UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

  

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

001-12934

(Commission file number)

 

ImmuCell Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware

 

01-0382980

(State of incorporation)   (I.R.S. Employer
Identification No.)

 

56 Evergreen Drive, Portland, Maine

 

04103

(Address of principal executive office)   (Zip Code)

 

Registrant’s telephone number: (207) 878-2770

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.10 per share 

(Title of class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No þ

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐  No þ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐  
Non-accelerated filer ☐   Smaller reporting company ☑  
Emerging growth company ☐      

   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2019 was approximately $40,669,000 based on the closing sales price on June 28, 2019 of $6.50 per share.

 

The number of shares of the Registrant’s common stock outstanding at March 19, 2020 was 7,212,919.

 

Documents incorporated by reference: Portions of the Registrant’s definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

 

 

 

 

 

ImmuCell Corporation

TABLE OF CONTENTS

December 31, 2019

 

  Page
  PART I  
ITEM 1. Business 1
     
ITEM 1A. Risk Factors 11
     
ITEM 1B. Unresolved Staff Comments 17
     
ITEM 2. Properties 18
     
ITEM 3. Legal Proceedings 18
     
ITEM 4. Mine Safety Disclosures 18
  PART II  
     
ITEM 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19
     
ITEM 6. Selected Financial Data 19
     
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 31
     
ITEM 8. Financial Statements and Supplementary Data 32
     
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 32
     
ITEM 9A Controls and Procedures 33
     
ITEM 9B. Other Information 33
  PART III  
     
ITEM 10. Directors, Executive Officers and Corporate Governance 34
     
ITEM 11. Executive Compensation 35
     
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35
     
ITEM 13. Certain Relationships and Related Transactions and Director Independence 35
     
ITEM 14. Principal Accounting Fees and Services 35
     
  PART IV  
     
ITEM 15. Exhibits and Financial Statement Schedules 36
     
  Audited Financial Statements F-1 to F-26
     
  Signatures 38

 

i

 

 

ImmuCell Corporation

 

PART I 

 

ITEM 1 – BUSINESS

 

Cautionary Note Regarding Forward-Looking Statements (Safe Harbor Statement):

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, but are not limited to, any statements relating to: our plans and strategies for our business; projections of future financial or operational performance; the timing and outcome of pending or anticipated applications for regulatory approvals; factors that may affect the dairy and beef industries and future demand for our products; the scope and timing of ongoing and future product development work and commercialization of our products; future costs of product development efforts; the estimated prevalence rate of subclinical mastitis; the expected efficacy of new products; estimates about the market size for our products; future market share of and revenue generated by current products and products still in development; our ability to increase production output and reduce costs of goods sold associated with our new product, Tri-Shield First Defense®; the future adequacy of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for our products on a timely basis; the anticipated costs of (or time to complete) planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the continuing availability to us on reasonable terms of third-party providers of critical products or services; the robustness of our manufacturing processes and related technical issues; estimates about our production capacity, efficiency and yield; the future adequacy of our working capital and the availability and cost of third-party financing; future regulatory requirements relating to our products; future expense ratios and margins; future compliance with bank debt covenants; future cost of our variable interest rate exposure on most of our bank debt; costs associated with sustaining compliance with current Good Manufacturing Practice (cGMP) regulations in our current operations and attaining such compliance for the facility to produce the Nisin Drug Substance; implementation of international trade tariffs that could reduce the export of dairy products, which could in turn weaken the price received by our customers for their products; our effectiveness in competing against competitors within both our existing and our anticipated product markets; the cost-effectiveness of additional sales and marketing expenditures and resources; anticipated changes in our manufacturing capabilities and efficiencies; the value of our net deferred tax assets; projections about depreciation expense and its impact on income for book and tax return purposes; anticipated market conditions; and any other statements that are not historical facts. Forward-looking statements can be identified by the use of words such as “expects”, “may”, “anticipates”, “aims”, “intends”, “would”, “could”, “should”, “will”, “plans”, “believes”, “estimates”, “targets”, “projects”, “forecasts”, “seeks” and similar words and expressions. In addition, there can be no assurance that future developments affecting us will be those that we anticipate. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to difficulties or delays in development, testing, regulatory approval, production and marketing of our products (including the First Defense® product line and Re-Tain™), competition within our anticipated product markets, customer acceptance of our new and existing products, product performance, alignment between our manufacturing resources and product demand, our reliance upon third parties for financial support, products and services, changes in laws and regulations, decision making and delays by regulatory authorities, currency values and fluctuations and other risks detailed from time to time in filings we make with the Securities and Exchange Commission (SEC), including our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K and our Current Reports on Form 8-K. Such statements involve risks and uncertainties and are based on our current expectations, but actual results may differ materially due to various factors, including the risk factors summarized under PART I: ITEM 1A – RISK FACTORS of this Annual Report and uncertainties otherwise referred to in this Annual Report on Form 10-K.

 

Summary

 

ImmuCell Corporation was founded in 1982 and completed an initial public offering of common stock in 1987. After achieving approval from the Center for Veterinary Biologics, U.S. Department of Agriculture (USDA) to sell First Defense® in 1991, we focused most of our efforts during the 1990’s attempting to develop human product applications of the underlying milk protein purification technology. Beginning in 1999, we re-focused our business strategy on the First Defense® product line and other products that improve the health and productivity of dairy and beef cattle. The demand for animal protein, that must be produced efficiently while ensuring food quality and safety, increases as the human population grows. Further, our products help address the growing human health concern about using less antibiotics in food-producing animals. We aim to capitalize on the growth in sales of the First Defense® product line (a product that provides significant Immediate Immunity™ to newborn dairy and beef livestock) and to revolutionize the mastitis treatment paradigm with Re-Tain™ (formerly Mast Out®), a product we are developing to treat this most significant cause of economic loss to the dairy industry.

 

1

 

 

ImmuCell Corporation

 

During 2000, we began the development of Re-Tain™, our purified Nisin treatment for subclinical mastitis in lactating dairy cows. No sales of this product can be made without prior approval of our New Animal Drug Application (NADA) by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA). We have now achieved FDA approval for four out of five of the significant regulatory submissions required for product approval. Regulatory achievements to date have significantly reduced the product development risks in the areas of safety and effectiveness. Our primary product development focus has now turned to completion of the manufacturing objectives required for FDA approval.

 

Since 2006, we have made ongoing efforts to maintain compliance with current Good Manufacturing Practice (cGMP) regulations in all of our manufacturing operations, which requires a sustained investment that further enhances the quality of all of our products and our operating efficiency. As we make process improvements, we continue to invest in personnel, equipment and facility modifications to increase the efficiency and quality of our operations.

 

During 2017 and 2016, we issued an aggregate of 2,401,497 shares of common stock, raising net proceeds of approximately $12.24 million in four separate transactions. Then during the first quarter of 2019, we sold an additional 1,636,364 shares of common stock at a price to the public of $5.50 per share, raising net proceeds of approximately $8.3 million. In order to minimize the dilutive effects of these transactions on our existing stockholders, we chose not to issue any form of convertible or preferred securities and issued these common shares without any warrants. During 2017 and 2016, we also secured approximately $6.8 million in new debt. During the first quarter of 2020, we refinanced all of our then outstanding bank debt, as discussed in more detail later in this report. This new capital has been and is being used to complete the development of Re-Tain™ and increase the production capacity for the First Defense® product line without relying on funding from a partner or licensee, thereby keeping control over all product rights and future revenues.

