Notes to Unaudited Financial
Statements
1. BUSINESS OPERATIONS
ImmuCell Corporation (the “Company”,
“we”, “us”, “our”) was originally incorporated in Maine in 1982 and reincorporated in Delaware
in 1987, in conjunction with our 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 manufacture
and market the First Defense® product line
for the prevention of scours in newborn dairy and beef calves. We are developing improved formulations of this product line providing
Immediate Immunity™ to newborn calves and are in the
late stages of developing Re-Tain™, a treatment for
cows with subclinical 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. We are subject to certain risks associated with this 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 (which are of a normal recurring nature) 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. You should read these unaudited financial statements in conjunction
with our audited financial statements on Form 10-K for the year ended December 31, 2019.
(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 $6,505,141 and $5,792,993 as of March 31, 2020 and December 31,
2019, 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.
(c) Trade Accounts Receivable
Accounts receivable are carried at the original
invoice amount less an estimate made for doubtful collection when applicable. 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 March 31, 2020 and December 31, 2019, we determined that no allowance for
doubtful accounts was necessary. See Note 4.
(d) Inventory
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 balance
sheet date, we evaluate our ending inventories for excess quantities and obsolescence.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
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 or farm.
Our policy is to maintain more than one source of supply for the components used in our products when practicable. See Note 5.
(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 Nisin 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 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 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 three-month period ended March 31, 2020 or the year ended December 31, 2019. See Notes 2(h) and 8 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 March 31, 2020 and December 31, 2019, the carrying amounts of cash and
cash equivalents, short-term investments, 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 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.
|
ImmuCell Corporation
Notes to Unaudited 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, 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.
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 three-month periods ended March 31, 2020 and 2019, there were no transfers between levels. As
of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019 our bank certificates of deposit were
classified as Level 2 and were measured by other significant observable inputs. As of December 31, 2019, 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 March 31, 2020 or December 31, 2019.
|
|
As of March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
6,505,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,505,141
|
|
Bank certificates of deposit
|
|
|
—
|
|
|
|
493,821
|
|
|
|
—
|
|
|
|
493,821
|
|
Total
|
|
$
|
6,505,141
|
|
|
$
|
493,821
|
|
|
$
|
—
|
|
|
$
|
6,998,962
|
|
|
|
As of December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
6,293,293
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,293,293
|
|
Bank certificates of deposit
|
|
|
—
|
|
|
|
2,480,753
|
|
|
|
—
|
|
|
|
2,480,753
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
—
|
|
|
|
(58,526
|
)
|
|
|
—
|
|
|
|
(58,526
|
)
|
Total, net
|
|
$
|
6,293,293
|
|
|
$
|
2,422,227
|
|
|
$
|
—
|
|
|
$
|
8,715,520
|
|
(h) Valuation of Long-Lived Assets
We periodically evaluate our long-lived
assets, consisting principally of fixed assets, operating lease right-of-use asset 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 three-month period ended March 31, 2020 or the year ended December 31, 2019.
(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 March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Company A
|
|
|
38
|
%
|
|
|
43
|
%
|
Company B
|
|
|
31
|
%
|
|
|
27
|
%
|
Company C
|
|
|
11
|
%
|
|
|
*
|
|
ImmuCell Corporation
Notes to Unaudited 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
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Company B
|
|
|
41
|
%
|
|
|
48
|
%
|
Company A
|
|
|
33
|
%
|
|
|
28
|
%
|
Company C
|
|
|
12
|
%
|
|
|
*
|
|
|
*
|
Amount is less than 10%.
|
(j) Revenue Recognition
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 14.
(k) Expense Recognition
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 $18,526 and $30,807 during the three-month periods ended March 31, 2020 and 2019, 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.
(l) Income Taxes
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 six 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.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
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
2016. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions existed
as of March 31, 2020 or December 31, 2019. Although we believe that our estimates are reasonable, actual results could differ from
these estimates. See Note 16.
