Notes to Unaudited Condensed Financial
Statements
ImmuCell Corporation (the “Company”,
“we”, “us”, “our”) was originally incorporated in Maine in 1982 and reincorporated in Delaware
in 1987, in conjunction with its initial public offering of common stock. We are 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. We market products
that provide Immediate Immunity™ to newborn dairy and beef cattle. We are developing improved formulations of the
First Defense® product line for the prevention of calf scours and are in the late stages of developing Re-Tain™,
a treatment for subclinical mastitis. 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 and third-party
providers of critical goods and services, 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.
Based on our best estimates and projections, we believe that we have sufficient capital resources to continue operations for at
least twelve months from the date of this filing.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis of Presentation
|
We have prepared the accompanying unaudited
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 the disclosures are adequate to ensure that the information presented is not misleading.
(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 $1,854,261 and $2,268,737 as of September 30, 2019 and December
31, 2018, respectively. Short-term investments are classified as held to maturity and are comprised 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.
We account for investments in marketable securities in accordance with Codification Topic 320, Investments — Debt and
Equity Securities. See Note 3.
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 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. Accounts receivable are written off when deemed uncollectible. The amount
of accounts receivable written off during all periods reported was immaterial. Recoveries of accounts receivable previously written
off are recorded as income when received. As of September 30, 2019 and December 31, 2018, we determined that no allowance for bad
debt was necessary. See Note 4.
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. At each monthly balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. Inventories
that we consider excess or obsolete are reserved. Once inventory is written down and a new cost basis is established, it is not
written back up if demand increases. We believe that supplies and raw materials for the production of our products are available
from more than one vendor. Our policy is to maintain more than one source of supply for the components used in our products when
practicable. See Note 5.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
(e)
|
Property, Plant and Equipment
|
We depreciate property, plant and equipment
on the straight-line method by charges to operations and costs of goods sold 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 have constructed
to produce the Nisin Drug Substance for Re-Tain™ is being depreciated over 39 years from when a certificate of occupancy
was issued during the fourth quarter of 2017. We began depreciating the equipment for our Drug Substance facility when it was placed
in service during the third quarter of 2018. Approximately 89% of these assets are being depreciated over ten years. Significant
repairs to fixed assets that benefit more than a current period are capitalized and depreciated over their useful lives. Insignificant
repairs are expensed when incurred. See Note 7.
(f)
|
Intangible Assets and Goodwill
|
We amortize intangible assets on the straight-line
method by charges to costs of goods sold in amounts estimated to expense the cost of the assets until 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 31st) 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. Judgment 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 properly stated in the accompanying financial statements, changes in strategy or market conditions could significantly
impact these judgments and require an adjustment to the recorded balance. No goodwill impairments were recorded during the nine-month
periods ended September 30, 2019 or 2018. 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. As of September 30, 2019 and December 31, 2018, the carrying amounts of cash
and cash equivalents, short-term investments, accounts receivable, inventory, other assets, accounts payable, deferred revenue
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 based on similar instruments with similar maturities.
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.
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the level of an asset or liability 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 judgment, and considers factors
specific to the investment. From time to time, 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.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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 periods ended September 30, 2019 and 2018, there were no transfers between levels.
As of September 30, 2019 and December 31, 2018, 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, 2019 our bank certificates of deposit were classified as Level
2 and were measured by significant other observable inputs. As of September 30, 2019 and December 31, 2018, 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, 2019 or December 31, 2018.
|
|
As of September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
2,354,561
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,354,561
|
|
Bank certificates of deposit
|
|
|
—
|
|
|
$
|
7,199,947
|
|
|
|
—
|
|
|
$
|
7,199,947
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
—
|
|
|
$
|
86,973
|
|
|
|
—
|
|
|
$
|
86,973
|
|
|
|
As of December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
2,521,050
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,521,050
|
|
Interest rate swaps
|
|
|
—
|
|
|
$
|
40,209
|
|
|
|
—
|
|
|
$
|
40,209
|
|
(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 for use 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. No impairment was recognized during the nine-month
periods ended September 30, 2019 or 2018.
(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 when deemed necessary, 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:
|
|
During the Three-Month
Periods Ended September 30,
|
|
|
During the Nine-Month
Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Company A
|
|
|
39
|
%
|
|
|
50
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
Company B
|
|
|
29
|
%
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
22
|
%
|
Company C
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
*
|
Amount is less than 10%
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Trade 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, 2019
|
|
|
As of
December 31, 2018
|
|
Company A
|
|
|
38
|
%
|
|
|
35
|
%
|
Company B
|
|
|
26
|
%
|
|
|
36
|
%
|
Company C
|
|
|
*
|
|
|
|
15
|
%
|
*
|
Amount is less than 10%.
|
(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.
For periods beginning on or after January
1, 2018, we recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
ASC 606 is a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. The
core principle is that we recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods
or services to customers when a customer obtains control of promised goods or services in an amount that reflects the consideration
we expect to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers. We conduct our business with customers
through valid purchase orders or sales orders which are considered contracts and are not interdependent on one another. A performance
obligation is a promise in a contract to transfer a distinct product to the customer. The transaction price is the amount of consideration
we expect to receive under the arrangement. Revenue is measured based on consideration specified in a contract with a customer.
