liabilities for such obligations as of September 30, 2017.
We
are committed to purchasing certain key parts (syringes) and services (formulation, filling and packaging of Drug Product) pertaining
to our mastitis product exclusively from two contractors. If we do not commercialize the product by the end of 2019, we would
be liable for a $100,000 termination fee under one of such agreements.
During
the second quarter of 2009, we entered into an exclusive license with the Baylor College of Medicine covering the underlying rotavirus
vaccine technology used to generate the specific antibodies for our product line extension (
First Defense
®
Tri-Shield™
)
that is under development. This perpetual license (if not terminated for cause) is subject to a milestone payment of $150,000
due within 90 days of regulatory approval and a royalty equal to 4% of sales above current sales of our bivalent product plus
a growth assumption.
During
the third quarter of 2016, we initiated construction of our Nisin production facility. The estimated total cost of the Nisin facility
is approximately $20,803,000. As of September 30, 2017, we had incurred approximately $17,106,000 of capital expenditures related
to this project, of which $14,570,000 had been paid as of the end of the quarter. The majority of the remainder of this investment
is expected to be paid during the three-month period ending December 31, 2017. As of September 30, 2017, we had committed $4,516,000
of the remaining $6,233,000 expected to be paid on this project. Approximately $2,605,000 of these capital expenditures is committed
under a guaranteed maximum price contract with our construction management firm, net of payments made. This contract includes
provisions that could reduce the amount of the commitment generally by the amount not expended or committed by the construction
manager at the time of an unexpected and unlikely early termination. We expect to fund the remaining costs in excess of our current
cash and investments with borrowings under the credit facilities described in Note 11. In addition to the commitments related
to our Nisin production facility discussed above, we had committed $441,000 to the production of inventory and $134,000 to other
obligations as of September 30, 2017.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
We
principally operate in the business segment described in Note 1. Pursuant to Codification Topic 280,
Segment Reporting
,
we operate in one reportable business segment, that being the development, acquisition, manufacture and sale of products that
improve the health and productivity of dairy and beef cattle. Almost all of our internally funded product development expenses
are in support of such products. The significant accounting policies of this segment are described in Note 2. Our single operating
segment is defined as the component of our business for which financial information is available and evaluated regularly by our
chief operating decision-maker in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker
is our President and CEO.
Sales
of the
First Defense
®
product line aggregated 98% and 93% of our total product sales during the three-month periods
ended September 30, 2017 and 2016, respectively, and 94% and 93% of our total product sales during the nine-month periods ended
September 30, 2017 and 2016, respectively. Our primary customers for the majority of our product sales (87% and 83% during the
three-month periods ended September 30, 2017 and 2016, respectively, and 83% and 85% during the nine-month periods ended September
30, 2017 and 2016, 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 13% and 17% of our total product sales during the three-month periods ended
September 30, 2017 and 2016, respectively, and 15% and 14% of our total product sales during the nine-month periods ended September
30, 2017 and 2016, respectively.
17.
|
RELATED
PARTY TRANSACTIONS
|
Dr.
David S. Tomsche (Chair of our Board of Directors) is a controlling owner of Leedstone Inc. (formerly Stearns Veterinary Outlet,
Inc.), a domestic distributor of ImmuCell products (
First Defense
®
and
CMT
) and of J-t Enterprises of Melrose,
Inc., an exporter. His affiliated companies purchased $465,670 and $476,311 of products from ImmuCell during the nine-month periods
ended September 30, 2017 and 2016, respectively, on terms consistent with those offered to other distributors of similar status.
We made marketing-related payments of $3,168 and $2,925 to these affiliate companies during the nine-month periods ended September
30, 2017 and 2016, respectively, that were expensed as incurred. Our accounts receivable (subject to standard and customary payment
terms) due from these affiliated companies aggregated $27,909 and $3,221 as of September 30, 2017 and December 31, 2016, respectively.
We
have a 401(k) savings plan (the Plan) in which all employees completing one month of service with the Company are eligible to
participate. Participants may contribute up to the maximum amount allowed by the Internal Revenue Service. Since August 2012,
we have matched 100% of the first 3% of each employee’s salary that is contributed to the Plan and 50% of the next 2% of
each employee’s salary that is contributed to the Plan. Under this matching plan, we paid $21,083 and $17,642 into the plan
during the three-month periods ended September 30, 2017 and 2016, respectively, and $64,105 and $55,209 during the nine-month
periods ended September 30, 2017 and 2016, respectively.
W
e
have
evaluated
subsequent
events through
the time
of
filing
on
November 13
, 2017,
the
date
we
have issued this
Quarterly
Report on Form 10-Q. As of such date, except as described below, there were no material, reportable subsequent events.
On November 13, 2017, we announced that
we achieved regulatory approval of
First Defense
®
Tri-Shield
™, our new trivalent scours preventative product.
ImmuCell Corporation
ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read together with our unaudited
condensed financial statements and the related notes and other financial information included in this Quarterly Report on Form
10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including
information with respect to our plans and strategy for our business and related financing, includes forward-looking statements
that involve risks and uncertainties. One should review
Part II -
“Other Information”,
Item 1A -
“Risk
Factors” of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Liquidity
and Capital Resources
We
have funded most of our product development and other operating expenses principally from our gross margin on product sales. We
were profitable during the six-month period ended December 31, 2014 and during the years ended December 31, 2015 and 2016 and
during the nine-month period ended September 30, 2017. The table below summarizes the changes in selected, key accounts (in thousands,
except for percentages):
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
(Decrease) Increase
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Cash, cash equivalents and short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
$
|
2,305
|
|
|
$
|
10,624
|
|
|
$
|
(8,319
|
)
|
|
|
(78
|
)%
|
Net working capital
|
|
$
|
2,691
|
|
|
$
|
12,289
|
|
|
$
|
(9,598
|
)
|
|
|
(78
|
)%
|
Total assets
|
|
$
|
30,290
|
|
|
$
|
24,697
|
|
|
$
|
5,593
|
|
|
|
23
|
%
|
Stockholders’ equity
|
|
$
|
20,954
|
|
|
$
|
19,722
|
|
|
$
|
1,232
|
|
|
|
6
|
%
|
Common shares outstanding
|
|
|
5,051
|
|
|
|
4,847
|
|
|
|
204
|
|
|
|
4
|
%
|
Net
cash provided by operating activities amounted to $845,000 during the nine-month period ended September 30, 2017 in comparison
to net cash provided by operating activities of $150,000 during the nine-month period ended September 30, 2016. Capital investments
totaled $13.1 million during the nine-month period ended September 30, 2017 compared to capital investments of $1.8 million (which
amount did not include approximately $470,000 related to a business acquisition) during the nine-month period ended September
30, 2016.