 

Our operations have been generally profitable, except when we have elected to make unusually large investments in product development expenses for future growth. During the past four years, we have funded our operations, completed a significant capital investment in our Drug Substance manufacturing facility for Re-Tain™ and initiated capital investments to increase our production capacity for the First Defense® product line and to bring the formulation and aseptic filling capabilities for Re-Tain™ in house. Once these capital expenditure investments are complete, we expect to see decreases in cash and net working capital and increases in total assets and stockholders’ equity in comparison to the balances as of December 31, 2015. The following table displays the balances of these accounts (in thousands, except for percentages):

 

  

As of
December 31,
2019

   As of
December 31,
2015
  

$ Increase
Over
Four-
Year Period

  

% Increase
Over
Four-
Year Period

 
Cash, cash equivalents, short-term investments and long-term investments  $8,774   $6,524   $2,250    34%
Net working capital  $10,694   $7,056   $3,638    52%
Total assets  $38,692   $14,601   $24,091    165%
Stockholders’ equity  $28,991   $10,614   $18,377    173%
Market capitalization  $37,147   $23,035   $14,112    61%
Common shares outstanding(1)   7,213    3,055    4,158    136%

 

(1)There were approximately 389,000 and 238,000 shares of common stock reserved for issuance under stock options that were outstanding as of December 31, 2019 and 2015, respectively.

 

2

 

 

ImmuCell Corporation

 

Animal Health Products

 

The First Defense® product line is manufactured from hyperimmune cows’ colostrum (the antibody rich milk that a cow produces immediately after giving birth) utilizing our proprietary vaccine and milk protein purification technologies. The First Defense® product line provides bovine antibodies that newborn calves need but are unable to produce on their own immediately after birth. The target disease, calf scours (bovine enteritis), causes diarrhea and dehydration in newborn calves and often leads to serious sickness and even death. The First Defense® product line is the only USDA-licensed, orally delivered scours preventive product on the market for calves with claims against E. coli, coronavirus and rotavirus (three leading causes of scours). A single dose of our product provides a measured level of protection proven to reduce mortality and morbidity. Our milk antibody products provide Immediate Immunity™ during the first few critical days of life when calves need this protection most. Studies have shown that calves that scour are more susceptible to other diseases later in life and under-perform calves that do not contract scours. The direct, two-part mode-of-action of the First Defense® product line delivers specific immunoglobulins at the gut level to immediately protect against disease, while also providing additional antibodies that are absorbed into the bloodstream. These circulating antibodies function like a natural timed-release mechanism, as they are re-secreted into the gut later to provide extended protection. The First Defense® product line is convenient to use. A calf needs to receive only one dose of First Defense® within the first twelve hours after birth. The capsule format of this product is stored at room temperature and no mixing is required before it is given to the calf. The gel tube formats of this product require refrigeration in accordance with product label indications. We are a leader in the scours prevention market with this product. The third quarter of 2019 marked the 28th anniversary of the original USDA approval of this product in 1991. During the fourth quarter of 2019, our cumulative sales of First Defense® since inception exceeded 24,000,000 doses. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product.

 

The global coronavirus pandemic (novel coronavirus or COVID-19, technically known as SARS-CoV-2 and originating from China) has tragically resulted in the deaths of more than 14,000 people and infected more than 330,000 others so far in many countries. Our First Defense® product line protects against bovine coronavirus, which is in a different coronavirus taxonomic group and therefore not likely to be cross-protective with SARS-CoV-2. We have contacted experts at the NIAID Respiratory Diseases Branch, CDC, USDA and certain contract research organizations and universities to understand the related regulatory issues and in an effort to have our antibodies tested. We would make a public announcement when and if we have any favorable test results.

 

We believe that the long-term growth in sales of the First Defense® product line may reflect, at least in part, the success of our strategic decision initiated in 2010 to invest in additional sales and marketing efforts to help us introduce the expanding First Defense® product line to new customers. We launched a communications campaign at the end of 2010 that continues to emphasize how the unique ability of the First Defense® product line to provide Immediate Immunity™ generates a dependable and competitive return on investment for dairy and beef producers. Preventing newborn calves from becoming sick helps them to reach their genetic potential and reduces the need to use treatment antibiotics later in life.

 

Our new product line extension, Tri-Shield First Defense®, is the first calf-level, passive antibody product on the market with USDA-approved disease claims providing Immediate Immunity™ against each of the three leading causes of calf scours (E. coli, coronavirus and rotavirus). This new product achieved USDA approval during the fourth quarter of 2017 and was listed with the Organic Materials Research Institute (OMRI) during the first quarter of 2019, which means it can be used on organic farms. Tri-Shield®combines the E. coli and coronavirus antibodies contained in our bivalent product with a measured level of rotavirus antibody in one preventative dose in a gel tube delivery format. This unique breadth of claims further differentiates our product from competitive products on the market that contain only one or two of these label claims. Because it is possible that all farms may not have a rotavirus problem, we are continuing to sell the bivalent formats of the First Defense®product line as options for customers.

 

3

 

 

ImmuCell Corporation

 

Historically, the primary tool to help combat scours has been to vaccinate the mother cow (dam) with a scours vaccine. With this expanded claim set, we are competing more effectively against these dam-level vaccine products that are given to increase the antibody level against specific scours-causing pathogens in the colostrum that she produces for her newborn. It is generally believed that only 80% of animals respond to a vaccine, which could leave about 20% of calves unprotected. We believe that the variability in a cow’s immune response to vaccines creates a sales opportunity for our product. Additionally, our research suggests that treatment protocols for dam-level scours vaccine programs are not always followed, leaving even more calves compromised. Our new marketing campaign, Beyond Vaccination®, emphasizes that by delivering Immediate Immunity™ directly to the calf via the First Defense®product line, producers can reduce stress-causing injections to the cow and save the associated labor for vaccines that are more critical to cow health. Reliance on a dam-level scours vaccine requires that money be spent before it is known whether the cow is carrying a viable, valued calf. With the First Defense® product line, every calf is equally protected and that investment can be targeted to the calves that are most critical to the operation. This, in turn, can free up space in the cow’s vaccination schedule to improve her immune response to vaccines that are critical to her health.

 

First Defense Technology® is a unique whey protein concentrate that is processed utilizing our proprietary colostrum (first milk) protein purification methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed product. During 2012, we initiated a limited launch of a gel tube delivery format of our First Defense Technology® in a gel solution. We achieved USDA claims for this product format during the fourth quarter of 2018 and Canadian approval during the first quarter of 2019, and it is now being sold as Dual-Force First Defense®. We are selling the same concentrated whey proteins in a bulk powder format (no capsule), which is delivered with a scoop and mixed with colostrum for feeding to calves. We are working to achieve USDA claims for this product format by 2021. During 2011, Milk Products, LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra Start® 150 Plus and certain similar private label products, which are colostrum replacers with First Defense Technology® Inside.

 

Other competition for resources that dairy producers allocate to their calf enterprises has been increased by the many new products (principally feed supplements) that have been introduced to the calf market. Warm and dry weather reduces the producer’s perception of the need for a disease preventative product like the First Defense® product line. However, heat stress on calves caused by extremely hot summer weather can increase the incidence of scours, just as harsher winter weather benefits our sales. Market conditions in the dairy and beef industries, including milk pricing and prices for calves, have weakened since 2014. Milk prices made modest improvements in 2017 over the annual averages for 2016 and 2015 but declined by 10% in 2018 in comparison to 2017. We have seen an improved milk price during 2019 and into 2020. Despite the market volatility affecting both milk prices and feed costs, we continue to increase our sales.

 

During 2001, we began to offer our own, internally developed California Mastitis Test (CMT). CMT is most often used as a quick on-farm diagnostic to determine which quarter of the udder is mastitic. This test can be performed at cow-side for early detection of mastitis. CMT products are also made by other manufacturers and are readily available to the dairy producer.

 

In connection with our acquisition of certain gel formulation technologies during the first quarter of 2016, we also acquired private label manufacturing rights covering two feed supplement product lines that we now produce and sell under private label relationships with Ridley, USA Inc. of Mankato, MN and Genex Cooperative Inc. of Shawano, WI. These products do not utilize our proprietary antibody technology.