The transaction price of a contract is allocated to each distinct performance obligation and recognized when or as the customer
receives the benefit of the performance obligation. Product transaction prices on a purchase or sale order are discrete and stand-alone.
We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer
when product delivery occurs. Consideration is typically paid approximately 30 days from the time control is transferred. Shipping
and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for
as a fulfillment cost in costs of goods sold. We have enhanced disclosures related to disaggregation of revenue sources and accounting
policies prospectively as a result of adopting these standards. 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. See Note 13.
In 2018, we adopted ASC 340-40, Accounting
for Other Assets and Deferred Costs, which requires sales commissions and other third-party acquisition costs resulting directly
from securing contracts with customers to be recognized as an asset when incurred and to be expensed over the associated contract
term or estimated customer life depending on the nature of the underlying contract. We do not incur costs in connection with product
sales to customers that are eligible for capitalization. Advertising costs are expensed when incurred, which is generally during
the month in which the advertisement is published. Advertising expenses amounted to $9,940 and $3,900 during the three-month periods
ended September 30, 2019 and 2018, respectively, and $50,563 and $26,895 during nine-month periods ended September 30, 2019 and
2018, 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. Adoption of the amended provisions of ASC 340-40 did not have a material impact on our financial statements.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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. During the second quarter of 2018, we assessed our historical and near-term
future profitability and decided to record $563,252 in non-cash income tax expense to create a full valuation allowance against
our net deferred tax assets (which consist largely of net operating loss carryforwards and federal and state tax credits). At that
time, we had incurred a net loss for five consecutive quarters, had not been profitable on a year-to-date basis since the nine-month
period ended September 30, 2017 and projected additional net losses for some period going forward before returning to profitability.
We consider future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance at each
quarter end. If we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded
amount over a reasonably short period of time, a reduction of the valuation allowance would increase income in the period such
determination was made. Likewise, if we determine that we would not be able to realize all or part of our net deferred tax asset
in the future, an increase to the valuation allowance would be charged to income in the period such determination was made.
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. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before
2015. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as
of September 30, 2019 or December 31, 2018. Although we believe that our estimates are reasonable, actual results could differ
from these estimates. See Note 16.
(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 $68,653 and $89,706 during the three-month periods ended September 30, 2019 and 2018,
respectively, and $221,569 and $257,697 during the nine-month periods ended September 30, 2019 and 2018, respectively.
(o)
|
Net Loss Per Common Share
|
Net loss 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 are 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.
During the three-month periods ended September 30, 2019 and 2018, the weighted average number of shares outstanding was 7,209,595
and 5,483,880, respectively, and at the end of such periods there were 370,000 and 489,000 outstanding stock options, respectively,
that were not included in the calculations because the effect would have been anti-dilutive. During the nine-month periods ended
September 30, 2019 and 2018, the weighted average number of shares outstanding was 6,687,037 and 5,481,095, respectively, and at
the end of such periods there were 370,000 and 489,000 outstanding stock options, respectively, that were not included in the calculations
because the effect would have been anti-dilutive.
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, valuation of deferred tax 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 February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance,
lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than
12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition
in the income statement. This ASU and its amendments became effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early adoption was permitted. We elected to adopt this ASU effective January 1, 2019.
In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10
provide more clarification in regards to the application and requirements of Topic 842. In July 2018, the FASB issued ASU
2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard
prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical
expedient that will allow us to elect, by class of underlying asset, to not separate non-lease and lease components in certain
circumstances and instead to account for those components as a single item. Based on our current lease agreements and a review
of all of our material vendor relationships for potential embedded lease obligations, we have concluded that we are not subject
to material lease obligations, and the adoption of Topic 842 did not have a material impact on our financial statements
as of January 1, 2019. The lease has a commencement date of November 15, 2019 and will be accounted for in accordance with ASU
2018-11 beginning during the fourth quarter of 2019.
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. Topic 718 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 adopted this guidance during
the three-month period ended March 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance is intended
to more closely align hedge accounting with entities’ hedging strategies, simplify the application of hedge accounting and
increase the transparency of hedging programs. Topic 815 is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, with early adoption permitted. For cash flow and net investment hedges existing
at the date of adoption, Topic 815 must be applied through a cumulative-effect adjustment. The amended presentation and
disclosure guidance is required only prospectively. The adoption of Topic 815 did not have a material impact on our financial
statements as of January 1, 2019.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,
which modifies the disclosure requirements of fair value measurements. Topic 820 is effective for fiscal years beginning after
December 15, 2019, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on
our financial statements.
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, 2019
|
|
|
As of
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
2,354,561
|
|
|
$
|
2,521,050
|
|
Short-term investments
|
|
|
7,199,947
|
|
|
|
—
|
|
Total
|
|
$
|
9,554,508
|
|
|
$
|
2,521,050
|
|
Held to maturity securities (certificates
of deposit) are carried at amortized cost. We are required by a bank debt covenant to maintain at least $2,000,000 of otherwise
unrestricted cash, cash equivalents and short-term investments.