(m) 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 $77,404 and $82,835 during the three-month periods ended March 31, 2020 and 2019, respectively.
(n) Net (Loss) Income Per Common Share
Net income (loss) per common share has been
computed in accordance with Codification Topic 260-10, Earnings Per Share. The weighted average number of shares outstanding
was 7,212,919 and 5,624,504 during the three-month periods ended March 31, 2020 and 2019, respectively. 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 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 because their inclusion would be anti-dilutive. Outstanding
stock options that were not included in this calculation because the effect would be anti-dilutive amounted to 406,500 and 87,000
as of March 31, 2020 and 2019, respectively.
(o) Use of Estimates
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
and are subject to change in the near term. 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.
(p) 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 are 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 regard 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 allows 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 concluded
that we were not subject to material lease obligations as of December 31, 2019, and the adoption of Topic 842 did not have a material
impact on our financial statements as of January 1, 2019. The lease we entered into on September 12, 2019 to expand our production
capacity for the First Defense® product line with a Possession Date of
November 15, 2019 and a Commencement Date of February 13, 2020 has been accounted for in accordance with Topic 842 during the first
quarter of 2020. The only material lease pursuant to which we are the lessee is comprised of real estate property. All leases are
classified as operating leases, and therefore, were previously not recognized on our balance sheets. With the adoption of Topic
842, operating lease agreements are required to be recognized on our balance sheets as a right-of-use asset with a corresponding
lease liability. If at a lease inception date or at some later date during the term of a lease, we consider the exercising of a
renewal option to be reasonably certain, we would include the extended term in the calculation of the ROU asset and lease liability.
Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable.
As this rate is rarely determinable, we utilize our incremental borrowing rate at lease inception, on a collateralized basis, over
a similar term. We elected the following practical expedients in conjunction with implementation of Topic 842:
|
●
|
Inclusion of both the lease and non-lease components for all classes of underlying assets as a single component.
|
|
●
|
Election to exclude short-term lease (i.e., lease with initial terms of twelve months or less) from capitalization on our balance
sheets.
|
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
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 Topic 820 did not have a material impact on our financial statements
as of January 1, 2020.
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
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Cash and cash equivalents
|
|
$
|
6,505,141
|
|
|
$
|
6,293,293
|
|
Short-term investments
|
|
|
493,821
|
|
|
|
2,480,753
|
|
Total
|
|
$
|
6,998,962
|
|
|
$
|
8,774,046
|
|
Held to maturity securities (certificates
of deposit) are carried at amortized cost. As of March 31, 2020, we were required by a bank debt covenant to maintain at least
$1,400,000 of otherwise unrestricted cash, cash equivalents and short-term investments in an escrow account in favor of the bank.
4. TRADE ACCOUNTS RECEIVABLE, net
Trade accounts receivable amounted to $1,875,783
and $1,637,165 as of March 31, 2020 and December 31, 2019, respectively. No allowance for bad debt and product returns was recorded
as of March 31, 2020 or December 31, 2019.