 

Sales and Markets

 

Our sales and marketing team consists of one vice president, seven regional manager positions and one inside sales and marketing position. Presently, one of these regional manager positions is open, but we have engaged two independent contractors to help increase our sales. The First Defense® product line and CMT are sold primarily through major animal health distributors who, in turn, sell to veterinary clinics, fleet stores and direct to farms. We have experienced minimal bad debt with respect to these products. Sales of the First Defense® product line are normally seasonal, with higher sales expected during the first quarter, largely driven by the beef calving season, which runs primarily from January to April, unlike the dairy industry in which operations generally calve year round.

 

We estimate that the total U.S. market for scours preventative products (including sales of our product) that are given to newborn calves (the calf-level market) is approximately $21.6 million per year. With the additional claim for our new product (Tri-Shield First Defense®) against rotavirus, we are now competing against the dam-level vaccine products that are given to the mother cow to increase the antibody level against specific scours-causing pathogens in the colostrum that she produces for her newborn. We estimate that the dam-level product category covers approximately twice as many calves as the calf-level product segment reaches. We estimate that the total addressable market (both calf and dam levels) is approximately $64.1 million.

 

4

 

 

ImmuCell Corporation

 

The majority of our international sales are to Canada. We price our products in U.S. dollars. To the extent that the value of the dollar declines with respect to any other currency, our competitive position may be enhanced. Conversely, an increase in the value of the dollar in any country in which we sell products may have the effect of increasing the local price of our products, thereby leading to a potential reduction in demand. Generally, our international sales have been generated through relationships with in-country distributors that have knowledge of the local regulatory and marketing requirements. We are initiating our plan to expand the number of countries to which our First Defense® product line is approved for export. Generally, it is our intent to be the holder of these product registrations for each country rather than rely on distribution partners to gain and hold these registrations. This is a long regulatory process but allows us to maximize the use of our product label claims. We continue our efforts to grow sales of the First Defense® product line in North America, where there are approximately 41,119,000 dairy and beef cows in the United States and 4,640,000 dairy and beef cows in Canada. We believe that significant market opportunities exist in other international territories. The statistics above are provided by an industry compilation of USDA data for 2020. However, industry practices, economic conditions, cause of disease, distribution channels and regulatory requirements may differ in these international markets from what we experience in North America, potentially making it more difficult or costly for us to generate and sustain sales volumes at profitable margins in these markets.

 

We introduced First Defense® into South Korea in 2005 through Medexx Co., Ltd of Gyeonggi-do, Korea and its equivalent into Japan in 2007 through NYS Co., Ltd of Iwate, Japan. The business in Japan is currently not active, but we are working to resume sales in this territory. We entered into distribution contracts covering certain Middle Eastern countries with Triplest for Drugs and Trade of Madaba, Jordan during the first quarter of 2017 (no sales have yet been achieved under this contract) and covering Iran with Senikco, LLC of Laguna Niguel, CA during the fourth quarter of 2016 (sales have been initiated under this contract).

 

With Re-Tain, we are working to expand our product offerings to include an intramammary treatment for subclinical mastitis for the mother cow during lactation. Nisin (the active ingredient in Re-Tain) is a bacteriocin that is not used in human medicines and could alleviate some of the social concerns that the widespread use of antibiotics encourages the growth of antibiotic-resistant bacteria (“superbugs”). This antibacterial peptide is known to be effective against most Gram-positive and some Gram-negative bacteria. Mastitis (inflammation of the mammary gland) is estimated to cost the U.S. dairy industry approximately $2 billion in economic harm per year, which makes it the most costly and common disease affecting the dairy industry. The disease diminishes the saleable quantity and overall value of milk, in addition to causing other herd health and productivity losses. While the benefit of treating clinical mastitis is widely known, subclinical mastitis (those cases where cows have infected udders, but still produce saleable milk) is associated with its own significant economic losses and is recognized as a substantial contributor to clinical mastitis cases. There is a growing awareness of the cascade of adverse events and conditions associated with subclinical mastitis for both the dairy producer and the milk processor, including reduced or foregone milk quality premiums, lower milk production (some have estimated approximately 1,500 pounds of lost milk, or about $270 at $18.00 per hundredweight, per infected cow), shorter shelf life for fluid milk, lower yields and less flavor for cheese, higher rates of clinical mastitis, lower conception rates, increased abortions and increased cull rates. Some industry experts have estimated that subclinical mastitis costs the U.S. dairy industry approximately $1 billion per year.

 

We believe that Re-Tain could revolutionize the way that mastitis is treated by making earlier treatment of subclinically infected cows (while these cows are still producing saleable milk) economically feasible by not requiring a milk discard during, or for a period of time after, treatment, which would be a significant competitive advantage for our product. No other FDA-approved mastitis treatment product on the market can offer this value proposition. Because the milk from cows treated with traditional antibiotics must be discarded, most dairy producers simply do not treat subclinically infected cows. It is generally current practice to treat mastitis only when the disease has progressed to the clinical stage where the milk from an infected cow cannot be sold. The ability to treat such cases without a milk discard could revolutionize the way mastitis is managed in a herd. It is common practice to move sick cows from their regular herd group to a sick cow group for treatment and the related milk discard. This movement causes stress on the cow and a reduction in milk production. Cows treated with our product would not have to be moved, allowing this costly drop in production to be avoided. Our product likely will be priced at a premium to the traditional antibiotic products currently on the market, which are all sold subject to a milk discard requirement. Common milk discard periods cover the duration of treatment and extend from 36 to 96 hours after last treatment, depending on the antibiotic. On average, a cow produces approximately 60 to 80 pounds of milk per day. While milk prices vary significantly, at an average value of $18.00 per 100 pounds, a cow produces approximately $10.80 to $14.40 worth of milk per day. These estimated figures would result in milk discard costs ranging from approximately $37.80 (for 3.5 days of milk at 60 pounds per day) to $158.40 (for 11 days of milk at 80 pounds per day) per treated animal. We estimate that the approximate cost to the U.S. dairy industry of this discarded milk may be around $300 million per year. We believe that the product’s value proposition demonstrates a return on investment to the dairy producer and the milk processor that will justify a premium over other mastitis treatments on the market today.

 

5

 

 

ImmuCell Corporation

 

The USDA’s National Animal Health Monitoring System through its Dairy 2014 study suggests that 21% of all dairy cows are treated with a mastitis drug, of which approximately 51% are treated with third generation cephalosporins. Many fear that the possible overuse of antibiotics in livestock undermines the effectiveness of drugs to combat human illnesses and contributes to a rising number of life-threatening human infections from antibiotic-resistant bacteria, commonly known as “superbugs”. The FDA is committed to addressing this public health risk. Citing concerns about untreatable, life-threatening infections in humans, new FDA and European regulations are aimed at restricting the use of antibiotics (including cephalosporins) in food animals and at improving milk quality. Regulators have recently increased their monitoring of antibiotic residues in milk and meat. During the first quarter of 2012, the USDA reduced the allowable level of somatic cell counts (SCC) in milk from 750,000 (cells per milliliter) to 400,000 at the individual farm level (not a blended calculation of comingled milk) in order to qualify for an EU health certification for export.

 

The FDA’s Veterinary Feed Directive (VFD) became effective January 1, 2017, restricting the use of medically important antibiotics for performance purposes and requiring more oversight of antibiotic usage in food producing animals by a veterinarian, and more changes and restrictions relating to antibiotic usage appear to be likely. Several major food processors and retailers have implemented policies addressing this growing public health concern. By reducing the risk of antibiotic residues and slowing the development of antibiotic-resistant organisms, we can improve food quality and preserve medically important antibiotics for human disease treatment. This would not be a concern for Re-Tain because Nisin is not used for human health. This current environment could be favorable to the introduction of our new product as an alternative to traditional antibiotics such as penicillin and cephalosporins. We believe that this changing environment of new regulations and public opinion supports the value of our ongoing development and commercialization efforts for Re-Tain. Additionally, we believe that the use of our First Defense® product line is consistent with this trend of reducing the use of antibiotics because the prevention of calf scours early in life with our purified colostrum antibodies can reduce the need for treatment antibiotics later in a calf’s life.