4.
|
TRADE ACCOUNTS RECEIVABLE, net
|
Trade accounts receivable amounted to $886,705
and $932,298 as of September 30, 2019 and December 31, 2018, respectively. No allowance for bad debt and product returns was recorded
as of September 30, 2019 or December 31, 2018.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Inventory consisted of the following:
|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
Raw materials
|
|
$
|
686,740
|
|
|
$
|
338,991
|
|
Work-in-process
|
|
|
1,137,997
|
|
|
|
1,337,035
|
|
Finished goods
|
|
|
856,336
|
|
|
|
655,645
|
|
Total
|
|
$
|
2,681,073
|
|
|
$
|
2,331,671
|
|
6.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets
consisted of the following:
|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
Prepaid expenses
|
|
$
|
266,561
|
|
|
$
|
142,528
|
|
Other receivables(1)
|
|
|
235,712
|
|
|
|
493,289
|
|
Total
|
|
$
|
502,273
|
|
|
$
|
635,817
|
|
(1)
|
This amount includes $200,000 and $450,000 outstanding from a third party for the sale of assets as of September 30, 2019 and
December 31, 2018, respectively. See Note 14.
|
7.
|
PROPERTY, PLANT AND EQUIPMENT, net
|
Property, plant and equipment consisted
of the following:
|
|
Estimated Useful Lives
(in years)
|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
Buildings and improvements
|
|
10-39
|
|
$
|
17,078,829
|
|
|
$
|
17,018,316
|
|
Laboratory and manufacturing equipment
|
|
3-10
|
|
|
15,279,172
|
|
|
|
15,092,252
|
|
Office furniture and equipment
|
|
3-10
|
|
|
731,397
|
|
|
|
731,510
|
|
Construction in progress
|
|
n/a
|
|
|
477,400
|
|
|
|
91,067
|
|
Land
|
|
n/a
|
|
|
516,867
|
|
|
|
516,867
|
|
Property, plant and equipment, gross
|
|
|
|
|
34,083,665
|
|
|
|
33,450,012
|
|
Accumulated depreciation
|
|
|
|
|
(9,104,818
|
)
|
|
|
(7,422,463
|
)
|
Property, plant and equipment, net
|
|
|
|
$
|
24,978,847
|
|
|
$
|
26,027,549
|
|
As of September 30, 2019 and December 31,
2018, construction in progress consisted principally of down payments towards manufacturing equipment. During the three-month periods
ended September 30, 2019 and 2018, $4,770 and $11,824 of property, plant and equipment was disposed of, respectively. During the
nine-month periods ended September 30, 2019 and 2018, $11,164 and $18,554 of property, plant and equipment was disposed of, respectively.
Depreciation expense was $562,722 and $377,828 during the three-month periods ended September 30, 2019 and 2018, respectively,
and $1,691,049 and $938,416 during the nine-month periods ended September 30, 2019 and 2018, respectively.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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 (or paste) 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). This gel formulation had been sold as a feed product without disease claims since 2012. During the fourth quarter
of 2018, we achieved USDA approval of an improved bivalent gel formulation and began marketing this product as Dual-Force First
Defense®. We achieved Canadian approval of this product during the first quarter of 2019. We
were also interested in a gel formulation in anticipation of the launch of Tri-Shield First Defense®
(which was approved by the USDA during the fourth quarter of 2017) because the additional rotavirus
antibodies in this new product would not fit in a bolus full of E. coli and coronavirus antibodies. This purchase
also included certain other related private-label products. The total purchase price was approximately $532,000 (comprised of a
$368,000 up front payment, a $97,000 technology transfer payment and estimated royalties of $67,000). Actual royalties paid based
on sales from January 1, 2016 through December 31, 2018 were $36,000, and no further royalties are payable under this agreement.
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 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 intangible assets described in Note
8 are being amortized to costs of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization
expense was $4,776 during both of the three-month periods ended September 30, 2019 and 2018 and $14,328 during both of the nine-month
periods ended September 30, 2019, and 2018. The net value of these intangibles was $119,400 and $133,728 as of September 30, 2019
and December 31, 2018, respectively. A summary of intangible amortization expense estimated for the periods subsequent to September
30, 2019 is as follows:
Period
|
|
Amount
|
|
Three-month period ending December 31, 2019
|
|
$
|
4,776
|
|
Year ending December 31, 2020
|
|
|
19,104
|
|
Year ending December 31, 2021
|
|
|
19,104
|
|
Year ending December 31, 2022
|
|
|
19,104
|
|
Year ending December 31, 2023
|
|
|
19,104
|
|
After December 31, 2023
|
|
|
38,208
|
|
Total
|
|
$
|
119,400
|
|
Intangible assets as of September 30, 2019
consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(69,037
|
)
|
|
$
|
115,063
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(488
|
)
|
|
|
812
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(2,115
|
)
|
|
|
3,525
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(71,640
|
)
|
|
$
|
119,400
|
|
Intangible assets as of December 31, 2018
consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(55,230
|
)
|
|
$
|
128,870
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(390
|
)
|
|
|
910
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(1,692
|
)
|
|
|
3,948
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(57,312
|
)
|
|
$
|
133,728
|
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
10.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consisted
of the following:
|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
Accounts payable – trade
|
|
$
|
397,437
|
|
|
$
|
531,048
|
|
Accounts payable – capital
|
|
|
17,495
|
|
|
|
72,695
|
|
Accrued payroll
|
|
|
318,103
|
|
|
|
358,451
|
|
Accrued professional fees
|
|
|
68,656
|
|
|
|
93,050
|
|
Accrued other
|
|
|
135,685
|
|
|
|
165,416
|
|
Total
|
|
$
|
937,376
|
|
|
$
|
1,220,660
|
|
We have in place five credit facilities
and a line of credit with TD Bank N.A. These five credit facilities are secured by substantially all of our assets and are subject
to certain restrictions and financial covenants.