5. INVENTORY
Inventory consisted of the following:
|
|
As of
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Raw materials
|
|
$
|
590,720
|
|
|
$
|
791,558
|
|
Work-in-process
|
|
|
844,889
|
|
|
|
1,207,457
|
|
Finished goods
|
|
|
162,349
|
|
|
|
519,241
|
|
Total
|
|
$
|
1,597,958
|
|
|
$
|
2,518,256
|
|
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets
consisted of the following:
|
|
As of
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Prepaid expenses
|
|
$
|
406,450
|
|
|
$
|
218,232
|
|
Other receivables
|
|
|
67,829
|
|
|
|
40,534
|
|
Security deposits
|
|
|
800
|
|
|
|
800
|
|
Total
|
|
$
|
475,079
|
|
|
$
|
259,566
|
|
7. PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment consisted
of the following:
|
|
Estimated Useful Lives
(in years)
|
|
As of
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Laboratory and manufacturing equipment
|
|
3-10
|
|
$
|
15,462,319
|
|
|
$
|
15,437,724
|
|
Building and improvements
|
|
10-39
|
|
|
17,078,829
|
|
|
|
17,078,829
|
|
Office furniture and equipment
|
|
3-10
|
|
|
716,793
|
|
|
|
719,323
|
|
Construction in progress
|
|
n/a
|
|
|
2,552,383
|
|
|
|
1,124,189
|
|
Land
|
|
n/a
|
|
|
516,867
|
|
|
|
516,867
|
|
Property, plant and equipment, gross
|
|
|
|
|
36,327,191
|
|
|
|
34,876,932
|
|
Accumulated depreciation
|
|
|
|
|
(10,153,890
|
)
|
|
|
(9,611,194
|
)
|
Property, plant and equipment, net
|
|
|
|
$
|
26,173,301
|
|
|
$
|
25,265,738
|
|
As of March 31, 2020 and December 31, 2019,
construction in progress consisted principally of payments toward the First Defense®
production capacity expansion project and equipment needed to bring the final formulation and aseptic filling for Re-Tain™
in-house. Approximately $16,294 and $1,830 of property, plant and equipment was disposed of during the three-month periods ended
March 31, 2020 and 2019, respectively. Depreciation expense was $555,123 and $563,805 during the three-month periods ended March
31, 2020 and 2019, respectively.
8. INTANGIBLE ASSETS
The developed technology intangible assets
of approximately $191,000 (which include an immaterial amount of value associated with customer relationships and a non-compete
agreement and was valued using the relief from royalty method) 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 March
31, 2020 and 2019. The net value of these intangibles was $109,848 and $114,624 as of March 31, 2020 and December 31, 2019, respectively.
Intangible asset amortization expense is estimated to be approximately $19,104 per year through December 31, 2025.
Intangible assets as of March 31, 2020 consisted
of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(78,243
|
)
|
|
$
|
105,857
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(552
|
)
|
|
|
748
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(2,397
|
)
|
|
|
3,243
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(81,192
|
)
|
|
$
|
109,848
|
|
Intangible assets as of December 31, 2019
consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
$
|
(73,640
|
)
|
|
$
|
110,460
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(520
|
)
|
|
|
780
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(2,256
|
)
|
|
|
3,384
|
|
Total
|
|
$
|
191,040
|
|
|
$
|
(76,416
|
)
|
|
$
|
114,624
|
|
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted
of the following:
|
|
As of
March 31, 2020
|
|
|
As of
December 31, 2019
|
|
Accounts payable – trade
|
|
$
|
171,411
|
|
|
$
|
401,958
|
|
Accounts payable – capital
|
|
|
384,631
|
|
|
|
170,220
|
|
Accrued payroll
|
|
|
196,968
|
|
|
|
399,501
|
|
Accrued professional fees
|
|
|
55,250
|
|
|
|
73,781
|
|
Accrued other
|
|
|
388,217
|
|
|
|
175,106
|
|
Total
|
|
$
|
1,196,477
|
|
|
$
|
1,220,566
|
|
10. BANK DEBT
Prior to a refinancing with Gorham Savings
Bank during the first quarter of 2020, we had in place five different credit facilities and a line of credit with TD Bank N.A.
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 bearing interest at the fixed rate of 6.04% per annum (with
a 10-year term and a 15-year amortization schedule). A balloon principal payment of $451,885 would have been due during the third
quarter of 2020. Proceeds from a $2,500,000 second mortgage on this corporate headquarters (Loan #2) were received during the third
quarter of 2015 bearing interest at the fixed rate of 4.38% per annum (with a 10-year term and 25-year amortization schedule).