 

It is difficult to estimate the potential size of the market for the treatment of subclinical mastitis because this disease is largely left untreated presently. We believe that approximately 20-30% of the U.S. dairy herd is affected by subclinical mastitis caused by Gram-positive organisms falling within the claim spectrum of our product. This compares to approximately 2% of the U.S. herd that is thought to be infected with clinical mastitis, where approximately $60 million per year is spent on drug treatments. We believe that similar market opportunities also exist outside of the United States and for the treatment of dry (non-lactating) cows. Given what we believe to be reasonable assumptions, we estimate that the U.S. market potential for first year sales of our new product could be approximately $5.8 million and could grow to approximately $36.1 million during the fifth year after market launch. The amount of sales that we can capture from this estimated market potential and the timing of when this can be achieved is very difficult to know, and the actual size of the market for our new product may differ materially from our estimates (up or down). We expect the Drug Substance production facility that we constructed for approximately $20.8 million to have initial annual production capacity sufficient to meet approximately $10 million in sales of Re-Tain at current production yields. This production capacity estimate does not yet reflect any inventory build strategies in advance of product approval or ongoing yield improvement initiatives. Our new facility is designed to have enough room to add a second fermentation and recovery portion of the production line to be purchased and installed at the cost of approximately $7 million to effectively double production output. We would consider making this investment only after commercial acceptance of the product is demonstrated. That being said, we are presently planning to use the space originally intended for the second Drug Substance fermentation and recovery production line for the installation of a Drug Product formulation and aseptic filling module. Thus, expansion of the estimated annual capacity of the Drug Substance facility beyond approximately $10 million (without factoring in potential yield improvements) would now require relocation of the Drug Product formulation and aseptic filling module to another facility, or the acquisition and equipping of other Drug Substance production facilities at substantial additional cost or alternative manufacturing strategies.

 

6

 

 

ImmuCell Corporation

 

With a measured approach to expanding our customer-facing staff, it is our objective to increase our current annual level of product sales of almost $14 million to approximately $20 million through both continued growth in sales of the First Defense® product line and a successful launch of Re-Tain as soon as possible. As market penetration for both new products is achieved and additional resources are dedicated to production, sales, marketing and technical services, our longer-term goal is to exceed the $30 million level of annual product sales as soon as possible during the five-year period after the market launch of Re-Tain.

 

Product Development

 

The majority of our product development spending has been focused on the development of Re-Tain, our purified Nisin treatment for subclinical mastitis in lactating cows. During the twenty-year period that began on January 1, 2000 and ended on December 31, 2019, we invested the aggregate of approximately $17.3 million (excluding depreciation and the capital cost of our Drug Substance production facility) in the development of this product. This estimated allocation reflects only direct expenditures and includes no allocation of product development or administrative overhead expenses. Approximately $2.9 million of this investment was offset by related product licensing revenues and grant income, most of which was earned from 2001 to 2007.

 

Subclinical mastitis, and the study required to achieve an effectiveness claim for it, is defined under the FDA/Center for Veterinary Medicine Guidance #49: Target Animal Safety and Drug Effectiveness Studies for Anti-Microbial Bovine Mastitis Products (Lactating and Non-Lactating Cow Products). Trial eligibility requires both pretreatment samples to be positive for the mastitis pathogen (except for Staphylococcus aureus and Streptococcus agalactiae, where a single pretreatment sample qualifies a cow for enrollment). For all pathogens, both samples taken between 14 and 28 days post treatment (and at least 5 days apart) must be negative to be judged a cure. These conservative criteria generally result in enrolling cows with chronic subclinical disease, which rarely self-resolves. It has been reported that approximately 25% to 30% of cows with chronic cases of subclinical mastitis may exhibit clinical symptoms that require antibiotic treatments and withholding of milk. In the field, these cows are generally not treated in order to avoid the label requirement to discard milk from treated cows. We believe that the chronicity of subclinical mastitis is responsible for several negative impacts. Milk from cows infected with subclinical mastitis has greater somatic cell counts (SCC), and producers may be paid less for this lower quality milk. Cows with subclinical mastitis infections are known to produce less milk, and cows that maintain subclinical mastitis across the dry period have been shown to produce significantly less milk. The failure to treat subclinical mastitis may result in chronic infections that are unlikely to respond to antibiotic therapy. Finally, cows with subclinical mastitis maintain a reservoir of infection within the herd and increase exposure of healthy cows to contagious pathogens.

 

During 2000, we acquired an exclusive license from Nutrition 21, Inc. (formerly Applied Microbiology Inc. or AMBI) to develop and market Nisin-based products for animal health applications, which allowed us to initiate the development of Re-Tain™. In 2004, we paid Nutrition 21 approximately $965,000 to buy out this royalty and milestone-based license to Nisin, thereby acquiring control of the animal health applications of Nisin. Nisin is a well characterized substance, having been used in food preservation applications for over 50 years. Food-grade Nisin, however, cannot be used in pharmaceutical applications because of its low purity. Our Nisin technology includes patented processing and purification methods to achieve pharmaceutical-grade purity.

 

In 2004, we entered into a product development and marketing agreement with Zoetis (formerly Pfizer Animal Health, a division of Pfizer, Inc.) covering this product. That company elected to terminate the agreement in 2007. We believe that this decision was not based on any unanticipated efficacy or regulatory issues. Rather, we believe the decision was primarily driven by a marketing concern relating to their fear that the milk from treated cows could interfere with the manufacture of certain cultured dairy products. Due to the zero milk discard feature, there is a risk that Nisin from the milk of treated cows could interfere with the manufacture of certain (but not all) commercial cultured dairy products, such as some kinds of cheese and yogurt, if a process tank contains a high enough percentage of milk from treated cows. The impact of this potential interference ranges from a delay in the manufacturing process (which does happen at times for other reasons) to the less likely stopping of a cheese starter culture. Milk from cows that have been treated with our product that is sold exclusively for fluid milk products presents no such risk. We worked with scientists and mastitis experts to conduct a formal risk assessment to quantify the impact that milk from treated cows may have on cultured dairy products. This study concluded that the dilution of milk from treated cows through comingling with milk from untreated cows during normal milk hauling and storage practices reduces the risk of interference with commercial dairy cultures to a negligible level when the product is used in accordance with the product label. Further, we believe that such a premium-priced product will be used selectively, which reduces the risk of cheese interference and is consistent with modern “precision dairying” practices that discourage the indiscriminate use of drug treatments.

 

7

 

 

ImmuCell Corporation

 

Our second most important product development initiatives (in terms of dollars invested and, we believe, potential market impact) have been focused on other improvements, extensions or additions to our First Defense® product line. 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 use with animals. This perpetual license (if not terminated for cause) is subject to ongoing royalty payments. We achieved product license approval and initiated market launch of this product, Tri-Shield First Defense®, during the fourth quarter of 2017. During the third quarter of 2018, we obtained approval from the Canadian Food Inspection Agency to sell Tri-Shield® in Canada. We initiated sales in Canada through our in-country distributor during the fourth quarter of 2019. We achieved USDA approval of our bivalent gel tube formulation (formerly marketed as First Defense Technology®) during the fourth quarter of 2018 and have re-branded this product format, together with the bolus format, as Dual-Force First Defense®. We are currently working to establish USDA claims for our bivalent bulk powder formulation of First Defense Technology®.

 

At the same time, we are working to expand our product development pipeline of bacteriocins that can be used as alternatives to traditional antibiotics. During the second quarter of 2015, we entered into an exclusive option agreement to license new bacteriocin technology from the University of Massachusetts Amherst. During the first quarter of 2019, we extended this exclusive option agreement through March of 2021. This technology focuses on bacteriocins having activity against Gram-negative infections for use in combating mastitis in dairy cattle. Subject to the availability of resources, we intend to begin new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring, on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.

