Notes to Unaudited Condensed Financial Statements
ImmuCell
Corporation (the “Company”, “we”, “us”, “our”) is an animal health company whose
purpose is to create scientifically-proven and practical products that improve animal health and productivity in the dairy and
beef industries. The Company was originally incorporated in Maine in 1982 and reincorporated in Delaware in 1987, in conjunction
with its initial public offering of common stock. We market products that provide immediate immunity to newborn dairy and beef
cattle. We are developing product line extensions of our existing products and are in the late stages of developing a novel product
that addresses mastitis, the most significant cause of economic loss to the dairy industry. These products help reduce the need
to use traditional antibiotics in food producing animals. The Company is subject to certain risks associated with its stage of
development including dependence on key individuals, competition from other larger companies, the successful sale of existing
products and the development and acquisition of additional commercially viable products with appropriate regulatory approvals,
where applicable. These and other risks to our Company are further detailed under
Part II
- “Other Information”,
Item 1A
- “Risk Factors”.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis
of Presentation
|
We
have prepared the accompanying unaudited condensed financial statements reflecting all adjustments that are, in our opinion, necessary
in order to ensure that the financial statements are not misleading. We follow accounting standards set by the Financial Accounting
Standards Board (FASB). The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, earnings per share and cash flows. References to GAAP in these footnotes
are to the FASB
Accounting Standards Codification
™ (Codification). Accordingly, we believe that although the disclosures
are adequate to ensure that the information presented is not misleading, these unaudited condensed financial statements should
be read in conjunction with the financial statements for the year ended December 31, 2016 and the notes thereto, contained in
our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC).
|
(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 $3,751,720 and $4,650,044
as of March 31, 2017 and December 31, 2016, respectively. We account for investments in marketable securities in accordance with
Codification Topic 320,
Investments – Debt and Equity Securities
. Short-term investments are classified as held to
maturity and are comprised principally of certificates of deposit that mature in more than three months from their purchase dates
and not more than twelve months from the balance sheet date. Short-term investments are held at different financial institutions
that are insured by the FDIC, within the FDIC limits per financial institution. See Note 3.
Inventory
includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method,
or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable
costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and
manufacturing overhead. See Note 4.
Accounts
receivable are carried at the original invoice amount less an estimate made for doubtful collection and product returns. Management
determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience
applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded as income when received. Accounts receivable are considered to be past due if any portion
of the receivable balance is outstanding for more than 30 days. Interest is charged on past due accounts receivable. 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 in amounts estimated to expense
the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. The
facility we are constructing to produce the active ingredient, Nisin, for
Mast Out
®
will be depreciated
over its useful life beginning when that facility is placed into service, which could be before the Food and Drug Administration
(FDA) approval of the product is achieved. This facility is not yet placed in service. We are evaluating the estimated useful
lives of the assets associated with this facility. Significant repairs to fixed assets that benefit more than a current period
are capitalized and depreciated over their useful lives. See Note 7.
(f)
|
Intangible Assets and Goodwill
|
We
amortize intangible assets on the straight-line method by charges to operations in amounts estimated to expense the cost of the
assets from the date they are first put into service to the end of the estimated useful lives of the assets. We have recorded
intangible assets related to customer relationships, non-compete agreements, and developed technology, each with defined useful
lives. We have classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) acquired
in purchase transactions.
We
assess the impairment of intangible assets and goodwill that have indefinite lives at the reporting unit level on an annual basis
(as of December 31
st
) and whenever events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine
whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having
a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, we would then perform step one of the
two-step impairment test; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the qualitative
assessment for any reporting unit in any period and proceed directly to step one of the two-step impairment test. Doing so does
not preclude us from performing the qualitative assessment in any subsequent period. Factors that could indicate that an impairment
may exist include significant under-performance relative to plan or long-term projections, significant changes in business strategy
and significant negative industry or economic trends. Although we believe intangible assets and goodwill are appropriately stated
in the accompanying financial statements, changes in strategy or market conditions could significantly impact these judgements
and require an adjustment to the recorded balance. No goodwill impairments were recorded during the three-month period ended March
31, 2017 or the year ended December 31, 2016. See Notes 2(h), 8 and 9 for additional disclosures.
(g)
|
Fair Value Measurements
|
In
determining fair value measurements, we follow the provisions of Codification Topic 820,
Fair Value Measurements and Disclosures
.
Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures
about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based
information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the
nature of inputs used in the valuation of an asset or liability as of the measurement date. At March 31, 2017 and December 31,
2016, the carrying amounts of cash and cash equivalents, accounts receivable, inventory, other assets, accounts payable and accrued
liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is
measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated
fair value of our bank debt facilities approximates their carrying value. The three-level hierarchy is as follows:
|
Level 1
|
-
|
Pricing
inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.
|
|
|
|
|
|
Level
2
|
-
|
Pricing
inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly,
for substantially the full term through corroboration with observable market data.
|
|
|
|
|
|
Level
3
|
-
|
Pricing
inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting
entity’s own assumptions about the assumptions market participants would use in pricing the asset
or liability.
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
In
certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant
to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgement, and considers factors specific to the investment.
Our
held to maturity securities are comprised of investments in bank certificates of deposit. The value of these securities is disclosed
in Note 3. We also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured
at fair value. The fair value of these investments is based on their closing published net asset value.