A balloon principal payment of approximately $1,550,000 would have been due during the third quarter of 2025. 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 was a construction loan of $3,940,000. In September 2018, the loan converted to a term loan facility bearing
interest at the variable rate equal to the one-month LIBOR plus a margin of 2.25% per annum (with a 7-year term and 7-year amortization
schedule). Loan #4 was a construction loan of $2,560,000. In March 2018, the loan converted to a term loan facility bearing interest
at the variable rate equal to the one-month LIBOR plus a margin of 2.25% per annum (with a 10-year term and 25-year amortization
schedule). A balloon principal payment of approximately $1,408,000 would have been due during the first quarter of 2027. Proceeds
from a $340,000 first mortgage on our 4,114 square foot warehouse and cold storage facility (Loan #5) were received during the
first quarter of 2017 bearing interest at the variable rate equal to the one-month LIBOR plus a margin of 2.25% per annum (with
a 10-year term and 20-year amortization schedule). A balloon principal payment of approximately $206,000 would have been due during
the first quarter of 2027.
On March 11, 2020, we closed on a debt financing
with Gorham Savings Bank aggregating $8,600,000 and a $1,000,000 line of credit. The debt is comprised of a $5,100,000 mortgage
note (Loan #6) that bears interest at a fixed rate of 3.50% per annum (with a 10-year term and 25-year amortization schedule) and
a $3,500,000 note (Loan #7) that bears interest at a fixed rate of 3.50% per annum (with a 7-year term and amortization schedule).
The line of credit bears interest at a variable rate equal to the one-month LIBOR plus 2.15% per annum. The proceeds were used
to repay all bank debt outstanding at the time of closing and to provide some additional working capital. These two credit facilities
are secured by liens on substantially all of our assets and are subject to certain restrictions and financial covenants. We were
required by a bank debt covenant (before the debt refinancing discussed above) to maintain at least $2,000,000 of otherwise unrestricted
cash, cash equivalents and short-term investments. Under the new debt, we are required to hold $1,400,000 in escrow (a non-current
asset), which reduces the effective availability of our liquid assets for operational needs by that amount.
In connection with Loan #6 and Loan #7,
we incurred debt issuance costs of $39,789. The amortization of debt issuance 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.
Debt proceeds received and principal repayments made during the three-month periods ended March 31, 2020 and 2019 are reflected
in the following table by year and by loan:
|
|
During the
Three-Month Period
Ended March 31, 2020
|
|
|
During the
Three-Month Period
Ended March 31, 2019
|
|
|
|
Proceeds from Debt Issuance
|
|
|
Debt Principal Repayments
|
|
|
Proceeds from
Debt Issuance
|
|
|
Debt Principal Repayments
|
|
Loan #1
|
|
$
|
—
|
|
|
$
|
(493,696
|
)
|
|
$
|
—
|
|
|
$
|
(16,881
|
)
|
Loan #2
|
|
|
—
|
|
|
|
(2,143,771
|
)
|
|
|
—
|
|
|
|
(22,260
|
)
|
Loan #3
|
|
|
—
|
|
|
|
(3,236,429
|
)
|
|
|
—
|
|
|
|
(140,715
|
)
|
Loan #4
|
|
|
—
|
|
|
|
(2,336,000
|
)
|
|
|
—
|
|
|
|
(32,000
|
)
|
Loan #5
|
|
|
—
|
|
|
|
(309,182
|
)
|
|
|
—
|
|
|
|
(2,445
|
)
|
Loan #6
|
|
|
5,100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loan #7
|
|
|
3,500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
8,600,000
|
|
|
$
|
(8,519,078
|
)
|
|
$
|
—
|
|
|
$
|
(214,301
|
)
|
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
Principal payments (net of debt issue costs)
due under bank loans outstanding as of March 31, 2020 (excluding our $1,000,000 line of credit) are reflected in the following
table by the year that payments are due:
|
|
During the
Nine-Month
Period Ending
|
|
|
During the Years Ending December 31,
|
|
|
|
|
|
|
December 31, 2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025 and After
|
|
|
Total
|
|
Loan #6
|
|
$
|
96,820
|
|
|
$
|
133,397
|
|
|
$
|
138,141
|
|
|
$
|
143,055
|
|
|
$
|
148,142
|
|
|
$
|
4,440,445
|
|
|
$
|
5,100,000
|
|
Loan #7
|
|
|
335,201
|
|
|
|
461,055
|
|
|
|
477,454
|
|
|
|
494,435
|
|
|
|
512,021
|
|
|
|
1,219,834
|
|
|
|
3,500,000
|
|
Subtotal
|
|
$
|
432,021
|
|
|
$
|
594,452
|
|
|
$
|
615,595
|
|
|
$
|
637,490
|
|
|
$
|
660,163
|
|
|
$
|
5,660,279
|
|
|
|
8,600,000
|
|
Debt Issuance Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,452
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,560,548
|
|
On March
11, 2020, we entered into a $1,000,000 line of credit with Gorham Savings Bank, which is secured by substantially all of our assets
and is subject to certain restrictions and financial covenants. This line of credit is available as needed through March 10, 2022.