Proceeds from a $1,000,000 first mortgage
on our corporate headquarters and production and research facility at 56 Evergreen Drive in Portland (Loan #1) were received during
the third quarter of 2010 with monthly principal and interest payments due for ten years, calculated 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, 2019, $511,615
was outstanding under Loan #1.
Proceeds from a $2,500,000 second mortgage
on this corporate headquarters (Loan #2) were received during the third quarter of 2015 with monthly principal and interest payments
due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,550,000
will be due during the third quarter of 2025. As of September 30, 2019, $2,166,988 was outstanding under Loan #2.
During the first quarter of 2016, we entered
into two additional credit facilities (Loans #3 and #4) aggregating up to approximately $4,500,000. As a result of loan amendments
entered into during the first quarter of 2017, these two credit facilities were increased to up to $6,500,000. Loan #3 is a construction
loan of $3,940,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted at each monthly
payment date) plus a margin of 2.25% through September 2018, at which time the loan converted to a seven-year term loan facility
at the same variable interest rate (which was equal to 4.35% as of September 30, 2019) with monthly principal and interest payments
due based on a seven-year amortization schedule. As of September 30, 2019, $3,377,143 was outstanding under Loan #3. Loan #4 is
a construction loan of $2,560,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted
at each monthly payment date) plus a margin of 2.25% through March 2018, at which time the loan converted to a term loan facility
at the same variable interest rate (which was equal to 4.35% as of September 30, 2019) with monthly principal and interest payments
due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,408,000
will be due during the first quarter of 2027. As of September 30, 2019, $2,368,000 was outstanding under Loan #4.
Proceeds from a $340,000 first mortgage
on our 4,114 square foot warehouse and cold storage facility near our Re-Tain™ production facility (Loan #5) were
received during the first quarter of 2017. This note bears interest at a variable rate equal to the one-month LIBOR (adjusted at
each monthly payment date) plus a margin of 2.25% (which was equal to 4.45% as of September 30, 2019) with monthly principal and
interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately
$208,000 will be due during the first quarter of 2027. As of September 30, 2019, $312,550 was outstanding under Loan #5.
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 the debt principal repayment
date immediately preceding September 30, 2019, the variable rates on these two mortgage notes were 5.29% and 4.30%, 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 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 $2,678,603 as of September 30, 2019. 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.
|
|
During the Three-Month
Periods Ended September 30,
|
|
|
During the Nine-Month
Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(Receipts) payments required by interest rate swaps
|
|
$
|
(158
|
)
|
|
$
|
1,391
|
|
|
$
|
(3,214
|
)
|
|
$
|
9,499
|
|
Other comprehensive (loss) income, net of taxes
|
|
$
|
(22,318
|
)
|
|
$
|
14,330
|
|
|
$
|
(95,387
|
)
|
|
$
|
74,430
|
|
In connection with Loan #1 and Loan #2,
we incurred debt issue costs of $26,489 and $34,125, respectively. In connection with Loan #3, Loan #4 and Loan #5, we incurred
debt issue costs of $114,806. The 2017 amendments to Loan #3 and Loan #4 were accounted for as modifications. The amortization
of debt issue costs is being recorded as a component of interest expense, included with other expenses, net, and is being amortized
over the underlying terms of the respective credit facilities.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Debt proceeds received and principal repayments
made during the three-month periods ended September 30, 2019 and 2018 are reflected in the following table by year and by loan:
|
|
During the Three-Month Period Ended
September 30,
2019
|
|
|
During the Three-Month Period Ended
September 30,
2018
|
|
|
|
Proceeds from Debt Issue
|
|
|
Debt Principal Repayments
|
|
|
Proceeds from Debt Issue
|
|
|
Debt Principal Repayments
|
|
Loan #1
|
|
$
|
—
|
|
|
$
|
(17,227
|
)
|
|
$
|
—
|
|
|
$
|
(16,219
|
)
|
Loan #2
|
|
|
—
|
|
|
|
(22,260
|
)
|
|
|
—
|
|
|
|
(21,279
|
)
|
Loan #3
|
|
|
—
|
|
|
|
(140,714
|
)
|
|
$
|
426,499
|
|
|
|
—
|
|
Loan #4
|
|
|
—
|
|
|
|
(32,000
|
)
|
|
|
—
|
|
|
|
(32,000
|
)
|
Loan #5
|
|
|
—
|
|
|
|
(2,967
|
)
|
|
|
—
|
|
|
|
(2,640
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(215,168
|
)
|
|
$
|
426,499
|
|
|
$
|
(72,138
|
)
|
Debt proceeds received and principal repayments