We
assess the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date
of the event or change in circumstances that caused the transfer in accordance with our accounting policy regarding the recognition
of transfers between levels of the fair value hierarchy. During the three-month period ended March 31, 2017 and the year ended
December 31, 2016, there were no transfers between levels. As of March 31, 2017 and December 31, 2016, our Level 1 assets measured
at fair value by quoted prices in active markets consisted of bank savings accounts and money market funds. As of March 31, 2017
and December 31, 2016, our bank certificates of deposit were classified as Level 2 and were measured by significant other observable
inputs. As of March 31, 2017 and December 31, 2016, our interest rate swaps were classified as Level 2 and were measured by observable
market data in combination with expected cash flows for each instrument. There were no assets or liabilities measured at fair
value on a nonrecurring basis as of March 31, 2017 or December 31, 2016.
|
|
As of March 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
4,252,020
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,252,020
|
|
Bank certificates of deposit
|
|
|
-
|
|
|
$
|
2,978,355
|
|
|
|
-
|
|
|
$
|
2,978,355
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
$
|
21,611
|
|
|
|
-
|
|
|
$
|
21,611
|
|
|
|
As
of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
5,150,344
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,150,344
|
|
Bank certificates of deposit
|
|
|
-
|
|
|
$
|
5,474,013
|
|
|
|
-
|
|
|
$
|
5,474,013
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
$
|
37,346
|
|
|
|
-
|
|
|
$
|
37,346
|
|
(h)
|
Valuation of Long-Lived Assets
|
We
periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential
impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying
value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for
impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the
held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable
cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets
whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the
estimated undiscounted future cash flows. No impairment was recognized during the three-month period ended March 31, 2017 or the
year ended December 31, 2016.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
(i)
|
Concentration of Risk
|
Concentration
of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales.
To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable
credit risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced
significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area.
Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:
|
|
Three-Month
Period Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Patterson Companies, Inc.
|
|
|
40
|
%
|
|
|
37
|
%
|
AmerisourceBergen Corporation
|
|
|
26
|
%
|
|
|
21
|
%
|
Robert J. Matthews Company
|
|
|
*
|
|
|
|
10
|
%
|
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,
2017
|
|
|
As of
December 31,
2016
|
|
Patterson Companies, Inc.
|
|
|
28
|
%
|
|
|
31
|
%
|
AmerisourceBergen Corporation
|
|
|
27
|
%
|
|
|
33
|
%
|
ANIMART LLC(1)
|
|
|
12
|
%
|
|
|
*
|
|
(1)
Assumes that the acquisition of Animal Medic by ANIMART LLC (which closed during the third quarter of 2016) had occurred
as of the beginning of the periods being reported.
*
Amount is less than 10%.
We
believe that supplies and raw materials for the production of our products are available from more than one vendor or farm. Our
policy is to maintain more than one source of supply for the components used in our products. However, there is a risk that we
could have difficulty in efficiently acquiring essential supplies.
(j)
|
Interest Rate Swap Agreements
|
All
derivatives are recognized on the balance sheet at their fair value. We entered into interest rate swap agreements in 2010 and
2015. On the dates the agreements were entered into, we designated the derivatives as hedges of the variability of cash flows
to be paid related to our long-term debt. The agreements have been determined to be highly effective in hedging the variability
of identified cash flows, so changes in the fair market value of the interest rate swap agreements are recorded as comprehensive
income (loss), until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate
asset or liability are recorded in earnings). We formally documented the relationship between the interest rate swap agreements
and the related hedged items. We also formally assess, both at the interest rate swap agreements’ inception and on an ongoing
basis, whether the agreements are highly effective in offsetting changes in cash flow of hedged items. See Note 11.
We
sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met.
These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii)
the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time
of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery
to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because
our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced
an immaterial amount of product returns.
Advertising
costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses
amounted to $29,057 and $10,492 during the three-month periods ended March 31, 2017 and 2016, respectively. All product development
expenses are expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production
cycle, and these costs are charged to costs of goods sold when the inventory is sold to a customer.
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. We believe it is more likely than not
that the deferred tax assets will be realized through future taxable income and future tax effects of temporary differences between
book income and taxable income. Accordingly, we have not established a valuation allowance for the deferred tax assets. Codification
Topic 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must
meet before being recognized in the financial statements. In the ordinary course of business, there are transactions and calculations
where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue
Service and other taxing authorities. Our tax returns for the years 2013 through 2016 are subject to audit. We have evaluated
the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as of March 31, 2017 or
December 31, 2016. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See
Note 14.
(n)
|
Stock-Based Compensation
|
We
account for stock-based compensation in accordance with Codification Topic 718,
Compensation-Stock Compensation
, which
generally requires us to recognize non-cash compensation expense for stock-based payments using the fair-value-based method. The
fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model. Accordingly,
we recorded compensation expense pertaining to stock-based compensation of $46,763 and $8,908 during the three-month periods ended
March 31, 2017 and 2016, respectively, which resulted in a decrease to income before income taxes of less than $0.01 per share
during each of the periods reported.
(o)
|
Net Income Per Common Share
|
Net
income per common share has been computed in accordance with Codification Topic 260-10,
Earnings Per Share.