There was no outstanding balance under this line of credit as of March 31, 2020. Interest on borrowings against the line of credit
is at the rate of the one-month LIBOR plus 2.15% per annum.
11. 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
March 31, 2020. 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 March 31, 2020.
We are committed to purchasing certain key
parts (syringes) and services (formulation, aseptic filling and final packaging of Drug Product) pertaining to Re-Tain™,
our Nisin-based intramammary treatment of subclinical mastitis in lactating dairy cows, exclusively from contractors. We are investing
in the necessary equipment to perform the Drug Product formulation and aseptic filling services in-house.
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®.
The license is 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 $5,000, $10,396 and $76,876 were paid
for the years ended December 31, 2017, 2018 and 2019, respectively. Royalties of $28,538 were accrued as of March 31, 2020.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
During the first quarter of 2020, we entered
into a Severance Agreement with our President and CEO. Under the terms of this agreement, we agreed to pay this executive (or his
estate) nine months of his then current salary plus any accrued and unused paid time off in the event of the involuntary termination
of his employment by the Company (except for cause) or in the event of termination by him for good reason.
In addition to the commitments discussed
above, we had committed $1,078,000 to increase our production capacity for the First Defense®
product line, $1,245,000 to construct and equip our own Drug Product formulation and aseptic filling facility for Re-Tain™,
$1,072,000 to the purchase of inventory, $36,000 to capital expenditures and $423,000 to other obligations as of March 31, 2020.
12. OPERATING LEASE
On
September 12, 2019, we entered into a lease covering approximately 14,300 square feet of office and warehouse space with a Possession
Date of November 15, 2019 and a Commencement Date of February 13, 2020. We are renovating this space to meet our needs in expanding
our production capacity for the First Defense®
product line. We are investing approximately $2,350,000 in leasehold improvements that we expect
to depreciate over the ten-year lease term beginning upon issuance of a Certificate of Occupancy by the City of Portland. 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. At this time, we are
not reasonably assured that we would exercise this renewal option. A ten-year period is reflected in the right-of-use (ROU) asset
and lease liability on our balance sheet. The total lease liability over the initial ten-year term (including inflationary adjustments)
aggregates approximately $1,318,945 and includes real estate and personal property taxes, utilities, insurance, maintenance and
related building and operating expenses. Our lease includes variable lease and non-lease components that are included in the ROU
asset and lease liability. Such payments primarily include common area maintenance charges and increases in rent payments that
are driven by factors such as future changes in an index, such as the Consumer Price Index. As of March 31, 2020, the balance of
the operating lease ROU asset was $1,305,450 and the operating lease liability was $1,306,939. The calculated amount of the ROU
asset and lease liability is impacted by the length of the lease term and the discount rate used for the present value of the minimum
lease payments. The following table represents lease costs and other lease information. As we elected, for all classes of underlying
assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable
lease cost primarily represents variable payments such as real estate taxes and common area maintenance.