During
the first and fourth quarters of 2016, we issued an aggregate of approximately 1.8 million shares of common stock, raising net
proceeds of approximately $8.5 million in two separate transactions. During the third quarter of 2017, we issued 200,000 shares
of common stock, raising net proceeds of just over $1.0 million.
We
have in place five credit facilities and a line of credit with TD Bank N.A. During the third quarters of 2010 and 2015, we agreed
to terms of two credit facilities. As of September 30, 2017, approximately $3.0 million was outstanding under these two loan agreements.
During the first quarter of 2016, we entered into two additional bank debt agreements covering two additional credit facilities
aggregating up to approximately $4.5 million. During the first quarter of 2017, we amended these two agreements to increase the
total amount of debt available to up to approximately $6.5 million. As of September 30, 2017, approximately $2.7 million was outstanding
under these two loan agreements, and approximately $3.8 million was available to be drawn generally at the same time as when the
remaining project disbursements are made. During the first quarter of 2017, we acquired a 4,114 square foot warehouse and storage
facility that is adjacent to our Nisin production facility. We financed the purchase price of $465,500, in part, with a mortgage
loan in the amount of $340,000. As of September 30, 2017, approximately $334,000 was outstanding under this loan agreement. We
have a $500,000 line of credit that is available as needed through May 31, 2018 and subject to extension by the bank after that
date. No amounts were outstanding under the line of credit as of September 30, 2017. These credit facilities are subject to certain
restrictions and financial covenants and are secured by substantially all of our assets, including our corporate headquarters
and production and research facility at 56 Evergreen Drive in Portland, which was independently appraised at $4.2 million in connection
with the 2015 financing. Based on our unaudited results, we are in compliance with all applicable covenants as of September 30,
2017.
ImmuCell Corporation
During
the third quarter of 2016, we initiated construction of our Nisin production facility. The estimated total cost of the Nisin facility
is approximately $20.8 million. This cost estimate has increased by approximately 4% from the $20 million estimate as of September
30, 2016 and by approximately 3% from the most recent cost estimate as of June 30, 2017. While we negotiate to control cost increases
at every opportunity, such increases are to be expected on an investment of this size as project requirements are finalized. Expenditures
on this project are heavily weighted to the six-month period ending December 31, 2017. We are substantially complete with construction
of the building shell and have made significant progress on the interior of the building. We began equipment installation during
the third quarter of 2017. We expect to fund the estimated costs to complete the project of approximately $6.2 million that are
in excess of our current cash and investments (which was equal to approximately $2.3 million as of September 30, 2017) with available
borrowings (aggregating up to approximately $4.3 million) under the credit facilities and line of credit, described above. These
costs are being capitalized on our balance sheet as construction in progress. Depreciation of these costs is expected to begin
when the facility is placed into service for its intended purpose (which is to produce Nisin), which will likely be by the second
quarter of 2018. We anticipate that depreciation expense, while not affecting our cash flows from operations, will result in net
operating losses until product sales increase sufficiently to offset these non-cash expenses. The following table details the
expected amount and timing of this investment:
Period
|
|
Amount
|
|
Paid through December 31, 2016
|
|
$
|
2,080,000
|
(1)
|
Paid during the nine-month period ended September 30, 2017
|
|
|
12,489,000
|
(2)
|
Estimate to be paid after September 30, 2017
|
|
|
6,234,000
|
(3)
|
Estimated total cost of investment
|
|
$
|
20,803,000
|
(4)
|
(1)
This amount does not include approximately $1,250,000 that was capitalized as of December 31, 2016 but not paid until the
first quarter of 2017.
(2)
This amount includes approximately $1,250,000 that was capitalized as of December 31, 2016 but paid during the first quarter
of 2017. This amount does not include approximately $2,536,000 that was capitalized as of September 30, 2017 but not paid until
the fourth quarter of 2017.
(3)
This amount includes approximately $2,536,000 that was capitalized as of September 30, 2017 but paid during the fourth quarter
of 2017.
(4)
This budget estimate does not include approximately $278,000 that was invested in land for the facility, which was acquired
during the fourth quarter of 2015.
Our
capital expenditure investments from January 1, 2014 through September 30, 2017 have been larger than our historical norm due
to investments to increase our production capacity for the
First Defense
®
product line and to construct and equip
our Nisin production facility. During the nine-month period ended September 30, 2017, we invested approximately $121,000 in routine
and necessary capital expenditures, which does not include payments pertaining to the Nisin production facility, described above.
As of October 1, 2017, we had additional authorization from our Board of Directors to invest up to approximately $29,000 through
December 31, 2017 in routine and necessary capital expenditures, which is in addition to payments made pertaining to the Nisin
production facility, described above. We believe that our cash, together with gross margin to be earned from ongoing product sales
and available bank debt, is sufficient to meet our working capital and capital expenditure requirements and to finance our ongoing
business operations during at least the next twelve months.