The basic net
income per share has been computed by dividing net income by the weighted average number of common shares outstanding during the
period. The diluted net income per share has been computed by dividing net income by the weighted average number of shares outstanding
during the period plus all outstanding stock options with an exercise price that is less than the average market price of the
common stock during the period less the number of shares that could have been repurchased at this average market price with the
proceeds from the hypothetical stock option exercises. The weighted average and diluted number of shares outstanding consisted
of the following:
|
|
Three-Month Periods
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average number of shares outstanding
|
|
|
4,847,557
|
|
|
|
3,833,056
|
|
Effect of dilutive stock options
|
|
|
92,736
|
|
|
|
111,294
|
|
Diluted number of shares outstanding
|
|
|
4,940,293
|
|
|
|
3,944,350
|
|
Outstanding stock options not included in the calculation because the effect would be anti-dilutive
|
|
|
184,000
|
|
|
|
14,000
|
|
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period. Although we regularly assess these estimates,
actual amounts could differ from those estimates. Changes in estimates are recorded during the period in which they become known.
Significant estimates include our inventory valuation, goodwill, accrued expenses, costs of goods sold accounts, and useful lives
of intangible assets.
(q)
|
New Accounting Pronouncements
|
In
May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
, which requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU
2014-09 was initially to become effective for the Company on January 1, 2017. Early application was not permitted. In July 2015,
the FASB approved a one-year deferral in the effective date to January 1, 2018, with the option of applying the standard on the
original effective date. ASU 2014-09 permits the use of either the full or modified retrospective method. We intend to utilize
the modified retrospective method and have made a preliminary evaluation of the effect that ASU 2014-09 would have on our financial
statements and related disclosures and do not expect ASU 2014-09 to have a material impact on our financial statements.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
In
August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements-Going Concern”,
which provides
guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue
as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual
and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial
statements are issued. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and
interim periods thereafter. We implemented this guidance during 2016. The adoption of this guidance did not have a material impact
on our financial statements.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory
, which simplifies the existing guidance which requires entities to
subsequently measure inventory at the lower of cost or market value. Under ASU No. 2015-11, an entity should measure inventory
valued using a first-in, first-out or average cost method at the lower of cost or net realizable value, which is defined as the
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption
permitted. We adopted ASU 2015-11 during the third quarter of 2016, and it did not have a material impact on our financial statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes
, which simplifies the existing guidance which requires an
entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of
financial position. Under ASU No. 2015-17, an entity should classify all deferred tax liabilities and assets as one noncurrent
deferred tax liability or asset (net) within the statement of financial position. The amendments apply to all entities that present
a classified statement of financial position and are effective for the public business entities for annual periods beginning after
December 15, 2016, including interim periods therein. Earlier application was permitted. During the first quarter of 2016, we
adopted ASU No. 2015-17 early and reclassified $19,588 of current deferred tax liabilities to long-term, which amount was netted
against our long-term deferred tax asset, as of December 31, 2015. ASU No. 2015-17 did not have a material impact on our financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
, which requires lessees to put most leases on their balance sheet
but recognize expenses on their income statements in a manner similar to today’s accounting. ASU 2016-02 is effective for
fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. Based on our current
lease agreements, we are not subject to material lease obligations, and we do not expect ASU 2016-02 to have a material impact
on our financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation
, which simplifies several aspects of the accounting
for share-based payment transactions, including income tax consequences, recognition of stock compensation award forfeitures,
classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on
the statement of cash flows. The most significant change resulting from these amendments is recording all the tax effects related
to share-based payments at settlement through the income statement. Under existing guidance, tax benefits in excess of compensation
costs (“windfalls”) are recorded in equity. Similarly, tax deficiencies below compensation costs (“shortfalls”)
are recorded in equity to the extent of previous windfalls, while shortfalls in excess of this are recorded to the income statement.
Furthermore, the new guidance is expected to increase the dilutive effect of share-based payment awards as a result of no longer
assuming that tax benefits are used to purchase our common stock under the treasury method. The amendments also provide an alternative
to estimating stock award forfeitures and instead recording at the time of forfeiture. This update is effective for public business
entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2016-09 during 2016,
and it did not have a material impact on our financial statements.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
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,
2017
|
|
|
As of
December 31,
2016
|
|
|
(Decrease)
|
|
Cash and cash equivalents
|
|
$
|
4,252,020
|
|
|
$
|
5,150,344
|
|
|
$
|
(898,324
|
)
|
Short-term investments
|
|
|
2,978,355
|
|
|
|
5,474,013
|
|
|
|
(2,495,658
|
)
|
Total
|
|
$
|
7,230,375
|
|
|
$
|
10,624,357
|
|
|
$
|
(3,393,982
|
)
|
Held
to maturity securities (certificates of deposit) are carried at amortized cost. The cost of securities sold is determined based
on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are
included in investment income. As of March 31, 2017 and December 31, 2016, the fair value of held to maturity securities consisted
of the following:
|
|
As of
March 31,
2017
|
|
|
As of
December 31,
2016
|
|
Amortized cost
|
|
$
|
2,968,000
|
|
|
$
|
5,450,000
|
|
Accrued interest
|
|
|
10,355
|
|
|
|
24,013
|
|
Gross unrealized gains
|
|
|
590
|
|
|
|
2,073
|
|
Gross unrealized losses
|
|
|
(27
|
)
|
|
|
(59
|
)
|
Estimated fair value
|
|
$
|
2,978,918
|
|
|
$
|
5,476,027
|
|
Inventory
consisted of the following:
|
|
As of
March 31,
2017
|
|
|
As of
December 31,
2016
|
|
|
(Decrease)
Increase
|
|
Raw materials
|
|
$
|
313,648
|
|
|
$
|
318,443
|
|
|
($
|
4,795
|
)
|
Work-in-process
|
|
|
1,208,713
|
|
|
|
968,810
|
|
|
|
239,903
|
|
Finished goods
|
|
|
576,573
|
|
|
|
839,646
|
|
|
|
(263,073
|
)
|
Total
|
|
$
|
2,098,934
|
|
|
$
|
2,126,899
|
|
|
($
|
27,965
|
)
|
Accounts
receivable consisted of the following:
|
|
As of
March 31, 2017
|
|
|
As of
December 31, 2016
|
|
|
Increase
(Decrease)
|
|
Trade accounts receivable, gross
|
|
$
|
1,034,068
|
|
|
$
|
1,013,716
|
|
|
$
|
20,352
|
|
Allowance for bad debt and product returns
|
|
|
(22,406
|
)
|
|
|
(21,326
|
)
|
|
|
(1,080
|
)
|
Trade accounts receivable, net
|
|
$
|
1,011,662
|
|
|
$
|
992,390
|
|
|
$
|
19,272
|
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
6.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets consisted of the following:
|
|
As of
March 31, 2017
|
|
|
As of
December 31, 2016
|
|
|
Increase
(Decrease)
|
|
Prepaid expenses
|
|
$
|
186,291
|
|
|
$
|
126,523
|
|
|
$
|
59,768
|
|
Other receivables
|
|
|
76,232
|
|
|
|
144,848
|
|
|
|
(68,616
|
)
|
Security deposits
(1)
|
|
|
308,375
|
|
|
|
333,111
|
|
|
|
(24,736
|
)
|
Total
|
|
$
|
570,898
|
|
|
$
|
604,482
|
|
|
($
|
33,584
|
)
|
(1)
This balance as of December 31, 2016 included an option payment of $20,500 towards land (which we did not exercise) that
was subsequently applied to the purchase of a warehouse facility during the first quarter of 2017.
7.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property,
plant and equipment consisted of the following:
|
|
Estimated Useful Lives
(in years)
|
|
As of
March 31, 2017
|
|
|
As of
December 31, 2016
|
|
|
(Decrease)
Increase
|
|
Laboratory and manufacturing
equipment
|
|
5-10
|
|
$
|
5,360,730
|
|
|
$
|
5,562,938
|
|
|
($
|
202,208
|
)
|
Building and improvements
|
|
10-33
|
|
|
5,373,019
|
|
|
|
5,037,512
|
|
|
|
335,507
|
|
Office furniture and equipment
|
|
5-10
|
|
|
655,022
|
|
|
|
653,462
|
|
|
|
1,560
|
|
Construction in progress
(1)
|
|
|
|
|
7,481,083
|
|
|
|
3,694,509
|
|
|
|
3,786,574
|
|
Land
|
|
|
|
|
526,998
|
|
|
|
347,114
|
|
|
|
179,884
|
|
Property, plant and equipment, gross
|
|
|
|
|
19,396,852
|
|
|
|
15,295,535
|
|
|
|
4,101,317
|
|
Accumulated depreciation
|
|
|
|
|
(5,272,074
|
)
|
|
|
(5,449,242
|
)
|
|
|
177,168
|
|
Property, plant and equipment, net
|
|
|
|
$
|
14,124,778
|
|
|
$
|
9,846,293
|
|
|
$
|
4,278,485
|
|
(1)
Construction in progress consisted principally of costs incurred in connection with the building and equipping of our Nisin
production plant for
Mast Out
®
.
On
January 4, 2016, we acquired certain business assets and processes from DAY 1™ Technology, LLC of Minnesota. The acquired
rights and know-how are primarily related to formulating our bovine antibodies into a gel solution for an oral delivery option
to newborn calves via a syringe (or tube). This product format offers customers an alternative delivery option to the bolus (the
standard delivery format of the bivalent
First Defense
®
product since first approval by the U.S. Department
of Agriculture (USDA) and product launch in 1991) and could allow more market penetration. The formulation was developed for us
and has been sold as a feed product without disease claims since 2012. This purchase also includes certain other related private-label
products. The total purchase price was approximately $532,000. Approximately $368,000 of this amount was paid as of the closing
date. A technology transfer payment of $97,000 was made during the third quarter of 2016. There are also royalty payments owed
based on a percentage of sales made through December 31, 2018. There is no limit to the royalty amount. As of January 4, 2016,
we estimated the aggregate royalties to be paid would be approximately $67,000, which was recorded in accounts payable and accrued
expenses on the accompanying balance sheet. This amount was estimated to be approximately $30,000 as of December 31, 2016 and
March 31, 2017, which was included in accrued expenses. We made payments of $8,200 for the year ended December 31, 2016. The estimated
fair values of the assets purchased in this transaction included inventory of $113,000, machinery and equipment of $132,000, a
developed technology intangible of $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 $96,000. The intangible assets
and goodwill are deductible for tax return purposes. The goodwill arising from the acquisition consists largely of the estimated
value of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction
was closed as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies.