|
|
During the Three-Month
Periods Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Lease Cost
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
15,597
|
|
|
|
—
|
|
Variable lease cost
|
|
|
5,472
|
|
|
|
—
|
|
Total lease cost
|
|
$
|
21,069
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
9.8
|
|
|
|
—
|
|
Weighted average discount rate
|
|
|
4.77
|
%
|
|
|
—
|
|
Future lease payments required under non-cancelable
operating leases in effect as of March 31, 2020 were as follows:
|
|
March 31, 2020
|
|
During the nine-month period ending December 31, 2020
|
|
$
|
115,050
|
|
During the year ending December 31, 2021
|
|
|
159,396
|
|
During the year ending December 31, 2022
|
|
|
162,102
|
|
During the year ending December 31, 2023
|
|
|
165,120
|
|
During the year ending December 31, 2024
|
|
|
168,210
|
|
During the years ending December 31, 2025 and after
|
|
|
905,687
|
|
Total lease payments (undiscounted cash flows)
|
|
|
1,675,565
|
|
Less: imputed interest (discount effect of cash flows)
|
|
|
(368,626
|
)
|
Total operating lease liabilities
|
|
$
|
1,306,939
|
|
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
13. STOCKHOLDERS’ EQUITY
From February 2016 to March 2019, we issued
the aggregate of 4,037,861 shares of common stock in five different transactions raising gross proceeds of approximately $22,464,000.
These funds are essential to funding our business growth plans. The details of each transaction are discussed below.
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 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 $1,034,000
(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 Securities and Exchange Commission (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).
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. As of December 31, 2019, no
options were outstanding under the 2000 Plan.
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 can be granted under the 2010 Plan. However, options outstanding under the 2010 Plan at that time can be exercised in accordance
with their terms. As of March 31, 2020, 255,000 options were outstanding under the 2010 Plan.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
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 can be granted under the 2017 Plan. However, options outstanding under the 2017 Plan at that time can be exercised in accordance
with their terms. As of March 31, 2020, 151,500 options were outstanding under the 2017 Plan.
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, 2018
|
|
|
12,500
|
|
|
|
270,00
|
|
|
|
111,500
|
|
|
$
|
6.37
|
|
|
$
|
266,020
|
|
Grants
|
|
|
—
|
|
|
|
26,000
|
|
|
|
25,000
|
|
|
$
|
5.90
|
|
|
|
|
|
Terminations
|
|
|
—
|
|
|
|
(26,000
|
)
|
|
|
(3,000
|
)
|
|
$
|
6.05
|
|
|
|
|
|
Exercises
|
|
|
(12,500
|
)
|
|
|
(15,000
|
)
|
|
|
—
|
|
|
$
|
4.37
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
—
|
|
|
|
255,000
|
|
|
|
133,500
|
|
|
$
|
6.48
|
|
|
$
|
(516,475
|
)
|
Grants
|
|
|
—
|
|
|
|
4,000
|
|
|
|
18,000
|
|
|
$
|
4.17
|
|
|
|
|
|
Terminations
|
|
|
—
|
|
|
|
(4,000
|
)
|
|
|
—
|
|
|
$
|
5.88
|
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
—
|
|
|
|
255,000
|
|
|
|
151,500
|
|
|
$
|
6.36
|
|
|
$
|
(1,044,945
|
)
|
Vested at March 31, 2020
|
|
|
—
|
|
|
|
159,500
|
|
|
|
10,000
|
|
|
$
|
6.05
|
|
|
$
|
(383,270
|
)
|
Vested and expected to vest at March 31, 2020
|
|
|
—
|
|
|
|
255,000
|
|
|
|
151,500
|
|
|
$
|
6.36
|
|
|
$
|
(1,044,945
|
)
|
Reserved for future grants
|
|
|
—
|
|
|
|
1,000
|
|
|
|
148,500
|
|
|
|
|
|
|
|
|
|
|
(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, 2020
|
|
|
321,000
|
|
|
$
|
3.49
|
|
|
$
|
6.55
|
|
Non-vested stock options as of March 31, 2020
|
|
|
237,000
|
|
|
$
|
3.39
|
|
|
$
|
6.58
|
|
Stock options granted during the three-month period ended March 31, 2020
|
|
|
22,000
|
|
|
$
|
2.12
|
|
|
$
|
4.17
|
|
Stock options that vested during the three-month period ended March 31, 2020
|
|
|
102,000
|
|
|
$
|
3.44
|
|
|
$
|
6.00
|
|
Stock options that were forfeited during the three-month period ended March 31, 2020
|
|
|
4,000
|
|
|
$
|
3.08
|
|
|
$
|
5.88
|
|
No stock options were exercised during the
three-month period ended March 31, 2020. During the three-month period ended March 31, 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 $2 in cash.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
The weighted average remaining life of the
options outstanding under the 2010 Plan and the 2017 Plan as of March 31, 2020 was approximately 6 years and 3 months. The weighted
average remaining life of the options exercisable under these plans as of March 31, 2020 was approximately 5 years and 9 months.