 

Competition

 

Our competition in the animal health market includes other biotechnology companies and major animal health companies. Most, if not all, of these competitors have substantially greater financial, marketing, manufacturing and human resources and more extensive product development capabilities than we do.

 

We would consider any company that sells an antibiotic to treat mastitis, such as Boehringer Ingelheim, Merck Animal Health and Zoetis, to be among the potential competitors with respect to Re-Tain. We expect the FDA to grant a period of five years of market exclusivity for our product (meaning the FDA would not grant approval to a second NADA with the same active drug for a period of five years after the first NADA approval is granted) under Section 512(c)(2)F of the Federal Food, Drug, and Cosmetic Act. The Nisin A to which we have exclusive rights for animal health applications is produced from our high-yielding, proprietary L. lactis strain and purified to a high level, providing us with a level of protection over a competitor that might try to develop a similar product.

 

There are several other products on the market (some with claims and some without) that are delivered to newborn calves to prevent scours. We believe that the First Defense® product line offers two significant competitive advantages. First, only the First Defense® product line provides protection against E. coli, coronavirus and rotavirus, three of the leading causes of calf scours. Second, being derived from colostrum, our product offers Immediate ImmunityTM through antibodies that both function at the gut level and are absorbed into the blood stream for future protection. All formats of our product can be administered immediately after birth and are not negatively affected by maternal colostrum.

 

8

 

 

ImmuCell Corporation

 

Zoetis sells a product that competes directly with the First Defense® product line in preventing scours via oral delivery to newborn calves. Their product (Calf-Guard®) is a modified-live virus vaccine. Newborn calves respond poorly to vaccines and the immune system must be given time to develop a response to vaccines. Both our product and Calf-Guard® carry claims against coronavirus and rotavirus infections, but this competitive product does not carry a claim against E. coli infections like our product does. It is common practice to delay colostrum feeding when dosing a calf with Calf-Guard® so that the antibodies in the colostrum do not inactivate this vaccine product. There is no nutritional benefit to withholding milk from newborn calves. In contrast, we encourage the feeding of four quarts of high quality colostrum immediately after birth when dosing a calf with our product, which is standard practice for good calf health. Because the antibodies in our product would likely work to inactivate a modified-live virus vaccine, rendering it useless or less useful, our product label historically included a precaution that First Defense® should not be used within five days of such a vaccine. During the first quarter of 2015, the USDA granted us permission to remove this precaution from our label, and we have done so. We believe that this precaution should be required on the Calf-Guard® label to prevent inactivation of that product by First Defense® antibodies or by colostrum. Our product is priced at a premium to Calf-Guard®.

 

During the fourth quarter of 2016, Merck launched a new competitive product into this market space. This product (BOVILIS® Coronavirus) is a modified-live virus intranasal vaccine that carries a claim against coronavirus only.

 

Around the end of 2019, Elanco Animal Health gave notice to the market that it has discontinued the manufacture of its competitive products, Bovine Ecolizer® and Bovine Ecolizer + C20, and is presently selling out available inventory. This product is the smallest of our three significant calf-level competitors.

 

When compared to the other USDA-approved calf-level scours preventatives, we believe we are first in sales dollars and second in volume in the U.S. market. This product category is comprised of the four primary brands discussed above that are given either orally or intranasal to newborn dairy and beef calves immediately after birth. Our share of the market (on a unit volume basis) of these scour preventative products administered at the calf-level increased to approximately 36% during 2019 (from 34% during 2018 and 32% during 2017).

 

With the new rotavirus claim for our product (Tri-Shield First Defense®), we are now also competing against dam-level vaccine products that are given to the mother cow to increase the antibody level against scours-causing pathogens in the colostrum that she produces for her newborn. Those products are sold by Elanco (Scour Bos™), Merck (Guardian®) and Zoetis (ScourGuard®). Despite the best-managed dam vaccine program, colostrum quality is naturally variable and newborn calves do not always get the antibodies they need from maternal colostrum. We believe that the measured dose of antibodies in our product provides more consistent protection than such vaccine products. Our share of calves treated in the U.S. with products administered to calves and those administered to the dam prior to calving (adjusting for the two doses of dam-level scour vaccines required for primary vaccination of first-calf-heifers) increased to approximately 11% during 2019 (from 10.3% during 2018 and 9.7% during 2017).

 

We may not be aware of competition that we face, or may face in the future, from other companies. Our competitive position will be highly influenced by our ability to attract and retain key scientific, manufacturing, managerial and sales and marketing personnel, to develop proprietary technologies and products, to obtain USDA, FDA or foreign approvals for new products, to effectively promote and market our products, to have available properly licensed, efficient and effective raw material and finished product manufacturing resources and to continue to profitably sell our current products. We currently compete on the basis of product performance, price and distribution capability. We continue to monitor our network of independent distributors to maintain our competitive position.

 

Intellectual Property

 

We own a broad collection of intellectual property rights relating to our research, products and processes. This includes patents, copyrights, trademarks, trade dress, trade secrets, know-how and other intellectual property rights in the United States and other countries. We believe the ownership of our intellectual property rights is an important factor in our business and that our success depends in part on such ownership. We also rely heavily on the innovative skills, technical competence and marketing abilities of our personnel. The Nisin A that is produced from our proprietary strain of L. lactis is an essential component of our intellectual property covering Re-Tain™.

 

9

 

 

ImmuCell Corporation

 

We own: (a) U.S. Patent No. 6,794,181 entitled “Method of Purifying Lantibiotics”, which covers a manufacturing process for preparing pharmaceutical-grade Nisin, which was issued in 2004; and (b) U.S. Patent No. 10,023,617 entitled “Methods and Systems of Producing Pharmaceutical Grade Lantibiotics”, which covers key, novel and proprietary aspects of our manufacturing process for preparing pharmaceutical-grade Nisin, and was issued during the third quarter of 2018. In the future, we may file additional patent applications for certain products under development. There can be no assurance that patents will be issued with respect to any pending or future applications. In some cases, we have chosen (and may choose in the future) not to seek patent protection for certain products or processes. In those instances, we have sought (and may seek in the future) to maintain the confidentiality of any relevant intellectual property and other proprietary rights through operational measures and contractual agreements.

 

We own numerous trademarks and trade dress that are very important to our business, and have several trademark and trade dress applications and registrations in the United States, Canada, Iran and Turkey. We own the following U.S. trademark registrations: IMMUCELL, FIRST DEFENSE, FD FIRST DEFENSE (& Design), FIRST DEFENSE TECHNOLOGY, TRI-SHIELD FIRST DEFENSE, TRI-SHIELD FIRST DEFENSE (& Design), YOUR CALF CREW, BEYOND VACCINATION, BEYOND VACCINATION (& Design), CALF HERO, DUAL-FORCE, TRI-SHIELD and MAST OUT. We also own U.S. registrations claiming rights in the color blue for our blue gel and blue bolus FIRST DEFENSE products. We own a pending U.S. trademark application for the RE-TAIN trademark. The United States Patent and Trademark Office refused registration of our IMMEDIATE IMMUNITY trademark, which we use extensively in connection with marketing of all of our products, on the grounds that the mark is generic. Rather than appeal this finding, we are continuing to build our common law rights in the brand. The FDA issued a determination that the name, MAST OUT, which we had intended to use for our purified Nisin product, is overly promotional. Rather than continuing an appeal of this decision, we selected a new product name, RE-TAIN, which was approved by the FDA during the first quarter of 2019.