made during the nine-month periods ended September 30, 2019 and 2018 are reflected in the following table by year and by loan:
|
|
During the Nine-Month Period Ended
September 30,
2019
|
|
|
During the Nine-Month Period Ended
September 30,
2018
|
|
|
|
Proceeds from Debt Issue
|
|
|
Debt Principal Repayments
|
|
|
Proceeds from Debt Issue
|
|
|
Debt Principal Repayments
|
|
Loan #1
|
|
$
|
—
|
|
|
$
|
(50,989
|
)
|
|
$
|
—
|
|
|
$
|
(47,995
|
)
|
Loan #2
|
|
|
—
|
|
|
|
(66,780
|
)
|
|
|
—
|
|
|
|
(63,837
|
)
|
Loan #3
|
|
|
—
|
|
|
|
(422,143
|
)
|
|
|
426,499
|
|
|
|
—
|
|
Loan #4
|
|
|
—
|
|
|
|
(96,000
|
)
|
|
|
267,141
|
|
|
|
(64,000
|
)
|
Loan #5
|
|
|
—
|
|
|
|
(8,217
|
)
|
|
|
—
|
|
|
|
(8,055
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(644,129
|
)
|
|
$
|
693,640
|
|
|
$
|
(183,887
|
)
|
Principal payments (net of debt issue costs)
due under bank loans outstanding as of September 30, 2019 (excluding our $500,000 line of credit) are reflected in the following
table by the year that payments are due:
|
|
Three-Months ending 12/31/2019
|
|
|
Year
ending 12/31/2020
|
|
|
Year
ending 12/31/2021
|
|
|
Year
ending 12/31/2022
|
|
|
Year
Ending 12/31/2023
|
|
|
After 12/31/2023
|
|
|
Total
|
|
Loan #1
|
|
$
|
17,919
|
|
|
$
|
493,696
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
511,615
|
|
Loan #2
|
|
|
23,217
|
|
|
|
94,005
|
|
|
|
98,538
|
|
|
|
103,077
|
|
|
|
107,769
|
|
|
|
1,740,382
|
|
|
|
2,166,988
|
|
Loan #3(1)
|
|
|
140,714
|
|
|
|
562,857
|
|
|
|
562,857
|
|
|
|
562,857
|
|
|
|
562,857
|
|
|
|
985,001
|
|
|
|
3,377,143
|
|
Loan #4(1)
|
|
|
32,000
|
|
|
|
128,000
|
|
|
|
128,000
|
|
|
|
128,000
|
|
|
|
128,000
|
|
|
|
1,824,000
|
|
|
|
2,368,000
|
|
Loan #5(2)
|
|
|
2,960
|
|
|
|
12,174
|
|
|
|
12,726
|
|
|
|
13,304
|
|
|
|
13,908
|
|
|
|
257,478
|
|
|
|
312,550
|
|
Subtotal
|
|
$
|
216,810
|
|
|
$
|
1,290,732
|
|
|
$
|
802,121
|
|
|
$
|
807,238
|
|
|
$
|
812,534
|
|
|
$
|
4,806,861
|
|
|
|
8,736,296
|
|
Debt Issue Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,856
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,634,440
|
|
(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 4.35%. The actual interest rate and principal payments will be different.
|
(2)
|
This note bears 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 4.45%. 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, is available as needed
and has been extended through May 31, 2020. There was no outstanding balance under this line of credit as of September 30, 2019.
As of December 31, 2018, $500,000 was outstanding under this line of credit, which was repaid during the first quarter of 2019.
Interest on borrowings against the line of credit is variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5%
per annum.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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 were 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 of our common stock within
the preceding 60 days leading up to a sale of securities) held by non-affiliates (non-insiders) of the Company. Having raised $10,000,000
in gross proceeds under the February 2016, July 2017 and December 2017 equity transactions, described below, no additional equity
securities can be issued under this registration statement.
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 in a public, registered sale 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 $1,034,000 (after deducting expenses
incurred in connection with the equity financing).
On December 21, 2017, we sold 417,807 shares
of common stock at a price to the public of $7.30 per share in an underwritten public offering pursuant to our effective shelf
registration statement on Form S-3, raising gross proceeds of approximately $3,050,000 and resulting in net proceeds to the Company
of approximately $2,734,000 (after deducting underwriting discounts and offering expenses incurred in connection with the equity
financing).
On November 20, 2018, we filed a registration
statement on Form S-3 (File No. 333-228479) with the SEC for the potential issuance of up to $20,000,000 in equity securities (subject
to certain limitations). This registration statement became effective on November 29, 2018. 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 of 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 March 29, 2019, we sold 1,636,364 shares
of common stock at a price to the public of $5.50 per share in an underwritten public offering pursuant to our effective shelf
registration statement on Form S-3, raising gross proceeds of approximately $9,000,000 and resulting in net proceeds to the Company
of approximately $8,303,000 (after deducting underwriting discounts and offering 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. At the June 14, 2018 Annual Meeting of
Stockholders, 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 11,000,000.