During
the early part of 2015, we invested $644,000 to complete a 7,100 square foot addition to our Portland facility, providing cold
storage, production and warehouse space required to increase our manufacturing capacity. Construction of the facility addition
was initiated at the end of the third quarter of 2014. The total cost of this project was $1,914,000. We completed an investment
to increase our liquid processing capacity by 50% during the fourth quarter of 2015 and an investment to increase our freeze-drying
capacity by 100% at the end of the first quarter of 2016. During 2015, we invested $1,379,000 in these production capacity increases
and $430,000 in other capital expenditures. During 2016, we invested $1,161,000 to complete these production capacity increases
and $345,000 in other capital expenditures.
During
the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces
our real estate taxes on the Nisin production facility that we are constructing by 65% over the eleven-year period ending June
30, 2028 and by 30% during the year ending June 30, 2029, at which time the rebate expires. During the second quarter of 2017,
the TIF was approved by the State’s Department of Economic and Community Development. The aggregate financial benefit was
originally estimated to be approximately $400,000. Based on the assessed value of approximately $1,651,000 as of April 1, 2017
for the building in process of being completed, the TIF will reduce our property taxes by approximately $23,000 for the year ending
June 30, 2018. The value of the tax savings would increase in proportion to the increase in the assessment of the building for
city real estate tax purposes. The actual savings will be based on the assessed value of the building after construction is complete,
which is likely to be less than its cost of construction.
ImmuCell
Corporation
Results
of Operations
Product
Sales
Total
product sales during the three-month period ended September 30, 2017 increased by 2%, or $37,000, to $2,005,000 from $1,968,000
during the same period in 2016, with domestic product sales increasing by 7%, or $121,000, and international product sales decreasing
by 25%, or $85,000, in comparison to the same period during 2016. Sales of the discontinued topical wipes product line aggregated
approximately $57,000 during the three-month period ended September 30, 2016. Sales during the third quarter of 2016 included
the shipments of orders worth $365,000 that were in backlog as of June 30, 2016, as the backlog of orders at that time was being
cleared. Since the third quarter of 2016, we have had sufficient available inventory and are shipping in accordance with the current
demand of our distributors. We believe that the 25% decrease (only $85,000 on a dollar basis) in international sales during the
third quarter was largely a timing difference, as most of our international orders tend to be received in larger amounts less
frequently. Total product sales during the nine-month period ended September 30, 2017 decreased by less than 1%, or $32,000, to
$7,298,000 from $7,330,000 during the same period in 2016, with domestic product sales decreasing by 3%, or $172,000, and international
product sales increasing by 14%, or $140,000, in comparison to the same period during 2016. Sales of the discontinued topical
wipes product line aggregated approximately $97,000 and $271,000 during the nine-month periods ended September 30, 2017 and 2016,
respectively. Sales during the first nine months of 2016 included the shipments of orders worth $381,000 that were in backlog
as of December 31, 2015. Total product sales during the twelve-month period ended September 30, 2017 decreased by 5%, or $512,000,
to $9,512,000 from $10,025,000 during the same period ended September 30, 2016, with domestic sales decreasing by 5%, or $436,000,
and international sales decreasing by 5%, or $76,000, in comparison to the same period ended September 30, 2016. Sales of the
discontinued topical wipes product line aggregated approximately $175,000 and $368,000 during the twelve-month periods ended September
30, 2017 and 2016, respectively. We do expect to record positive sales growth during the three-month period ending December 31,
2017 in comparison to the same period during the prior year.
The
First Defense
®
product line (our lead product), continues to benefit from wide acceptance by dairy and beef producers
as an effective tool to prevent scours (diarrhea) in newborn calves. Sales of the
First Defense
®
product line aggregated
98% and 93% of our total product sales during the three-month periods ended September 30, 2017 and 2016, respectively. Sales of
the
First Defense
®
product line during the three-month period ended September 30, 2017 increased by 7% in comparison
to the same period during 2016 with domestic sales increasing by 14% and international sales decreasing by 25%, in comparison
to the same period during 2016. Sales of the
First Defense
®
product line aggregated 94% and 93% of our total product
sales during the nine-month periods ended September 30, 2017 and 2016, respectively. Sales of the
First Defense
®
product line during the nine-month period ended September 30, 2017 increased by 1% in comparison to the same period during 2016
with domestic sales increasing by less than 1% and international sales increasing by 4%, in comparison to the same period during
2016. Sales of the
First Defense
®
product line aggregated 94% and 93% of our total product sales during the twelve-month
periods ended September 30, 2017 and 2016, respectively. Sales of the
First Defense
®
product line during the twelve-month
period ended September 30, 2017 decreased by 4% in comparison to the same period ended September 30, 2016 with domestic sales
decreasing by 3% and international sales decreasing by 12%, in comparison to the same period ended September 30, 2016.
We
have significantly increased our supply of colostrum, and we completed the investments necessary to increase our liquid processing
capacity by 50% during the fourth quarter of 2015 and our freeze drying capacity by 100% during the first quarter of 2016. The
prolonged period of order backlog (which began early in 2015 and extended through the middle of 2016) disrupted normal shipping
patterns. During this period when demand outpaced our production capacity, we were forced to allocate product to customers, and
more product was allocated to domestic distributors. With our production capacity expanded, current demand now has been fully
met, and we are working to grow sales.
We
believe that the long-term growth in sales of the
First Defense
®
product line may reflect, at least in part, the
success of our strategic decision initiated in 2010 to invest in additional sales and marketing efforts to help us introduce the
expanding
First Defense
®
product line to new customers. Our sales and marketing team currently consists of one vice
president, six regional managers and one inside sales and marketing employee. We launched a communications campaign at the end
of 2010 that continues to emphasize how the unique ability of
First Defense
®
to provide
Immediate Immunity™
generates a dependable and competitive return on investment for dairy and beef producers. Preventing newborn calves from becoming
sick helps them to reach their genetic potential and reduces the need to use treatment antibiotics later in life. We are expanding
this message by suggesting that producers can go
Beyond Vaccination™
to prevent scours with our new product,
First
Defense
®
Tri-Shield™
, which is expected to launch (subject to USDA approval) during the fourth quarter of 2017.