 

Government Regulation

 

We believe that we are in compliance with current regulatory requirements relating to our business and products. The manufacture and sale of animal health biologicals within the United States is generally regulated by the USDA. We have received USDA and Canadian Food Inspection Agency approval for the bolus format of First Defense® and for the gel tube formats of Tri-Shield First Defense® and Dual-Force First Defense®. Re-Tain is regulated by the FDA, which regulates veterinary drugs. Regulations in the European Union will likely require that our product be sold subject to a milk discard requirement in that territory, although the duration of the milk discard requirement may be shorter than the discard requirement applicable to competitive antibiotic products in that market. Comparable agencies exist in foreign countries, and foreign sales of our products will be subject to regulation by such agencies. Many countries have laws regulating the production, sale, distribution or use of biological products, and we may have to obtain approvals from regulatory authorities in countries in which we propose to sell our products. Depending upon the product and its applications, obtaining regulatory approvals may be a relatively brief and inexpensive procedure or it may involve extensive clinical tests, incurring significant expenses and an approval process of several years’ duration. We generally rely on in-country experts to assist us with or to perform international regulatory applications.

 

Employees

 

We currently employ 54 employees (including 3 part-time employees). Approximately 31 full-time equivalent employees are engaged in manufacturing operations, 9.4 full-time equivalent employees in sales and marketing, 7.2 full-time equivalent employees in product development activities and 4.9 full-time equivalent employees in finance and administration. As needed, we augment our staff with contracted temporary employees. All of our employees are required to execute non-disclosure and invention assignment agreements (and some are required to execute non-compete agreements) intended to protect our rights in our proprietary products. We are not a party to any collective bargaining agreement and consider our employee relations to be excellent.

 

Public Information

 

As a reporting company, we file quarterly and annual reports with the Securities and Exchange Commission (SEC) on Form 10-Q and Form 10-K. We also file current reports on Form 8-K, whenever events warrant or require such a filing. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information about us that we file electronically with the SEC at http://www.sec.gov. Our internet address is http://www.immucell.com.

 

10

 

 

ImmuCell Corporation

 

ITEM 1A — RISK FACTORS

 

Production capacity constraints: The inability to meet market demand for our products, discussed elsewhere in this report in more detail, is a risk to our business. Our plan to continue to expand the First Defense® product line requires ongoing review of equipment capacity and utilization across the manufacturing value stream at the 56 Evergreen Drive facility and our leased facility at 175 Industrial Way, as well as assessment of functional obsolescence and reliability of equipment. With the additional capital we raised at the end of the first quarter of 2019, we are investing approximately $3.5 million to increase our liquid processing capacity by 100% and our freeze drying capacity by 50% for the First Defense® product line. There is a risk that we will not be able to achieve our production capacity growth objectives on a timely basis and that we could experience an interruption to product supply during the expansion process.

 

Risk of experiencing higher than anticipated costs, or delays in expanding our manufacturing facilities and risk of failing to access adequate funding to complete the expansion projects: As discussed above and elsewhere in this report in more detail, we presently intend to invest the aggregate of approximately $7.5 million to: i) expand our existing production facilities for our First Defense® product line (approximately $3.5 million) and ii) construct and equip our own Drug Product formulation and aseptic filling capability for Re-Tain™ inside our existing Drug Substance facility (approximately $4 million). Actual project costs could exceed our current estimates. Also, our ability to fund the completion of these projects may depend on cash flows from future operations, which may not materialize or be available at the needed levels. In addition, completion of either project could be delayed due to factors outside our control, including equipment delivery delays or delays in obtaining FDA approvals for Re-Tain™.

 

Projection of net income (loss): Generally speaking, our financial performance can differ significantly from management projections, due to numerous factors that are difficult to predict or that are beyond our control. Weaker than expected sales of the First Defense® product line could lead to less profits or an operating loss.

 

Net deferred tax assets: The realizability of our net deferred tax assets is a subjective estimate that is contingent upon many variables. During the second quarter of 2018, we recorded a full valuation allowance against our net deferred tax assets that significantly increased our net loss in comparison to other periods. This non-cash expense could be reversed, and this valuation allowance could be reduced or eliminated, if warranted by our profitability and projected profitability in the future. We will continue to assess the need for the valuation allowance at each quarter.

 

Reliance on sales of the First Defense® product line: We are heavily reliant on the market acceptance of the First Defense® product line to generate product sales and fund our operations. Our business would not have been profitable during the nine consecutive years in the period ended December 31, 2007, during the years ended December 31, 2012, 2013, 2015 and 2016, during the nine-month period ended September 30, 2017 or during the three-month period ended March 31, 2019, without the gross margin that we earned on sales of the First Defense® product line.

 

Concentration of sales: Sales of the First Defense® product line aggregated 97% of our total product sales during the years ended December 31, 2019 and 2018. Our primary customers for the majority of our product sales (89% and 87% during the years ended December 31, 2019 and 2018, respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 10% and 13% of our total product sales during the years ended December 31, 2019 and 2018, respectively. The concentration of our sales from one product into one market is a risk to our business. The animal health distribution segment has been aggressively consolidating over the last few years with larger distributors acquiring smaller distributors. A large portion of our product sales (69% and 66% during the years ended December 31, 2019 and 2018, respectively) was made to two large distributors. A large portion of our trade accounts receivable (76% and 72% as of December 31, 2019, and 2018, respectively) was due from these two distributors. We have a good history with these distributors, but the concentration of sales and accounts receivable with a small number of customers does present a risk to us, including risks related to such customers experiencing financial difficulties or altering the basis on which they do business with us in a manner unfavorable to us.

 

Gross margin on product sales: It is one of our goals to again achieve a gross margin (before related depreciation expenses) as a percentage of total sales close to 50% after the initial launch of new products. Depreciation expense will be a larger component of costs of goods sold for Re-Tain™ than it is for the First Defense® product line. Gross margins generally improve over time, but this anticipated improvement may not be realized. Many factors discussed in this report impact our costs of goods sold. There is a risk that we are not able to achieve our gross margin goals, which would adversely affect our operating results and could impact our future operating plans.

 

11

 

 

ImmuCell Corporation

 

Product risks: The sale of our products is subject to production, financial, efficacy, regulatory, competitive and other market risks. Elevated standards to achieve and maintain regulatory compliance required to sell our products continue to evolve. Failure to achieve acceptable biological yields from our production processes can materially increase our costs of goods sold and reduce our production output, leading to an order backlog that could adversely affect our customer relationships and operating results. There is no assurance that we will continue to achieve market acceptance at a profitable price level or that we can continue to manufacture our products at a low enough cost to result in a sufficient gross margin to justify their continued manufacture and sale.

 

Increasing dependence on the continuous and reliable operation of our information technology systems: We rely on information systems throughout our company. Any disruption of these systems or significant security breaches could adversely affect our business. Although we maintain information security policies and employ system backup measures and engage in information system redundancy planning and processes, such policies, measures, planning and processes, as well as our current disaster recovery plan may be ineffective or inadequate to address all eventualities. As information systems and the use of software and related applications by us, our business partners, suppliers, and customers become more cloud-based, we become inherently more susceptible to cyberattacks. There has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability and integrity of data and information. Any such attack or breach could compromise our networks and the information stored thereon could be accessed, publicly disclosed, lost, or stolen. While we have invested in our data and information technology infrastructure (including working with an information security technology consultant to assess and enhance our security systems and procedures, and periodically training our employees in such systems and procedures), there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains. We have not experienced any material adverse effect on our business or operations as a consequence of any such attack or breach, but may incur increasing costs in performing the tasks described above. Given the unpredictability of the timing, nature and scope of such disruptions and the evolving nature of cybersecurity threats, which vary in technique and sources, if we or our business partners or suppliers were to experience a system disruption, attack or security breach that impacts any of our critical functions, or our customers were to experience a system disruption, attack or security breach via any of our connected products and services, we could potentially be subject to production downtimes, operational delays or other detrimental impacts on our operations. Furthermore, any access to, public disclosure of, or other loss of data or information (including any of our - or our customers’ or suppliers’ - confidential or proprietary information or personal data or information) as a result of an attack or security breach could result in governmental actions or private claims or proceedings, which could damage our reputation, cause a loss of confidence in our products and services, damage or ability to develop (and protect our rights to) our proprietary technologies and have a material adverse effect on our business, financial condition, results of operations or prospects.