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.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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 no less than fair market value on the date of grant. 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 no less than fair market value on the date of grant. At that time, 300,000 shares of common stock were reserved for issuance
under the 2017 Plan and subsequently no additional shares have been reserved for 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, 2017
|
|
|
117,500
|
|
|
|
242,500
|
|
|
|
—
|
|
|
$
|
4.58
|
|
|
$
|
1,513,980
|
|
Grants
|
|
|
—
|
|
|
|
48,500
|
|
|
|
122,500
|
|
|
$
|
7.38
|
|
|
|
|
|
Terminations
|
|
|
—
|
|
|
|
(19,000
|
)
|
|
|
(11,000
|
)
|
|
$
|
6.63
|
|
|
|
|
|
Exercises
|
|
|
(105,000
|
)
|
|
|
(2,000
|
)
|
|
|
—
|
|
|
$
|
1.89
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
12,500
|
|
|
|
270,000
|
|
|
|
111,500
|
|
|
$
|
6.37
|
|
|
$
|
266,020
|
|
Grants
|
|
|
—
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
$
|
7.03
|
|
|
|
|
|
Terminations
|
|
|
—
|
|
|
|
(26,000
|
)
|
|
|
(3,000
|
)
|
|
$
|
6.05
|
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
|
(15,000
|
)
|
|
|
—
|
|
|
$
|
4.80
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
12,500
|
|
|
|
239,000
|
|
|
|
118,500
|
|
|
$
|
6.50
|
|
|
$
|
(344,100
|
)
|
Vested at September 30, 2019
|
|
|
12,500
|
|
|
|
65,500
|
|
|
|
—
|
|
|
$
|
5.74
|
|
|
$
|
(13,300
|
)
|
Vested and expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
12,500
|
|
|
|
239,000
|
|
|
|
118,500
|
|
|
$
|
6.50
|
|
|
$
|
(344,100
|
)
|
Reserved for future grants
|
|
|
—
|
|
|
|
17,000
|
|
|
|
181,500
|
|
|
|
|
|
|
|
|
|
(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.
|
The following table displays additional
information about the stock option plans described above:
|
|
Number of Shares
|
|
|
Weighted Average
Fair Value at Grant Date
|
|
|
Weighted Average Exercise Price
|
|
Non-vested stock options as of January 1, 2019
|
|
|
334,000
|
|
|
$
|
3.63
|
|
|
$
|
6.64
|
|
Non-vested stock options as of September 30, 2019
|
|
|
292,000
|
|
|
$
|
3.58
|
|
|
$
|
7.25
|
|
Stock options granted during the nine-month period ended September 30, 2019
|
|
|
20,000
|
|
|
$
|
3.31
|
|
|
$
|
7.03
|
|
Stock options that vested during the nine-month period ended September 30, 2019
|
|
|
34,000
|
|
|
$
|
4.09
|
|
|
$
|
6.87
|
|
Stock options that were forfeited during the nine-month period ended September 30, 2019
|
|
|
29,000
|
|
|
$
|
3.39
|
|
|
$
|
6.05
|
|
During the nine-month period ended September
30, 2019, one director exercised stock options covering 15,000 shares by the surrender of 10,731 shares of common stock with a
fair market value of $71,998 at the time of exercise and the payment of $2 in cash. During the nine-month period ended September
30, 2018, five employees exercised stock options covering 12,000 shares. Four thousand of these options were exercised for cash,
resulting in total proceeds of $15,490, and 8,000 of these options were exercised by the surrender of 3,469 shares of common stock
with a fair market value of $25,040 at the time of exercise and the payment of $10 in cash.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
The weighted average remaining life of
the options outstanding under the 2000 Plan, the 2010 Plan and the 2017 plan as of September 30, 2019 was approximately 6 years
and 1 month. The weighted average remaining life of the options exercisable under these plans as of September 30, 2019 was approximately
4 years and 3 months. The exercise prices of the options outstanding as of September 30, 2019 ranged from $3.15 to $8.90 per share.
The 20,000 stock options granted during the nine-month period ended September 30, 2019 had exercise prices between $6.50 and $7.50
per share. The 167,000 stock options granted during the nine-month period ended September 30, 2018 had exercise prices between
$6.81 and $8.43 per share. The aggregate intrinsic value of options exercised during the nine-month periods ended September 30,
2019 and 2018 approximated $28,641 and $46,790, respectively. The weighted-average grant date fair values of options granted during
the nine-month periods ended September 30, 2019 and 2018 were $3.31 and $4.21 per share, respectively. As of September 30, 2019,
total unrecognized stock-based compensation related to non-vested stock options aggregated $395,071, which will be recognized over
a weighted average period of 1 year and 4 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, 2019 and 2018:
|
|
During the Three-Month Periods Ended September 30,
|
|
|
During the Nine-Month Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
n/a
|
|
|
|
2.9
|
%
|
|
|
2.20
|
%
|
|
|
2.6
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
n/a
|
|
|
|
55
|
%
|
|
|
52
|
%
|
|
|
57
|
%
|
Expected life
|
|
|
n/a
|
|
|
|
6.5 years
|
|
|
|
5.3 years
|
|
|
|
5.4 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)
At various times over the years, our Board
of Directors has voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date, which is currently
September 19, 2022. Our Board of Directors also has voted to authorize amendments to increase the ownership threshold for determining
“Acquiring Person” status to 20%. During the second quarter of 2015, our Board of Directors also voted to authorize
an amendment to remove 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. Each
time that we made such amendments we entered into amendments to the Rights Agreement with the Rights Agent reflecting such extensions,
threshold increases or provision changes. No other changes have been made to the terms of the Rights or the Rights Agreement.