The exercise prices of the options outstanding as of March 31, 2020 ranged from $3.15 to $8.90 per share. The 22,000 stock options
granted during the three-month period ended March 31, 2020 had exercise prices between $4.00 and $5.92 per share. The 10,000 stock
options granted during the three-month period ended March 31, 2019 had exercise prices of $7.50 per share. The aggregate intrinsic
value of options exercised during the three-month periods ended March 31, 2020 and 2019 approximated $0 and $28,641, respectively.
The weighted-average grant date fair values of options granted during the three-month periods ended March 31, 2020 and 2019 were
$2.12 and $3.16, respectively. As of March 31, 2020, total unrecognized stock-based compensation related to non-vested stock options
aggregated $343,923, which will be recognized over a weighted average period of 1 year and 6 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(m), with the following weighted-average assumptions for the three-month periods ended March 31, 2020 and 2019:
|
|
During the Three-Month Period
Ended March 31, 2020
|
|
|
During the Three-Month Period
Ended March 31, 2019
|
|
Risk-free interest rate
|
|
|
0.78
|
%
|
|
|
2.59
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
52
|
%
|
|
|
51
|
%
|
Expected life
|
|
|
6.5 years
|
|
|
|
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.
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.
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.
ImmuCell Corporation
Notes to Unaudited Financial
Statements (continued)
14. REVENUE
We
primarily offer the First Defense® product
line to dairy and beef producers to prevent scours in newborn calves. 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 three-month period ended March 31, 2020 or the year ended December
31, 2019. 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 sheets are
from contracts with customers. We incur no material costs to obtain contracts.
The following table presents our product
sales disaggregated by geographic area:
|
|
During the Three-Month Periods Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
4,357,682
|
|
|
$
|
3,777,746
|
|
Other
|
|
|
552,706
|
|
|
|
632,815
|
|
Total product sales
|
|
$
|
4,910,388
|
|
|
$
|
4,410,561
|
|
The following table presents our product
sales disaggregated by major product category:
|
|
During the Three-Month Periods Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
First Defense® product line
|
|
$
|
4,819,191
|
|
|
$
|
4,140,917
|
|
Other animal health
|
|
|
91,197
|
|
|
|
136,043
|
|
Other
|
|
|
—
|
|
|
|
133,601
|
|
Total product sales
|
|
$
|
4,910,388
|
|
|
$
|
4,410,561
|
|
15. OTHER EXPENSES, NET
Other expenses, net, consisted of the following:
|
|
During the Three-Month Periods Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest expense(1)
|
|
$
|
346,950
|
|
|
$
|
114,041
|
|
Interest income
|
|
|
(13,174
|
)
|
|
|
(2,315
|
)
|
Other expenses, net
|
|
$
|
333,776
|
|
|
$
|
111,726
|
|
|
(1)
|
During the three-month period ended March 31, 2020 interest expense included the write-off
of $95,000 of debt issuance costs and the payment of $165,000 to terminate our interest rate swap agreements associated with debt
that we repaid.