This product enables producers to prevent scours at the calf-level without needing a dam-level scours vaccine. By our estimates,
in certain cases, when our product replaces all costs associated with dam-level scours vaccination programs, the producer can
experience a positive return on investment and more consistent calf protection.
ImmuCell Corporation
Our
product carries USDA-claims against
E. coli
and coronavirus. We compete directly at the calf level against products sold
by Boehringer Ingelheim (Bar-Guard-99™), Elanco (Bovine Ecolizer
®
), Merck (BOVILIS
®
Coronavirus) and Zoetis
(Calf-Guard
®
). The Boehringer product only has claims against
E. coli
and is derived from horse blood. The Elanco
product has claims against
E. coli
and
C. perfringens
and is derived from horse blood. The Merck product is an intranasal
vaccine that has claims only against coronavirus. The Zoetis product is an oral vaccine that has claims against coronavirus and
rotavirus but not
E. coli
. We estimate that the total market for these calf-level products (including sales of our product)
is approximately $17 million. With the anticipated additional claim for our new product (
First Defense
®
Tri-Shield™
)
against rotavirus, we intend to also compete against the dam-level vaccine products that are given to the mother cow to improve
the quality of the colostrum that she produces. Those products are sold by Elanco (Scour Bos™), Merck (Guardian
®
)
and Zoetis (ScourGuard
®
). We estimate that the total market for these dam-level products is approximately two times larger
than the market for the calf-level products.
Other
competition for resources that dairy producers allocate to their calf enterprises has been increased by the many new products
(principally feed supplements) that have been introduced to the calf market. Our sales are normally seasonal, with higher sales
expected during the first quarter. Warm and dry weather reduces the producer’s perception of the need for a disease preventative
product like
First Defense
®
. However, heat stress on calves caused by extremely hot summer weather can increase
the incidence of scours, just as harsher winter weather benefits our sales. Market conditions in the dairy and beef industries,
including milk pricing and prices for calves, weakened during 2016 in comparison to 2015. Milk prices have made modest improvements
in 2017 over the annual averages for 2016 and 2015. Despite the significant market volatility affecting both milk prices and feed
costs, we achieved a record level of product sales during the first quarter of 2017, surpassing the previous high level set during
the first quarter of 2015.
We
are selling new product applications of
First Defense
®
under the description
First Defense Technology
®
,
which is a unique whey protein concentrate that is processed utilizing our proprietary colostrum (first milk) protein purification
methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed product. Through our
First
Defense Technology
®
, we are selling concentrated whey proteins in different formats. During the first quarter of 2011,
we initiated sales of
First Defense Technology
®
in a bulk powder format (no capsule), which is delivered with a
scoop and mixed with colostrum for feeding to calves. We are working to achieve USDA claims for this product format during 2018.
During the fourth quarter of 2011, Milk Products, LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra
Start
®
150 Plus and certain similar private label products, which are colostrum replacers with
First Defense
Technology
®
Inside
. During the first quarter of 2012, we initiated a limited launch of a tube delivery format of our
First Defense Technology
®
in a gel solution. We are working to achieve USDA claims for this product format during
the first quarter of 2018, which will be sold as
First Defense
®
Dual Force™
.
During
the first quarter of 2008, we implemented a modest increase to the selling price of
First Defense
®
. We did not implement
another price increase until the third quarter of 2014. During 2015, we implemented an increase of approximately 10% to the selling
price of the gel tube format of
First Defense Technology
®
. During the middle of 2016, we implemented a price increase
of approximately 5% for
First Defense
®
and have not increased the selling price again since then. This strategy of
limiting our price increases recognizes that while selling a premium-priced product, we must be very efficient with our manufacturing
costs to maintain a healthy gross margin.
Sales
of products other than the
First Defense
®
product line decreased by 64% during the three-month period ended September
30, 2017 in comparison to the same period during 2016. Sales of these other products decreased by 18% during the nine-month period
ended September 30, 2017 in comparison to the same period during 2016. Sales of these other products decreased by 15% during the
twelve-month period ended September 30, 2017 in comparison to the same period during 2016. Sales of these other products aggregated
2% and 7% of our total product sales during the three-month periods ended September 30, 2017 and 2016, respectively, and 6% and
7% of our total product sales during the nine-month periods ended September 30, 2017 and 2016, respectively, and 6% and 7% of
our total product sales during the twelve-month periods ended September 30, 2017 and 2016, respectively. Our other product sales
are comprised of four different products. First, we began selling
Wipe Out
®
Dairy Wipes
(a Nisin-based wipe used
to prepare the teat area of a cow for milking) in 1999. During the first quarter of 2013, we initiated sales of Nisin-based wipes
for pets (Preva™ wipes) to Bayer HealthCare Animal Health of St. Joseph, Missouri for commercial sales to pet owners. Sales
of our Nisin-based topical wipes (our second leading source of animal health product sales prior to 2017) aggregated approximately
$350,000 during the year ended December 31, 2016. The topical wipes product line contributed very little to our profits and required
a significant portion of our production and storage capacity. Because we believed that the sales growth potential for this product
line was limited, we discontinued the production and sale of this product line during the first quarter of 2017. In connection
therewith, we realized a net gain of $7,000 during the first quarter of 2017. Second, we acquired several other private label
products in connection with our January 2016 acquisition of certain gel formulation technology. During the fourth quarter of 2016,
we shut down the manufacturing site in Minnesota that had been used to produce these products and moved these operations to our
Portland facility. We are realizing reduced labor and overhead expenses and benefiting from certain other operating efficiencies
as a result of this consolidation. In connection with the shutdown of the manufacturing site in Minnesota, we realized a net loss
of $27,000 during the fourth quarter of 2016. Third, we sell our own
California Mastitis Test (CMT)
which is used to detect
somatic cell counts in milk. Fourth, we make and sell bulk reagents for Isolate™ (formerly known as Crypto-Scan
®
),
which is a drinking water test that is sold by our distributor in Europe.