Generally, our products are promoted to
veterinarians and dairy and beef producers by our sales team and then sold through distributors. Our primary market is North America.
We do sell into select international regions and may expand this international reach in the future. There were no material changes
between the allocation and timing of revenue recognition during the year ended December 31, 2018 or the nine-month periods ended
September 30, 2019 or 2018 (under ASC 606). We do not have any contract assets such as contracts for which we have satisfied the
performance obligations but do not yet have the right to bill for or contract liabilities such as customer advances. All trade
receivables on our balance sheet are from contracts with customers. We incur no material costs to obtain contracts. As of March
31, 2018, we had a backlog of orders (representing purchase orders received from customers which were not fulfilled or paid) worth
approximately $1,245,000 for the First Defense® product line. Before June 30, 2018 we cleared all of this
backlog (approximately $901,000) that was related to orders for Dual-Force First Defense®.
The following table presents our product
sales disaggregated by geographic area:
|
|
During the Three-Month Periods Ended September 30,
|
|
|
During the Nine-Month Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
2,728,368
|
|
|
$
|
1,893,483
|
|
|
$
|
9,033,592
|
|
|
$
|
7,033,232
|
|
Other
|
|
|
242,128
|
|
|
|
260,267
|
|
|
|
1,057,385
|
|
|
|
1,016,249
|
|
Total product sales
|
|
$
|
2,970,496
|
|
|
$
|
2,153,750
|
|
|
$
|
10,090,977
|
|
|
$
|
8,049,481
|
|
The following table presents our product
sales disaggregated by major product category:
|
|
During the Three-Month Periods Ended September 30,
|
|
|
During the Nine-Month Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
First Defense® product line
|
|
$
|
2,873,732
|
|
|
$
|
2,118,655
|
|
|
$
|
9,687,181
|
|
|
$
|
7,783,006
|
|
Other animal health
|
|
|
96,764
|
|
|
|
35,095
|
|
|
|
270,195
|
|
|
|
266,475
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
133,601
|
|
|
|
—
|
|
Total product sales
|
|
$
|
2,970,496
|
|
|
$
|
2,153,750
|
|
|
$
|
10,090,977
|
|
|
$
|
8,049,481
|
|
14.
|
GAIN ON SALE OF ASSETS
|
During the third quarter of 2018, we sold
the assets underlying our water diagnostic product for $700,000. This sale of assets was recognized as an operating activity at
that time in accordance with ASC 610: Other Income and ASC 810: Consolidation. An upfront payment of $250,000 was
received upon closing, a second payment of $250,000 was received during the third quarter of 2019 and a third payment of $200,000
is due during the fourth quarter of 2019 (the latter payment receivable was recorded in prepaid expenses and other current assets
as of September 30, 2019).
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
Other expenses, net, consisted of the following:
|
|
During the Three-Month
Periods Ended September 30,
|
|
|
During the Nine-Month
Periods Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Interest expense
|
|
$
|
106,999
|
|
|
$
|
109,651
|
|
|
$
|
333,030
|
|
|
$
|
311,934
|
|
Interest income
|
|
|
(41,719
|
)
|
|
|
(3,237
|
)
|
|
|
(91,133
|
)
|
|
|
(10,270
|
)
|
Other expenses, net
|
|
$
|
65,280
|
|
|
$
|
106,414
|
|
|
$
|
241,897
|
|
|
$
|
301,664
|
|
Our income tax expense (benefit) aggregated
$7,439 and ($5,598) (amounting to 2% of our loss before income taxes) during the three-month periods ended September 30, 2019 and
2018. Our income tax expense aggregated $31,796 and $447,075 (amounting to 3% and 54% of our loss before income taxes, respectively)
during the nine-month periods ended September 30, 2019 and 2018, respectively. As of December 31, 2018, we had federal net operating
loss carryforwards of $11,839,349, of which $10,127,442 do not expire, and $1,711,907 which expire in 2034 through 2037 (if not
utilized before then), and state net operating loss carryforwards of $3,485,949 that expire in 2037 through 2038 (if not utilized
before then). Additionally, we had federal general business tax credit carryforwards of $407,023 that expire in 2027 through 2038
(if not utilized before then) and state tax credit carryforwards of $763,350 that expire in 2023 through 2038 (if not utilized
before then).