|
16. INCOME TAXES
Our income tax (benefit) expense aggregated
($14,632) and $9,023 (amounting to (11%) and 6% of our (loss) income before income taxes, respectively) during the three-month
periods ended March 31, 2020 and 2019, respectively. As of December 31, 2019, we had federal net operating loss carryforwards of
$11,949,860 of which $10,237,953 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 $3,299,929 that expire in 2037 through 2038 (if not utilized before then). Additionally,
we had federal general business tax credit carryforwards of $434,838 that expire in 2027 through 2039 (if not utilized before then)
and state tax credit carryforwards of $763,350 that expire in 2023 through 2039 (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 $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 credits) based
on applicable accounting standards and practices. At that time, we had incurred a net loss for six 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. Adjustments related to the termination of our interest rate swap agreements were recorded during the first quarter of
2020.
ImmuCell Corporation
Notes to Unaudited 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. 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.
17. SEGMENT INFORMATION
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 94% of our total product sales during the three-month periods ended March 31, 2020 and 2019, respectively.
Our primary customers for the majority of our product sales (89% and 86% during the three-month periods ended March 31, 2020 and
2019, 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 11% of our total product sales during the three-month periods ended March 31, 2020 and 2019.
18. RELATED PARTY TRANSACTIONS
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 $264,830 and $176,866 of products from us during the three-month periods ended March 31, 2020 and 2019,
respectively, on terms consistent with those offered to other distributors of similar status. Our accounts receivable
(subject to standard and customary payment terms) due from these affiliated companies aggregated $32,101 and $0 as of
March 31, 2020 and December 31, 2019, respectively.
19. EMPLOYEE BENEFITS
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 $29,422 and $31,197 into the plan for the three-month periods ended March 31, 2020 and 2019,
respectively.
20. SUBSEQUENT EVENTS
We have
evaluated subsequent events through the time of filing on May 13, 2020, the date we have issued this Quarterly Report on Form 10-Q.
The COVID-19 pandemic has created a great deal of uncertainty since December 31, 2019. We could experience product shortages, backlogs
and production slowdowns due to difficulties accessing needed supplies and labor and other restrictions affecting our ability to
consistently deliver our products to market. During April 2020, we received $937,700 in support from the federal government under
the Paycheck Protection Program (PPP). This funding accrues interest at a rate of 1% per annum, and our obligation to repay the
principal amount of the funding should be forgiven provided we use the proceeds only for eligible payroll costs, utility expenses,
rent payments and interest expense on mortgage debt, in each case incurred and paid during the eight-week period from April 13,
2020 through June 8, 2020 (which period may be extended at some future date). At least 75% of such forgiven amounts must be used
for eligible payroll costs. If any portion of this funding were not to be applied to eligible expenses during the applicable eight-week
period, we expect to repay such excess amount without any prepayment penalty by approximately October 13, 2020. By current estimated
calculations, this repayment obligation may be approximately $100,000, due to projected payroll costs during the applicable eight-week
period potentially being less than the 2019 levels used to determine the amount of available funding. However, the rules around
terms of forgiveness are unclear at this time. While we believe (based on the guidance that has been made available thus far with
respect to the loan program) that we will be able to establish our need for approximately $838,000 of the PPP funds to cover eligible
expenses, as well as our entitlement to forgiveness of the obligation to repay that amount, there is some risk that, due to our
being a publicly-traded company and the scrutiny that is expected to be applied to PPP loans made to publicly-traded borrowers,
our entitlement to forgiveness could be challenged and denied or limited. Any such forgiveness of indebtedness, in accordance with
the CARES Act, does not give rise to taxable income, but these forgiven expenses may not also be deducted for tax return purposes.
As of the time of filing on May 13, 2020, there were no other material, reportable subsequent events.
ImmuCell Corporation