The impact of the acquisition on our pro forma prior year operations is not material. As of December 31, 2016, we vacated the
rented facility in Minnesota that had been used to produce the gel solution format of our product and certain other related private-label
products. This resulted in the termination of employment of four employees, as these production functions were consolidated into
our Portland facility, which enables us to better utilize existing infrastructure and larger scale equipment to improve operating
efficiencies.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
The
intangible assets described in Note 8 are being amortized to cost of goods sold over their useful lives, which are estimated to
be 10 years. Intangible amortization expense was $4,776 during the three-month period ended March 31, 2017. The net value of these
intangibles was $167,160 as of March 31, 2017. A summary of intangible amortization expense estimated for the periods subsequent
to March 31, 2017 is as follows:
Period
|
|
Amount
|
|
Nine months ending December 31, 2017
|
|
$
|
14,328
|
|
Year ending December 31, 2018
|
|
$
|
19,104
|
|
Year ending December 31, 2019
|
|
$
|
19,104
|
|
Year ending December 31, 2020
|
|
$
|
19,104
|
|
Year ending December 31, 2021
|
|
$
|
19,104
|
|
After December 31, 2021
|
|
$
|
76,416
|
|
Total
|
|
$
|
167,160
|
|
Intangible
assets as of March 31, 2017 consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
($
|
23,013
|
)
|
|
$
|
161,087
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(162
|
)
|
|
|
1,138
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(705
|
)
|
|
|
4,935
|
|
Total
|
|
$
|
191,040
|
|
|
($
|
23,880
|
)
|
|
$
|
167,160
|
|
Intangible
assets as of December 31, 2016 consisted of the following:
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Developed technology
|
|
$
|
184,100
|
|
|
($
|
18,410
|
)
|
|
$
|
165,690
|
|
Customer relationships
|
|
|
1,300
|
|
|
|
(130
|
)
|
|
|
1,170
|
|
Non-compete agreements
|
|
|
5,640
|
|
|
|
(564
|
)
|
|
|
5,076
|
|
Total
|
|
$
|
191,040
|
|
|
($
|
19,104
|
)
|
|
$
|
171,936
|
|
10.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts
payable and accrued expenses consisted of the following:
|
|
As of
March 31, 2017
|
|
|
As of
December
31, 2016
|
|
|
(Decrease)
Increase
|
|
Accounts payable – capital
|
|
$
|
850,321
|
|
|
$
|
1,249,862
|
|
|
($
|
399,541
|
)
|
Accounts payable – trade
|
|
|
316,506
|
|
|
|
257,397
|
|
|
|
59,109
|
|
Accrued payroll
|
|
|
230,251
|
|
|
|
200,477
|
|
|
|
29,774
|
|
Accrued professional fees
|
|
|
58,250
|
|
|
|
82,500
|
|
|
|
(24,250
|
)
|
Accrued other
|
|
|
164,963
|
|
|
|
101,527
|
|
|
|
63,436
|
|
Total
|
|
$
|
1,620,291
|
|
|
$
|
1,891,763
|
|
|
($
|
271,472
|
)
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
During
the first quarter of 2016, we entered into bank debt agreements covering certain additional credit facilities with TD Bank N.A.
aggregating up to approximately $4.5 million. As a result of loan amendments entered into with TD Bank N.A. on March 1, 2017,
these credit facilities now aggregate up to approximately $6.5 million, subject to certain restrictions set forth in the agreements.
These amendments were accounted for as modifications, and the related debt issuance costs are being amortized over the new terms.
The first instrument is comprised of a construction loan of up to $2.5 million and not to exceed 80% of the cost of equipment
installed in the to-be-constructed commercial-scale Nisin production facility for
Mast Out
®
. Effective March
1, 2017, this loan amount was increased by $1.44 million to $3.94 million. As amended, interest only will be payable at a variable
rate equal to the one-month LIBOR plus a margin of 2.25% through July 2018, at which time the loan converts to a seven-year term
loan facility at the same variable interest rate with monthly principal and interest payments due based on a seven-year amortization
schedule. The second instrument is comprised of a construction loan of up to $2.0 million and not to exceed 80% (75% prior to
the March 1, 2017 amendment) of the appraised value of the to-be-constructed commercial-scale Nisin production facility in Portland,
Maine. Effective March 1, 2017, this loan amount was increased by $560,000 to $2.56 million. As amended, interest only will be
payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through January 2018, at which time the loan converts
to a nine-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on
a twenty-year amortization schedule with a balloon principal payment of approximately $1.654 million due in January 2027. These
credit facilities are secured by substantially all of our assets and are subject to certain financial covenants. There were no
amounts outstanding under these facilities as of March 31, 2017.
We
have in place two credit facilities with TD Bank N.A. not to exceed 80% of the appraised value of our corporate headquarters and
production and research facility in Portland. Proceeds from a $1.0 million mortgage note were received during the third quarter
of 2010. Based on a fifteen-year amortization schedule, a balloon principal payment of $451,885 will be due during the third quarter
of 2020. Proceeds from a $2.5 million mortgage note were received during the third quarter of 2015. Based on a twenty-year amortization
schedule, a balloon principal payment of approximately $1.55 million will be due during the third quarter of 2025. Additionally,
proceeds from a $340,000 mortgage note, which is secured by the 4,114 square foot warehouse and storage facility we acquired adjacent
to our Nisin production plant, were received during the first quarter of 2017. This note bears interest at a variable rate equal
to the one-month LIBOR plus a margin of 2.25% (which was equal to 3.23% as of March 31, 2017) with monthly principal and interest
payments due for ten years based on a twenty-year amortization table. These three notes are secured by substantially all of our
assets and are subject to certain financial covenants. Principal payments (net of debt issuance costs) due under debt outstanding
as of March 31, 2017 are reflected in the following table by the year that payments are due:
Period
|
|
$1,000,000 Mortgage
Note
|
|
|
$2,500,000 Mortgage
Note
|
|
|
$340,000
Mortgage
Note
(1)
|
|
|
Debt
Issuance
Costs
|
|
|
Total
|
|
Nine-month period ending December 31, 2017
|
|
$
|
46,104
|
|
|
$
|
61,965
|
|
|
$
|
9,192
|
|
|
($
|
11,614
|
)
|
|
$
|
105,647
|
|
Year ending December 31, 2018
|
|
|
64,876
|
|
|
|
86,097
|
|
|
|
12,607
|
|
|
|
(15,485
|
)
|
|
|
148,095
|
|
Year ending December 31, 2019
|
|
|
68,908
|
|
|
|
89,997
|
|
|
|
13,019
|
|
|
|
(15,485
|
)
|
|
|
156,439
|
|
Year ending December 31, 2020
|
|
|
493,696
|
|
|
|
94,005
|
|
|
|
13,446
|
|
|
|
(14,851
|
)
|
|
|
586,296
|
|
Year ending December 31, 2021
|
|
|
-
|
|
|
|
98,538
|
|
|
|
13,886
|
|
|
|
(13,837
|
)
|
|
|
98,587
|
|
After December 31, 2021
|
|
|
-
|
|
|
|
1,951,228
|
|
|
|
277,850
|
|
|
|
(58,458
|
)
|
|
|
2,170,620
|
|
Total
|
|
$
|
673,584
|
|
|
$
|
2,381,830
|
|
|
$
|
340,000
|
|
|
($
|
129,730
|
)
|
|
$
|
3,265,684
|
|
(1)
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 3.2%. The actual interest rate and principal payments will be different.