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):
|
|
For the Three-Month Periods Ended September 30,
|
|
|
Decrease
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
936
|
|
|
$
|
1,205
|
|
|
$
|
(269)
|
|
|
|
(22)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Product sales
|
|
|
47
|
%
|
|
|
61
|
%
|
|
|
(15)
|
%
|
|
|
(24)
|
%
|
|
|
For the Nine-Month Periods
Ended September 30,
|
|
|
Decrease
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
4,009
|
|
|
$
|
4,202
|
|
|
$
|
(193)
|
|
|
|
(5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Product sales
|
|
|
55
|
%
|
|
|
57
|
%
|
|
|
(2)
|
%
|
|
|
(4
|
)%
|
|
|
For the Twelve-Month Periods Ended September 30,
|
|
|
Decrease
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
5,228
|
|
|
$
|
5,860
|
|
|
$
|
(632)
|
|
|
|
(11)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Product sales
|
|
|
55
|
%
|
|
|
58
|
%
|
|
|
(3)
|
%
|
|
|
(6)
|
%
|
The
gross margin as a percentage of product sales was 47% and 61% during the three-month periods ended September 30, 2017 and 2016,
respectively, and 55% and 57% during the nine-month periods ended September 30, 2017 and 2016, respectively, and 55% and 58% during
the twelve-month periods ended September 30, 2017 and 2016, respectively. The gross margin as a percentage of product sales was
57% and 61% during the years ended December 31, 2016 and 2015, respectively. This compares to gross margin percentages of 59%
and 51% during the years ended December 31, 2014 and 2013, respectively. Our current objective is to maintain the gross margin
percentage over 55% on an annual basis, and we have achieved this annual objective since 2014. A number of factors account for
the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter. The gross margin
on the
First Defense
®
product line is affected by biological yields from our raw material, which do vary over time.
Just as our customers’ cows respond differently to commercial dam-level vaccines depending on time of year and immune competency,
our source cows have similar biological variances in response to our proprietary vaccine. The value of our
First Defense
®
product line is that we compensate for that variability by standardizing each dose of finished product. This impacts our costs
of goods sold but insures that every calf is equally protected, which is something that dam-level commercial scour vaccines cannot
offer. Like most U.S. manufacturers, we have also been experiencing increases in the cost of raw materials that we purchase. Our
costs have increased due to increased labor costs and other expenses associated with our efforts to sustain compliance with current
Good Manufacturing Practice (cGMP) regulations in our production processes. During the third quarter of 2017, we experienced a
significant drop in gross margin dollars ($269,000) and a decrease in the gross margin as a percent of sales to 47% from 61% during
the third quarter of 2016, due to a cost increase that was largely caused by a drop in the yields from our production process
and a scheduled reduction in production output. Over time, we have been able to minimize the impact of cost increases by implementing
yield improvements. We anticipate seeing a return to better yields during the fourth quarter of 2017 based on process improvements
that we are implementing.
ImmuCell Corporation
Sales
and Marketing Expenses
Sales
and marketing expenses decreased by approximately 8%, or $37,000, to $447,000 during the three-month period ended September 30,
2017 in comparison to $484,000 during the same period in 2016, amounting to 22% and 25% of product sales during the three-month
periods ended September 30, 2017 and 2016, respectively. Sales and marketing expenses decreased by less than 1% to $1,362,000
during the nine-month period ended September 30, 2017 in comparison to $1,365,000 during the same period in 2016, amounting to
19% of product sales during the nine-month periods ended September 30, 2017 and 2016. We continue to leverage the efforts of our
small sales force by using animal health distributors. These expenses have increased due principally to a strategic decision to
invest more to support sales of the
First Defense
®
product line. Our current budgetary objective in 2017 is to invest
less than 20% of product sales in sales and marketing expenses on an annual basis. With the new equity raised during the third
quarter of 2017, we increased our sales team by one new employee in advance of the anticipated product launch of
First Defense
®
Tri-Shield™
,
which could cause us to exceed our budgetary expense ratio temporarily.
Product
Development Expenses
Product
development expenses increased by 90%, or $278,000, to $586,000 during the three-month period ended September 30, 2017 in comparison
to $308,000 during the same period in 2016. Product development expenses aggregated 29% and 16% of product sales during the third
quarters of 2017 and 2016, respectively. Product development expenses increased by 32%, or $322,000, to $1,312,000 during the
nine-month period ended September 30, 2017 in comparison to $991,000 during the same period in 2016. Product development expenses
aggregated 18% and 14% of product sales during the nine-month periods ended September 30, 2017 and 2016, respectively. The majority
of our product development spending is focused on the development of our Nisin-based treatment for subclinical mastitis in lactating
dairy cows. During the 17.75-year period that began on January 1, 2000 (the year we began this product development initiative)
and ended on September 30, 2017, we have invested the aggregate of approximately $13,265,000 in this development. This estimated
expense allocation reflects only direct expenditures and includes no allocation of product development or administrative overhead
expenses. Approximately $2,891,000 of this investment was offset by related product licensing revenues and grant income, most
of which was earned from 2001 to 2007. Some of the increase in product development expenses during the third quarter of 2017 consisted
of final development costs related to the initial production batches of
First Defense
®
Tri-Shield™
.
During
2000, we acquired an exclusive license from Nutrition 21, Inc. (formerly Applied Microbiology Inc. or AMBI) to develop and market
Nisin-based products for animal health applications, which allowed us to initiate the development of our novel treatment for subclinical
mastitis. In 2004, we paid Nutrition 21 approximately $965,000 to buy out this royalty and milestone-based license to Nisin, thereby
acquiring control of the animal health applications of Nisin. Nisin, is an antibacterial peptide known to be effective against
most Gram-positive and some Gram-negative bacteria. In our pivotal effectiveness study, statistically significant cure rates were
associated with a statistically significant reduction in milk somatic cell count, which is an important measure of milk quality.