 

Product liability: The manufacture and sale of our products entails a risk of product liability. Our exposure to product liability is mitigated to some extent by the fact that our products are directed towards the animal health market. We have maintained product liability insurance in an amount which we believe is reasonable in relation to our potential exposure in this area. We have no history of claims of this nature being made.

 

Regulatory requirements for the First Defense® product line: First Defense® is sold in the United States subject to a product license from the Center for Veterinary Biologics, USDA, which was first obtained in 1991 with subsequent approvals of line extensions in 2017 and 2018. As such, our operations are subject to periodic inspection by the USDA. The potency of serial lots is directly traceable to the original serial used to obtain the product performance claims (the Reference Standard). Due to the unique nature of the label claims, host animal re-testing is not required as long as periodic laboratory analyses continue to support the stability of stored Reference Standard. To date, these analyses have demonstrated strong stability. However, if the USDA were not to approve requalification of the Reference Standard, additional clinical studies could be required to meet regulatory requirements and allow for continued sales of the product, which could interrupt sales and adversely affect our operating results. We expect to be subject to similar regulatory oversight risks in territories outside of the United States where we sell our products.

 

12

 

 

ImmuCell Corporation

 

Regulatory requirements for Re-Tain™: The commercial introduction of this product in the United States requires us to obtain FDA approval. Completing the development through to approval of the NADA by the FDA involves risk. While four of the five required Technical Sections have been approved, the development process timeline has been extensive (approximately 20 years) and has involved multiple commercial production strategies. The first phased Chemistry, Manufacturing and Controls Technical Section was submitted for the Nisin Drug Substance during the first quarter of 2019, and the FDA response was received during the third quarter of 2019. We expect to make the second phased Drug Substance and Drug Product submission before the end of 2020. Completion of the Drug Product development and scale-up work and subsequent product stability testing defines the remaining timeline to product approval. To reduce the risk associated with this process, we have engaged Norbrook for the Drug Product work and continue to meet with the FDA to align on filing strategy and requirements. We have disclosed a timeline of events that could lead to potential approval during 2021. However, there remains a risk that approval could be delayed or not obtained. We are exposed to additional regulatory compliance risks through the subcontractors that we choose to work with to produce Re-Tain™, who also need to satisfy certain regulatory requirements in order to provide us with the products and services we need. International regulatory approvals would be required for sales outside of the United States. European regulatory authorities are expected to require a milk discard period when using such a product, which would remove a significant competitive advantage in that territory. However, the assigned milk discard period may be shorter for our product than it is for other mastitis products on the market in Europe.

 

Economics of the dairy and beef industries:

 

·The January count of all cattle and calves in the United States had steadily declined from 97,000,000 as of January 1, 2007 to 88,500,000 as of January 1, 2014. Then this figure increased each year to reach 94,800,000 as of January 1, 2019 before declining slightly to 94,400,000 as of January 1, 2020.

 

·From 1998 through 2019, the size (annual average) of the U.S. dairy herd ranged from approximately the low of 9,011,000 (2004) to the high of 9,399,000 (2018). This annual average dropped slightly to 9,336,000 during 2019.

 

·The Class III milk price (an industry benchmark that reflects the value of product used to make cheese) is an important indicator because it defines our customers’ revenue level. This annual average milk price level (measured in dollars per hundred pounds of milk) reached its highest point (since these prices were first reported in 1980) during 2014 at $22.34 (peaking at $24.60 in September 2014). This strong milk price level during 2014 declined to the average of $15.80 during 2015 and further declined to $14.87 during 2016, but increased by 9% to $16.17 during 2017 and then declined by 10% to $14.61 during 2018. During 2019, this milk price average increased by 16% to $16.96. The low price level during 2018 and into the beginning of 2019 was very challenging to the profitability of our customers. The November 2019 price of $20.45 was the first time the price was above $20.00 since November 2014. The average price of $18.67 for the second half of 2019 and of $19.51 for the fourth quarter of 2019 are positive trends that could benefit our customers if maintained. The recent annual fluctuations in this milk price level are demonstrated in the following table:

 

Average Class III Milk Price for

the Year Ended December 31,

  

(Decrease)

Increase

 
  2014     2015     
$22.34   $15.80    (29%)
 2015    2016      
$15.80   $14.87    (6%)
 2016    2017      
$14.87   $16.17    9%
 2017    2018      
$16.17   $14.61    (10%)
 2018    2019      
$14.61   $16.96    16%

 

13

 

 

ImmuCell Corporation

 

·The actual level of milk prices may be less important than its level relative to feed costs. One measure of this relationship is known as the milk-to-feed price ratio, which represents the amount of feed that one pound of milk can buy. This ratio varies farm-to-farm based on individual operating parameters. The highest annual average this ratio has reached since this ratio was first reported in 1985 was 3.64 in 1987. The annual average for this ratio of 1.52 in 2012 was the lowest recorded since it was first reported in 1985. Since this ratio reached 3.24 in 2005, it has not exceeded 3.0. The annual average of 2.54 for 2014 was the highest this ratio has been since it was 2.81 in 2007. This ratio averaged 2.05 during 2018 and increased to 2.24 during 2019. An increase in feed costs also has a negative impact on the beef industry. The following table demonstrates the annual volatility and the low values of this ratio recently:

 

Average Milk-To-Feed Price

Ratio for the Year Ended

December 31,

  

(Decrease)

Increase

 
  2014     2015     
 2.54    2.14    (16%)
 2015    2016      
 2.14    2.26    6%
 2016    2017      
 2.26    2.42    7%
 2017    2018      
 2.42    2.05    (15%)
 2018    2019      
 2.05    2.24    9%

 

·While the number of cows in the U.S. herd and the production of milk per cow directly influence the supply of milk, the price for milk is also influenced by very volatile international demand for milk products.

 

·The all-time high value (annual average) for a milk cow was $1,993 during 2015. Since then, this annual average value steadily declined to $1,208 during 2019.

 

·The industry data referred to above is compiled from USDA databases. Additionally, the value of newborn bull calves had risen to the unusually high level of approximately $300 to $400 during 2015 but has declined to very little presently, depending on region.

 

Given our focus on the dairy and beef industries, the volatile market conditions and the resulting financial insecurities of our primary end users are risks to our ability to maintain and grow sales at a profitable level. These factors also heighten the challenge of selling premium-priced animal health products (such as Tri-Shield First Defense® and Re-Tain™) into the dairy market.

 

Product development risks: The development of new products is subject to financial, scientific, regulatory and market risks. Our current business growth strategy relies heavily on the development of Re-Tain™, our new product to treat subclinical mastitis, which has required (and will continue to require) a substantial investment of capital resources and personnel. Our efforts are subject to inspection and approval by the FDA. There is no assurance whether or when we will obtain regulatory approval for this product.

 

Risks associated with our funding strategy for Re-Tain™: Achieving FDA approval of our pharmaceutical-grade Nisin produced at commercial-scale is the most critical action in front of us on our path to U.S. regulatory approval of Re-Tain™. Having completed construction of the production facility described elsewhere in this report at a cost of approximately $20.8 million, we will continue to incur product development expenses to operate and maintain this facility. The additional debt we incurred to fund this project has significantly increased our debt service costs going forward. These loans are subject to certain financial covenants. Absent sufficient sales of Re-Tain™ at a profitable gross margin, we would be required to fund all debt service costs from sales of the First Defense® product line, which would reduce, and could eliminate, our expected profitability going forward and significantly reduce our cash flows.

 

Uncertainty of market size and product sales estimates: Estimating the size of the total addressable market and future sales growth potential for our First Defense® product line is difficult and subjective. Estimating the size of the market for any new product, such as Re-Tain™, is subject to numerous uncertainties. We do not know whether, or to what extent, our products will achieve or increase market acceptance and profitability. Some of the uncertainties surrounding Re-Tain™ include market acceptance, the development of the subclinical mastitis treatment market, the effect of a premium selling price on market penetration, competition from existing products sold by substantially larger competitors, the risk of competition from other new products, cost of manufacture and integration of milk from treated cows with susceptible cheese starter cultures.