We
hedged our interest rate exposure on the $1.0 million and the $2.5 million mortgage notes 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 March 31, 2017, the variable rates on these two mortgage notes were 4.13% and 3.23%, 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 (loss), 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 $3,055,414 as of March 31, 2017. The fair values of the interest rate swaps have been determined using observable
market-based inputs or unobservable inputs that are corroborated by market data. Accordingly, the interest rate swaps are classified
as level 2 within the fair value hierarchy provided in Codification Topic 820,
Fair Value Measurements and Disclosures
.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
|
|
Three-Month Periods
Ended March 31,
|
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
Payments required by interest rate swaps
|
|
$
|
11,676
|
|
|
$
|
15,200
|
|
|
$
|
58,346
|
|
|
$
|
32,515
|
|
Other comprehensive income (loss), net of taxes
|
|
$
|
10,070
|
|
|
($
|
65,074
|
)
|
|
$
|
26,354
|
|
|
($
|
26,925
|
)
|
In
connection with the credit facilities entered into during the third quarters of 2010 and 2015 and the first quarters of 2016 and
2017, we incurred debt issue costs of $26,489, $34,125, $46,734 and $54,036, respectively, which costs are being recorded as a
component of other expenses over the terms of the credit facilities.
The
$500,000 line of credit with TD Bank N.A. was first entered into during the third quarter of 2010 and has been renewed approximately
annually since then and is available as needed and has been extended through May 31, 2018. The line of credit, which is subject
to certain financial covenants, was unused as of March 31, 2017 and December 31, 2016. Interest on any borrowings against the
line of credit would be variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.
On
October 28, 2015, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) for the potential
issuance of up to $10,000,000 in equity (subject to certain limitations). This registration statement became effective on November
10, 2015. Under this form of registration statement, we were limited to raising gross proceeds of no more than one-third of the
market capitalization of our common stock (as determined by the high price within the preceding 60 days leading up to a sale of
securities) held by non-affiliates (non-insiders) of the Company within a twelve-month period. This limit was approximately $5,958,000,
based on the closing price of $8.08 per share as of January 6, 2016. 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, raising gross proceeds of approximately $5,900,000,
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,
resulting in net proceeds to the Company of approximately $3,161,000 after deducting placement agent fees and other estimated
expenses incurred in connection with the equity financing.
At
the June 15, 2016 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 10,000,000.
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.
In
June 2010, our stockholders approved the 2010 Stock Option and Incentive Plan (the “2010 Plan”) pursuant to the provisions
of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares
of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options
and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. At that time, 300,000
shares of common stock were reserved for issuance under the 2010 Plan and subsequently no additional shares have been reserved
for the 2010 Plan. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors
on a case by case basis. All options granted under the 2010 Plan expire no later than ten years from the date of grant.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
Activity
under the stock option plans described above was as follows:
|
|
2000 Plan
|
|
|
2010 Plan
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Outstanding at December 31, 2015
|
|
|
131,500
|
|
|
|
106,500
|
|
|
$
|
3.57
|
|
|
$
|
945,000
|
|
Grants
|
|
|
-
|
|
|
|
46,000
|
|
|
$
|
6.98
|
|
|
|
|
|
Terminations
|
|
|
(5,000
|
)
|
|
|
(12,000
|
)
|
|
$
|
6.16
|
|
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
(16,000
|
)
|
|
$
|
5.59
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
126,500
|
|
|
|
124,500
|
|
|
$
|
3.89
|
|
|
$
|
517,000
|
|
Grants
|
|
|
-
|
|
|
|
124,000
|
|
|
$
|
5.84
|
|
|
|
|
|
Terminations
|
|
|
(5,000
|
)
|
|
|
(1,000
|
)
|
|
$
|
4.90
|
|
|
|
|
|
Exercises
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
$
|
5.25
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
120,500
|
|
|
|
247,500
|
|
|
$
|
4.53
|
|
|
$
|
369,000
|
|
Vested at March 31, 2017
|
|
|
120,500
|
|
|
|
41,500
|
|
|
$
|
2.64
|
|
|
$
|
468,000
|
|
Vested and expected to vest at March 31, 2017
|
|
|
120,500
|
|
|
|
247,500
|
|
|
$
|
4.53
|
|
|
$
|
369,000
|
|
Reserved for future grants
|
|
|
-
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
(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.