Nisin is a well characterized substance, having been used in food preservation applications for over 50 years. Food-grade Nisin,
however, cannot be used in pharmaceutical applications because of its low purity. Our Nisin technology includes processing and
purification methods to achieve pharmaceutical-grade purity.
In
2004, we entered into a product development and marketing agreement with Pfizer Animal Health (now known as Zoetis) covering this
product. That company elected to terminate the agreement in 2007. We believe that this decision was not based on any unanticipated
efficacy or regulatory issues. Rather, we believe the decision was primarily driven by a marketing concern relating to their fear
that the milk from treated cows could interfere with the manufacture of certain cultured dairy products. Due to the zero milk
discard feature, there is a risk that Nisin from the milk of treated cows could interfere with the manufacture of certain (but
not all) commercial cultured dairy products, such as some kinds of cheese and yogurt, if a process tank contains a high enough
percentage of milk from treated cows. The impact of this potential interference ranges from a delay in the manufacturing process,
which does happen at times for other reasons, to the less likely stopping of a cheese starter culture. Milk from cows that have
been treated with our product that is sold exclusively for fluid milk products presents no such risk. We worked with scientists
and mastitis experts to conduct a formal risk assessment to quantify the impact that milk from treated cows may have on cultured
dairy products. This study concluded that the dilution of milk from treated cows through comingling with milk from untreated cows
during normal milk hauling and storage practices reduces the risk of interference with commercial dairy cultures to a negligible
level when the product is used in accordance with the product label. We do not believe that such a premium-priced product will
be used as part of a whole herd (“blitz”) treatment protocol, which reduces the risk of cheese interference. We do
not see this as a significant problem as modern “precision dairying” practices support reducing the indiscriminate
use of drug treatments.
Commercial
introduction of our novel mastitis treatment in the United States is subject to approval of our New Animal Drug Application (NADA)
by the Food and Drug Administration (FDA), which approval cannot be assured. Foreign regulatory approvals would be required for
sales in key markets outside of the United States, which would involve some similar and some different requirements. The NADA
is comprised of five principal Technical Sections and one administrative submission that are subject to the FDA’s phased
review. By statute, each Technical Section submission is generally subject to a six-month review cycle by the FDA. Each Technical
Section can be reviewed and approved separately. Upon review and assessment by the FDA that all requirements for a Technical Section
have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the
FDA is as follows:
1)
Environmental Impact: During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter
from the FDA.
ImmuCell Corporation
2)
Target Animal Safety: During the second quarter of 2012, we received the Target Animal Safety Technical Section Complete Letter
from the FDA.
3)
Effectiveness: During the third quarter of 2012, we received the Effectiveness Technical Section Complete Letter from the FDA.
The draft product label carries claims for the treatment of subclinical mastitis associated with
Streptococcus agalactiae
,
Streptococcus dysgalactiae
,
Streptococcus uberis
, and coagulase-negative staphylococci in lactating dairy cattle.
4)
Human Food Safety (HFS): The HFS Technical Section submission was made during the fourth quarter of 2010. This Technical Section
includes several subsections such as: a) toxicology, b) total metabolism, c) effects of drug residues in food on human intestinal
microbiology, d) effects on bacteria of human health concern (antimicrobial resistance) and e) pivotal residue chemistry. During
the second quarter of 2011, we announced that the FDA had accepted the subsections described above and granted a zero milk discard
period and a zero meat withhold period during and after treatment for our product. Before we can obtain this Technical Section
Complete Letter, we must transfer our analytical method that measures Nisin residues in milk to a government laboratory. This
work is complete, and we anticipate that the HFS Technical Section will be submitted to the FDA during the fourth quarter of 2017.
This submission is subject to a six-month review by the FDA. As a result, we anticipate making a public disclosure about the response
from the FDA during the second quarter of 2018.
5)
Chemistry, Manufacturing and Controls (CMC): Obtaining FDA approval of the CMC Technical Section defines the critical path to
FDA approval and to initial commercial sales. During the third quarter of 2014, we completed an investment in facility modifications
and processing equipment necessary to produce the Drug Substance (the Active Pharmaceutical Ingredient, which is our pharmaceutical-grade
Nisin) at small-scale. This small-scale facility has been used to i) expand our process knowledge and controls, ii) establish
operating ranges for critical process parameters, iii) optimize process yields and iv) verify the cost of production. We believe
these efforts will reduce risk as we invest in the commercial-scale production facility.
Implementing
Nisin production at commercial scale is the most critical action in front of us on our path to regulatory approval. We previously
entered into an agreement with a multi-national pharmaceutical ingredient manufacturer for our commercial-scale supplies of Nisin.
However, we determined in 2014 that that agreement did not offer us the most advantageous supply arrangement in terms of either
cost or long-term dependability. We presented this product development opportunity to a variety of large and small animal health
companies. While such a corporate partnership could have provided access to a much larger sales and marketing team and allowed
us to avoid the large investment in a commercial-scale production facility, the partner would have taken a large share of the
gross margin from all future product sales. We are encouraged by the regulatory and marketing feedback that we received from prospective
partners, following their due diligence, that our novel mastitis treatment can achieve FDA approval and have a significant, positive
impact on the dairy industry. We conducted a market research study that estimated that the market potential for this product could
grow from approximately $5.8 million to approximately $36.1 million over the first five years after product launch. With a measured
approach to expanding our customer-facing staff, it is our near-term objective to double our current product sales through continued
growth in sales of the
First Defense
®
product line (including
First Defense
®
Tri-Shield™
) and
a successful launch of our novel mastitis treatment as soon as possible. As market penetration is achieved and additional resources
are dedicated to sales, marketing and technical services, our longer-term goal is to triple our current sales as soon as possible
during the five-year period after the market launch of our new mastitis product. Our financial objective is to maintain our gross
margin (before related depreciation expenses) as a percentage of total sales at or above 50%, as we increase the amount of cash
we earn from product sales.