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. During the second quarter of 2018, we assessed our historical and near-term future profitability and recorded
approximately $563,000 in non-cash income tax expense to create a full valuation allowance against our net deferred tax assets
(which consist largely of net operating loss carryforwards and federal and state tax credits) based on applicable accounting standards
and practices. At that time, we had incurred a net loss for five consecutive quarters, had not been profitable on a year-to-date
basis since the nine-month period ended September 30, 2017 and projected additional net losses for some period going forward before
returning to profitability. Should future profitability be realized at an adequate level, we would be able to release this valuation
allowance (resulting in a non-cash income tax benefit) and realize these deferred tax assets before they expire. We will continue
to assess the need for the valuation allowance at each quarter and, in the event that actual results differ from these estimates,
or we adjust these estimates in future periods, we may need to adjust our valuation allowance. No subsequent adjustments were recorded
during the fifteen months ended September 30, 2019.
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. 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.
The Tax Cuts and Jobs Act was enacted on
December 22, 2017. This legislation made significant changes in the U.S. tax laws including a reduction in the corporate tax rates,
changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation
reduced the U.S. corporate tax rate from the prior rate of 34% to 21%. As a result of the enacted law, we were required to revalue
deferred tax assets and liabilities at the rate enacted in 2017. This revaluation resulted in a benefit of $71,000 to income tax
expense in continuing operations and a corresponding increase in the deferred tax assets during 2017. On December 22, 2017, the
SEC issued Staff Accounting Bulletin #118 that provides additional guidance and allows companies to apply a measurement period
of up to twelve months to account for the impacts of this legislation in their financial statements. The accounting for the transitional
impacts of this legislation is now complete.
17.
|
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, 2019. Since our incorporation, we have had no occasion to make any indemnification payment to any of our officers
or directors for any reason.
ImmuCell Corporation
Notes to Unaudited Condensed Financial
Statements (continued)
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, 2019.
During the second quarter of 2009, we entered
into an exclusive and perpetual (unless terminated for cause) license with the Baylor College of Medicine covering the underlying
rotavirus vaccine technology used to generate the specific antibodies for our product line extension, Tri-Shield First Defense®.
A milestone payment of $150,000 due upon regulatory approval of the product was accrued at December 31, 2017 and paid in January
2018. The license is also subject to a royalty equal to 4% of the sales of the First Defense® product line
realized above the average of the sales of our bivalent product line for the years ended December 31, 2016 and 2015, plus a growth
assumption of 6%. Earned royalties due are subject to annual minimums of $5,000, $10,000, $15,000, $20,000 and $25,000 for the
years ending December 31, 2017, 2018, 2019, 2020, and 2021 (and thereafter), respectively. Royalties of $10,396 were accrued at
December 31, 2018 and paid in January 2019. Royalties of $11,250 were accrued as of September 30, 2019.
We entered into a lease covering approximately
14,300 square feet of office and warehouse space with a commencement date of November 15, 2019. The lease term is ten years with
a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial
ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property
taxes, utilities, insurance, maintenance and related building and operating expenses.
Further, we had committed $662,000 to the
purchase of inventory, $108,000 to capital expenditures and $185,000 to other obligations as of September 30, 2019.
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 97% and 98% of our total product sales during the three-month periods ended September 30, 2019 and 2018,
respectively. Sales of the First Defense® product line aggregated 96% and 97% of our total product sales
during the nine-month periods ended September 30, 2019 and 2018, respectively. Our primary customers for the majority of our product
sales (92% and 88% during the three-month periods ended September 30, 2019 and 2018, respectively and 90% and 87% during the nine-month
periods ended September 30, 2019 and 2018, respectively) are in the U.S. dairy and beef industries. Product sales to international
customers, who are also in the dairy and beef industries, aggregated 8% and 12% of our total product sales during the three-month
periods ended September 30, 2019 and 2018, respectively, and 9% and 13% of our total product sales during the nine-month periods
ended September 30, 2019 and 2018, respectively.
19.
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RELATED PARTY TRANSACTIONS
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Dr. David S. Tomsche (Chair of our Board
of Directors) is a controlling owner of Leedstone Inc., a domestic distributor of ImmuCell products (the First Defense®
product line and CMT) and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $393,881
and $392,308 of products from us during the nine-month periods ended September 30, 2019 and 2018, respectively, on terms consistent
with those offered to other distributors of similar status. We made marketing-related payments of $975 and $11,405 to these affiliated
companies during the nine-month periods ended September 30, 2019 and 2018, respectively, which represent amounts similar to those
offered to other distributors of similar status. These payments were expensed as incurred. Our accounts receivable (subject to
standard and customary payment terms) due from these affiliated companies aggregated $15,102 and $16,283 as of September 30, 2019
and December 31, 2018, 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. We currently match 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 $29,081 and $25,644 into the plan for the three-month periods ended September 30, 2019 and 2018,
respectively, and $93,752 and $79,655 into the plan for the nine-month periods ended September 30, 2019 and 2018, respectively.
We have evaluated subsequent events through
the time of filing on November 12, 2019, the date we have issued this Quarterly Report on Form 10-Q. As of such date, there were
no material, reportable subsequent events.
ImmuCell Corporation