During
the three-month period ended March 31, 2017, one employee who is also a director exercised stock options covering 1,000 shares
for cash, resulting in total proceeds of $5,250. During the year ended December 31, 2016, one employee and one director exercised
stock options covering the aggregate of 16,000 shares, of which 6,000 were exercised for cash, resulting in total proceeds of
$31,900, and 10,000 of these options were exercised by the surrender of 7,334 shares of common stock with a fair market value
of $57,425 at the time of exercise and $75 in cash. At March 31, 2017, 368,000 shares of common stock were reserved for future
issuance under all outstanding stock options described above, and an additional 32,500 shares of common stock were reserved for
the potential issuance of stock option grants in the future under the 2010 Plan.
The
weighted average remaining life of the options outstanding under the 2000 Plan and the 2010 Plan as of March 31, 2017 was approximately
6 years and 1 month. The weighted average remaining life of the options exercisable under these plans as of March 31, 2017 was
approximately 2 years and 2 months. The exercise prices of the options outstanding as of March 31, 2017 ranged from $1.70 to $8.21
per share. The 124,000 stock options granted during the three-month period ended March 31, 2017 had exercise prices between $5.78
and $5.84 per share. The 46,000 stock options granted during 2016 had exercise prices between $6.27 and $8.21 per share. The aggregate
intrinsic value of options exercised during 2017 and 2016 approximated $350 and $32,000, respectively. The weighted-average grant
date fair values of options granted during 2017 and 2016 were $3.47 and $4.16 per share, respectively. As of March 31, 2017, total
unrecognized stock-based compensation related to non-vested stock options aggregated $587,817, which will be recognized over a
weighted average period of two years and eleven 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 period ended March 31, 2017 and for the year ended December 31, 2016:
|
|
Three-Month Period
Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
|
|
1.2
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
62
|
%
|
|
|
63
|
%
|
Expected life
|
|
|
6.5 years
|
|
|
|
6.5 years
|
|
The
risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected option term, while the other
assumptions are derived from averages of our historical data.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
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.
On
June 8, 2005, our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date
by an additional three years, to September 19, 2008. As of June 30, 2005, we entered into an amendment to the Rights Agreement
with the Rights Agent reflecting such extension. On June 6, 2008 our Board of Directors voted to authorize an amendment of the
Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2011 and to increase the ownership
threshold for determining “Acquiring Person” status from 15% to 18%. As of June 30, 2008, we entered into an amendment
to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On August 5, 2011, our Board of
Directors voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date by an additional three years
to September 19, 2014 and to increase the ownership threshold for determining “Acquiring Person” status from 18% to
20%. As of August 9, 2011, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension
and threshold increase. On June 10, 2014, our Board of Directors voted to authorize an amendment to the Rights Agreement to extend
the final expiration date by an additional three years to September 19, 2017. As of June 16, 2014, we entered into an amendment
to the Rights Agreement with the Rights Agent reflecting such extension. During the second quarter of 2015, we amended our Common
Stock Rights Plan by removing a provision that prevented a new group of directors elected following the emergence of an Acquiring
Person (an owner of more than 20% of our stock) from controlling the Rights Plan by maintaining exclusive authority over the Rights
Plan with pre-existing directors. We did this because such provisions have come to be viewed with disfavor by Delaware courts.
No other changes have been made to the terms of the Rights or the Rights Agreement.
Other
expenses, net, consisted of the following:
|
|
Three-Month
Periods
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest expense
|
|
$
|
39,902
|
|
|
$
|
36,907
|
|
Interest income
|
|
|
(5,957
|
)
|
|
|
(13,335
|
)
|
Other gains
|
|
|
(3,703
|
)
|
|
|
(185
|
)
|
Other expenses,
net
|
|
$
|
30,242
|
|
|
$
|
23,387
|
|
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
Our
income tax expense aggregated $303,725 and $223,129 (amounting to 34% and 33% of our income before income taxes, respectively)
during the three-month periods ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we had federal general business
tax credit carryforwards of approximately $98,000 that expire in 2032 through 2036 (if not utilized before then) and state tax
credit carryforwards of approximately $136,000 that expire in 2023 through 2036 (if not utilized before then). The $965,000 licensing
payment that we made during the fourth quarter of 2004 was treated as an intangible asset and is being amortized over 15 years,
for tax return purposes only. Approximately $1,112,000 of our investment in a small-scale facility to produce the Drug Substance
(our Active Pharmaceutical Ingredient, Nisin) for
Mast Out
®
was expensed as incurred for our books. Included
in this amount is approximately $820,000 that was capitalized and is being depreciated over statutory periods for tax return purposes
only.
The
provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach,
deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and
liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able
to realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance
would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize
all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the
period such determination was made.
Net
operating loss carryforwards, credits, and other tax attributes are subject to review and possible adjustment by the Internal
Revenue Service. Section 382 of the Internal Revenue Code contains provisions that could place annual limitations on the future
utilization of net operating loss carryforwards and credits in the event of a change in ownership of the Company, as defined.
The
Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. With few exceptions, the Company
is no longer subject to income tax examinations by tax authorities for years before 2013. We currently have no tax examinations
in progress. We also have not paid additional taxes, interest or penalties as a result of tax examinations nor do we have any
unrecognized tax benefits for any of the periods in the accompanying financial statements.