During
the fourth quarter of 2015, we acquired land nearby to our existing Portland facility for the construction of a new manufacturing
facility that would enable us to generate our own Nisin supply at commercial scale. During the third quarter of 2016, we commenced
construction of a facility with production capacity to meet approximately $12.6 million in annual sales. The estimated total cost
of the Nisin facility is approximately $20.8 million. Our facility is designed to have enough room for a second fermentation and
recovery portion of the production line to be purchased and installed at the cost of approximately $7 million to effectively double
production output after commercial acceptance of the product is demonstrated. If annual sales of our mastitis product exceed approximately
$25 million, we would evaluate all Nisin supply options, factoring in efficiencies and yield improvements. Building an additional
Nisin production facility to meet our needs at that time may be the most cost-effective solution. We are substantially complete
with construction of the building. As anticipated, we began equipment installation during the third quarter of 2017 and expect
installation and qualification to be complete by year end. Three validation batches must be produced at commercial scale, a detailed
CMC Technical Section must be prepared and submitted to the FDA and successful FDA site inspections must be achieved. We anticipate
making the first submission of the CMC Technical Section to the FDA with three months of product stability data from the three
validation batches during the middle of 2018. We anticipate that two submissions will be required. Each submission is subject
to a six-month review by the FDA. After approval of this final (being “final” because we expect to achieve earlier
approval of the HFS Technical Section) Technical Section, there is a 60-day administrative review before product license approval
could be issued. Adherence to this anticipated timeline could lead to potential approval by the end of 2019 with subsequent market
launch.
ImmuCell Corporation
We
are party to a long-term, exclusive supply agreement with Plas-Pak Industries, Inc. (now owned by Nordson Corporation) of Norwich,
Connecticut covering the proprietary syringe that was developed specifically for treating cows with our mastitis product. These
syringes were used for all pivotal studies. During the third quarter of 2017, this agreement was extended to January 1, 2024.
Since
2010, we have been party to a long-term, exclusive Contract Manufacture Agreement with Norbrook Laboratories Limited of Newry,
Northern Ireland, an FDA-approved Drug Product (sterile-filled and packaged syringes) manufacturer, covering the formulation and
sterile-filling of the Drug Substance (the active pharmaceutical ingredient) into Drug Product. Norbrook provided these services
for clinical material used in all pivotal studies. During the fourth quarter of 2015, we entered into a revised agreement with
Norbrook to support the final development and commercial-scale production of our mastitis product after FDA approval.
Our second most important product development
program (in terms of dollars invested and, we believe, potential market impact) is an effort to prevent scours in calves caused
by rotavirus. In connection with that effort, during the second quarter of 2009 we entered into an exclusive license with the
Baylor College of Medicine covering the underlying rotavirus vaccine technology used to generate the specific antibodies. This
perpetual license (if not terminated for cause) is subject to a $150,000 milestone payment due within 90 days of USDA approval
and ongoing royalty payments. Results from pilot studies completed during the first quarter of 2009 justified continued product
development. We initiated a second pivotal effectiveness study at Cornell University College of Veterinary Medicine during the
second quarter of 2014 and announced positive effectiveness results from this pivotal study during the first quarter of 2015.
During the third quarter of 2015, we obtained concurrence from the USDA that we have been granted disease claims against rotavirus
for our product. We are now working to complete the other laboratory and manufacturing objectives required for product license
approval. This could position us to achieve product licensure and market launch of this product,
First Defense
®
Tri-Shield™
, during the fourth quarter of 2017. This would be the first calf-level, passive antibody product on the
market with USDA-approved disease claims providing immediate immunity against each of the three leading causes of calf scours
(
E. coli
, coronavirus and rotavirus). The new product combines the
E. coli
and coronavirus antibodies contained
in our legacy product with a guaranteed minimum level of rotavirus antibody content in one preventative dose. This unique breadth
of claims further differentiates our product from competitive products on the market that have claims against both coronavirus
and rotavirus or just
E. coli
or just coronavirus, but not all three. This new product will be available in a gel tube
delivery format. Historically
, the primary tool to help combat scours has been to vaccinate
the cow with a dam-level scours vaccine.
With this expanded claim set, we can compete more effectively against these dam-level
vaccine products that are given to the cow to improve the quality of her colostrum (first milk) that is fed to the newborn. It
is generally believed that
only 80% of animals respond to a vaccine, which could leave about
20% of calves unprotected. Additionally, our research suggests that treatment protocols for dam-level scours vaccine programs
are not always followed, leaving even more calves compromised. Our
new marketing campaign, ‘
Beyond Vaccination™
’,
suggests that by delivering immediate immunity directly to the calf via
First Defense
®
Tri-Shield™
,
producers can save needles and labor for vaccines that are more critical to cow health. R
eliance
on a dam-level scours vaccine requires that money be spent before it is known whether the cow is carrying a viable, valued calf.
With
First Defense
®
Tri-Shield
™
,
every calf is equally protected and that investment can be targeted to the calves that are most critical to the operation. This,
in turn, can free up space in the cow’s vaccination schedule to optimize her immune response to vaccines that are critical
to her health.
We intend to continue selling the bivalent formats of
First Defense
®
as options for
customers after the launch of
First Defense
®
Tri-Shield™
.
The
balance of our product development efforts have been primarily focused on other improvements, extensions or additions to our
First
Defense
®
product line.
We are currently working to establish USDA claims
for our bivalent gel tube (expected during the first quarter of 2018) and bulk powder (expected during 2018) formulations of
First
Defense Technology
®
. We are also investing in additional studies comparing
First Defense
®
to the competition.
At the same time, we are working to expand our product development pipeline of bacteriocins that can be used as alternatives to
traditional antibiotics. During the second quarter of 2015, we entered into an exclusive option agreement to license new bacteriocin
technology from the University of Massachusetts Amherst. During the fourth quarter of 2017, we extended this exclusive option
agreement through March 2019. This technology focuses on bacteriocins having activity against Gram-negative infections for use
in combating mastitis in dairy cattle. Subject to the availability of needed financial and other resources, we intend to begin
new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring,
on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.
ImmuCell
Corporation
Administrative
Expenses
Administrative
expenses increased by approximately 6%, or $23,000, to $386,000 during the three-month period ended September 30, 2017 in comparison
to $363,000 during the same period in 2016. Administrative expenses increased by approximately 8%, or $89,000, to $1,165,000 during
the nine-month period ended September 30, 2017 in comparison to $1,076,000 during the same period in 2016. 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. During 2016, we engaged a new accounting firm for review, audit and tax services. Prior to
2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment
in a more actively managed investor relations program while continuing to provide full disclosure of the status of our business
and financial condition in three quarterly reports and one annual report each year, as well as in Current Reports on Form 8-K
when legally required or deemed appropriate by management. Additional information about us 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.
Net
Operating (Loss) Income
Our
net operating (loss) during the three-month period ended September 30, 2017 of ($482,000) was in contrast to net operating income
of $50,000 during the same period in 2016. Our net operating income during the nine-month period ended September 30, 2017 of $170,000
was $600,000 less than our net operating income of $771,000 during the same period in 2016. The decreases in both periods were
driven primarily by an increase in cost of goods sold (on similar sales volume) and an increase in product development expenses
incurred, as we invest to gain regulatory approval to launch two new products.
Other
expenses, net
Interest
expense (including amortization of debt issuance costs of approximately $4,000 and $3,000 during the three-month periods ended
September 30, 2017 and 2016, respectively) increased by approximately 28%, or $12,000, to $53,000 during the three-month period
ended September 30, 2017, in comparison to $41,000 during the same period in 2016. Interest expense (including amortization of
debt issuance costs of approximately $11,000 and $6,000 during the nine-month periods ended September 30, 2017 and 2016, respectively)
increased by approximately 11%, or $13,000, to $137,000 during the nine-month period ended September 30, 2017, in comparison to
$123,000 during the same period in 2016. Interest income decreased by approximately 82%, or $14,000, to $3,000 during the three-month
period ended September 30, 2017, in comparison to $17,000 during the same period in 2016. Interest income decreased by approximately
65%, or $28,000, to $15,000 during the nine-month period ended September 30, 2017, in comparison to $44,000 during the same period
in 2016. Less interest income was earned during the 2017 periods because we had less cash and investments on hand and because
these funds were held in more liquid investments (that earn a lower rate of interest) during the current periods in order to fund
our capital expenditure requirements. Other expenses, net, aggregated $49,000 and $27,000 during the three-month periods ended
September 30, 2017 and 2016, respectively. Other expenses, net, aggregated $116,000 and $81,000 during the nine-month periods
ended September 30, 2017 and 2016, respectively.
(Loss)
Income Before Income Taxes and Net (Loss) Income
Our
(loss) before income taxes of ($532,000) during the three-month period ended September 30, 2017 was $556,000 less than our income
before income taxes of $24,000 during the same period in 2016. Our income before income taxes of $55,000 during the nine-month
period ended September 30, 2017 was $635,000 less than our income before income taxes of $690,000 during the same period in 2016.
We recorded an income tax (benefit) of (36%) and (46%) of the (loss) income before income taxes during the three-month periods
ended September 30, 2017 and 2016, respectively. We recorded income tax expense of 51% and 31% of the income before income taxes
during the nine-month periods ended September 30, 2017 and 2016, respectively. Our net (loss) of ($339,000), or ($0.07) per share,
during the three-month period ended September 30, 2017 contrasts to net income of $35,000, or $0.01 per diluted share, during
the three-month period ended September 30, 2016. Our net income of $27,000, or $0.01 per diluted share during the nine-month period
ended September 30, 2017 compares to net income of $478,000, or $0.11 per diluted share, during the nine-month period ended September
30, 2016. The net loss for the third quarter (driven primarily by higher costs of goods sold and higher product development expenses)
reduced our profitability to just over breakeven for the nine-month period ended September 30, 2017.
During
the three-month period ended September 30, 2017, our net (loss) was ($339,000) and depreciation and amortization expenses aggregated
$215,000. During the three-month period ended September 30, 2016, our net income was $35,000 and depreciation and amortization
expenses aggregated $203,000. During the nine-month period ended September 30, 2017, our net income was $27,000 and depreciation
and amortization expenses aggregated $653,000. During the nine-month period ended September 30, 2016, our net income was $478,000
and depreciation and amortization expenses aggregated $591,000. During the twelve-month period ended September 30, 2017, our net
income was $57,000 and depreciation and amortization expenses aggregated $873,000. During the twelve-month period ended September
30, 2016, our net income was $767,000 and depreciation and amortization expenses aggregated $739,000. Net cash (used for) provided
by operating activities (which does not include investing or financing activities) was ($251,000) and ($16,000) during the three-month
periods ended September 30, 2017 and 2016, respectively, and $845,000 and $150,000 during the nine-month periods ended September
30, 2017 and 2016, respectively, and $473,000 and $980,000 during the twelve-month periods ended September 30, 2017 and 2016,
respectively.
ImmuCell
Corporation
Critical
Accounting Policies
The
financial statements are presented on the basis of accounting principles that are generally accepted in the United States. All
professional accounting standards that were effective and applicable to us as of September 30, 2017 have been taken into consideration
in preparing the financial statements. The preparation of financial statements requires that we make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to revenue recognition, income taxes, contingencies and
the useful lives and carrying values of intangible and long lived assets. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We have chosen to highlight certain policies that we
consider critical to the operations of our business and understanding our financial statements.
We
sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met.
These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii)
the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time
of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery
to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because
our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced
an immaterial amount of product returns.
Inventory
includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method,
or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable
costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and
manufacturing overhead.