15.
|
CONTINGENT LIABILITIES AND COMMITMENTS
|
Our
bylaws, as amended, in effect provide that the Company will indemnify its officers and directors to the maximum extent permitted
by Delaware law. In addition, we make similar indemnity undertakings to each director through a separate indemnification agreement
with that director. The maximum payment that we may be required to make under such provisions is theoretically unlimited and is
impossible to determine. We maintain directors’ and officers’ liability insurance, which may provide reimbursement
to the Company for payments made to, or on behalf of, officers and directors pursuant to the indemnification provisions. Our indemnification
obligations were grandfathered under the provisions of Codification Topic 460
, Guarantees
. Accordingly, we have recorded
no liability for such obligations as of March 31, 2017. Since our incorporation, we have had no occasion to make any indemnification
payment to any of our officers or directors for any reason.
The
development, manufacturing and marketing of animal health care products entails an inherent risk that liability claims will be
asserted against us during the normal course of business. We are aware of no such claims against us as of the date of this filing.
We feel that we have reasonable levels of liability insurance to support our operations.
We
enter into agreements with third parties in the ordinary course of business under which we are obligated to indemnify such third
parties from and against various risks and losses. The precise terms of such indemnities vary with the nature of the agreement.
In many cases, we limit the maximum amount of our indemnification obligations, but in some cases those obligations may be theoretically
unlimited. We have not incurred material expenses in discharging any of these indemnification obligations, and based on our analysis
of the nature of the risks involved, we believe that the fair value of the liabilities potentially arising under these agreements
is minimal. Accordingly, we have recorded no liabilities for such obligations as of March 31, 2017.
We
are committed to purchasing certain key parts (syringes) and services (formulation, filling and packaging of Drug Product) pertaining
to
Mast Out
®
exclusively from two contractors. If we do not commercialize the product by the end of 2019,
we would be liable for a $100,000 termination fee under one of such agreements.
ImmuCell Corporation
Notes to Unaudited Condensed Financial Statements
(continued)
During
the second quarter of 2009, we entered into an exclusive license with the Baylor College of Medicine covering the underlying rotavirus
vaccine technology used to generate the specific antibodies for our product line extension (
First Defense
®
Tri-Shield
™
)
that is under development. This perpetual license (if not terminated for cause) is subject to a milestone payment of $150,000
upon regulatory approval and a royalty equal to 4% of sales above current sales of our bivalent product plus a growth assumption.
During
the third quarter of 2016, we initiated construction of our Nisin production facility for
Mast Out
®
. The
estimated total cost of the Nisin facility is approximately $20,000,000. As of March 31, 2017, we had incurred approximately $7,315,000
of capital expenditures related to this project, of which $6,468,000 had been paid as of the end of the quarter. The majority
of the remainder of this investment is expected to be paid during the six-month period ending September 30, 2017. As of March
31, 2017, we had committed $11,245,000 of the remaining $13,532,000 expected to be paid on this project. Approximately $6,831,000
of these capital expenditures is committed under a guaranteed maximum price contract with our construction management firm, net
of payments made. This contract includes provisions that could reduce the amount of the commitment generally by the amount not
expended or committed by the construction manager at the time of an unexpected and unlikely early termination. We expect to fund
the remaining costs in excess of our current cash and investments with borrowings under the credit facilities described in Note
11. In addition to the commitments related to
Mast Out
®
discussed above, we had committed $529,000 to the
production of inventory and $67,000 to other obligations, as of March 31, 2017.
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 cows for the dairy and beef industries. 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 92% of our total product sales during the three-month periods
ended March 31, 2017 and 2016. Our primary customers for the majority of our product sales (77% and 89% for the three-month periods
ended March 31, 2017 and 2016, respectively) are in the U.S. dairy and beef industries. Product sales to international customers,
who are also in the dairy and beef industries, aggregated 18% and 9% of our total product sales for the three-month periods ended
March 31, 2017 and 2016, respectively.
17.
|
RELATED PARTY TRANSACTIONS
|
Dr.
David S. Tomsche (Chair of our Board of Directors) is a controlling owner of Leedstone Inc. (formerly Stearns Veterinary Outlet,
Inc.), a domestic distributor of ImmuCell products (
First Defense
®
,
Wipe Out
®
Dairy Wipes
,
and
CMT
) and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $196,708 and $158,387
of products from ImmuCell during the three-month periods ended March 31, 2017 and 2016, respectively, on terms consistent with
those offered to other distributors of similar status. We made marketing-related payments of $1,177 and $975 to these affiliate
companies during the three-month periods ended March 31, 2017 and 2016, respectively, that were expensed as incurred. Our accounts
receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated $33,828 and $3,221
as of March 31, 2017 and December 31, 2016, respectively.
We
have a 401(k) savings plan (the Plan) in which all employees completing one month of service with the Company are eligible to
participate. Participants may contribute up to the maximum amount allowed by the Internal Revenue Service. Since August 2012,
we have matched 100% of the first 3% of each employee’s salary that is contributed to the Plan and 50% of the next 2% of
each employee’s salary that is contributed to the Plan. Under this matching plan, we paid $18,709 and $17,326 into the plan
for the three-month periods ended March 31, 2017 and 2016, respectively.
We
have evaluated subsequent events through the time of filing on May 11, 2017, the date we have issued this Quarterly Report on
Form 10-Q. As of such date, except as described below, there were no material, reportable subsequent events. During the second
quarter of 2017, our $500,000 line of credit with TD Bank N.A. was extended through May 31, 2018.
ImmuCell Corporation