 

14

 

 

ImmuCell Corporation

 

Exposure to debt service obligations and debt covenants: Rising interest rates could negatively affect the operating costs of dairy and beef producers and thus put further financial pressure on an already stressed business sector. We removed this exposure to our business by refinancing our bank debt to fixed rate notes during the first quarter of 2020. Under our refinanced bank debt agreements, we are required by bank debt covenant to maintain at least $1.4 million in cash escrow in favor of the bank until we achieve certain debt service coverage and collateral value metrics. This requirement effectively reduces the availability of our liquid assets for operational needs. We are obligated to make principal and interest payment aggregating approximately $871,000 over the first twelve-month period of our new debt obligations.

 

Competition from others: Many of our competitors are significantly larger and more diversified in the relevant markets than we are and have substantially greater financial, marketing, manufacturing and human resources and more extensive product development and sales/distribution capabilities than we do, including greater ability to withstand adverse economic or market conditions and declining revenues and/or profitability. Merck and Zoetis, among other companies, sell products that compete directly with the First Defense® product line in preventing scours in newborn calves. The scours product sold by Zoetis sells for approximately half the price of our product, although it does not have an E. coli claim (which ours does). With Tri-Shield First Defense®, we can now compete more effectively against vaccines that are given to the mother cow (dam) to improve the quality of the colostrum that she produces for the newborn calf. Merck and Zoetis dominate the market for these dam vaccine products. The market for the treatment of mastitis in dairy cows is highly competitive and presently is dominated by large companies such as Boehringer Ingelheim, Merck and Zoetis. The mastitis products sold by these large companies are well established in the market and are priced lower than what we expect for our product, but all of them involve traditional antibiotics and are sold subject to a requirement to discard milk during and for a period of time after treatment. There is no assurance that our products will compete successfully in these markets. We may not be aware of other companies that compete with us or intend to compete with us in the future.

 

Access to raw materials and contract manufacturing services: Our objective is to maintain more than one source of supply for the components used to manufacture and test our products that we obtain from third parties. However, there is a risk that we could have difficulty in efficiently acquiring essential supplies. We have significantly increased the number of farms from which we purchase colostrum for the First Defense® product line. The loss of farms from which we buy raw material could make it difficult for us to produce enough inventory to meet customer demand. The specific antibodies that we purify from colostrum for the First Defense® product line are not readily available from other sources. We are and will be dependent on our manufacturing facilities and operations in Portland for the production of the First Defense® product line and Re-Tain™. We are and will be dependent on one manufacturer for the supply of the syringes used for our gel tube formats of Dual-Force First Defense® and Tri-Shield First Defense® and one other manufacturer for the supply of syringes for Re-Tain™. We expect to be dependent on a contract with Norbrook for the Drug Product formulation and aseptic filling of our Nisin Drug Substance for orders placed through December 31, 2021 with deliveries extending into the beginning of 2022. We expect to complete the investment to perform these services in-house during 2022. The facility we intend to construct to perform these services in-house will be subject to FDA inspection and approval. The potential alternative options for these services are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e. beta lactams). Any significant damage to or other disruption in the services at any of these third-party facilities or our own facilities (including due to regulatory non-compliance) could adversely affect the production of inventory and result in significant added expenses and potential loss of future sales.

 

Small size; dependence on key personnel: We are a small company with 54 employees (including 3 part-time employees). As such, we rely on certain key employees to support multiple operational functions, with limited redundancy in capacity. The loss of any of these key employees could adversely affect our operations until a qualified replacement is hired and trained. This challenge is heightened by the tight labor market conditions now prevailing. Our competitive position will be highly influenced by our ability to attract and retain key scientific, manufacturing, managerial and sales and marketing personnel, to develop proprietary technologies and products, to obtain USDA or FDA approval for new products, to maintain regulatory compliance with current products and to continue to profitably sell our current products.

 

15

 

 

ImmuCell Corporation

 

Failure to protect intellectual property: In some cases, we have chosen (and may choose in the future) not to seek patent protection for certain products or processes. Instead, we have sought (and may seek in the future) to maintain the confidentiality of any relevant proprietary technology through operational safeguards and contractual agreements. Reliance upon trade secret, rather than patent, protection may cause us to be vulnerable to competitors who successfully replicate our manufacturing techniques and processes. Additionally, there can be no assurance that others may not independently develop similar trade secrets or technology or obtain access to our unpatented trade secrets or proprietary technology. Other companies may have filed patent applications and may have been issued patents involving products or technologies potentially useful to us or necessary for us to commercialize our products or achieve our business goals. If that were to be the case, there can be no assurance that we will be able to obtain licenses to such patents on terms that are acceptable. There is also a risk that competitors could challenge the claims in patents that have been issued to us.

 

Cost burdens of our reporting obligations as a public company: Operating a public company involves substantial costs and administrative burdens to comply with reporting obligations under federal securities laws and the provisions of the Sarbanes-Oxley Act of 2002.

 

Exposure to risks associated with the financial downturn and economic instability: The positive indications about the health of the U.S. economy since 2008 and prior to the coronavirus outbreak could prove temporary, and a downturn could occur. Some observers believe that the housing market remains problematic for the overall U.S. economy, the United States has taken on too much national debt and the equity markets are overvalued. The ultimate magnitude and duration of the impact of the coronavirus outbreak from China on the economy are unknown. Higher interest rates could adversely affect us and the general economy and our customers. The dairy market is presently under extreme economic pressure, causing many of our customers to lose money or only earn minimal profits. A small percentage reduction in the export of dairy products results in a significant drop in the domestic price of milk. Trade wars and related tariffs or embargos with China and other countries, or travel and other restrictions related to the coronavirus outbreak and concerns arising from it, could have a negative impact on our industry and result in a reduction in our product sales. A combination of the conditions, trends and concerns summarized above could have a corresponding negative effect on our business and operations, including the demand for our products in the U.S. market and our ability to penetrate or maintain a profitable presence in international markets.

 

Global coronavirus pandemic (novel coronavirus or COVID-19, technically known as SARS-CoV-2): The global coronavirus outbreak that began in China and has spread to the United States, Italy, South Korea, Iran, and other territories has become a pandemic affecting international trade and creating a worldwide economic crisis. Stock market valuations have declined significantly and the full impact of this viral outbreak on the global economy is very uncertain at this time. 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. Our exposure to this risk is mitigated to some extent by the fact that our supply chain is not heavily dependent on manufacturers in as yet heavily affected countries, on-going cross-training of our employees and early compliance with recommended hygiene and social distancing practices.

 

Bovine diseases: The potential for epidemics of bovine diseases such as Foot and Mouth Disease, Bovine Tuberculosis, Brucellosis and Bovine Spongiform Encephalopathy (BSE) presents a risk to us and our customers. Documented cases of BSE in the United States have led to an overall tightening of regulations pertaining to ingredients of animal origin, especially bovine. The First Defense® product line is manufactured from bovine milk (colostrum), which is not considered a BSE risk material. Future regulatory action to increase protection of the human food supply could affect the First Defense® product line, although presently we do not anticipate that this will be the case.

 

Biological terrorism: The threat of biological terrorism is a risk to both the economic health of our customers and our ability to economically acquire and collect good quality raw material from our contract farms. Any act of widespread bioterrorism against the dairy industry could adversely affect our operations

 

16

 

 

ImmuCell Corporation

 

Certain provisions might discourage, delay or prevent a change in control of our Company or changes in our management: Provisions of our certificate of incorporation, our bylaws, our Common Stock Rights Plan or Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

·limitations on the removal of directors;

 

·advance notice requirements for stockholder proposals and nominations;

 

·the ability of our Board of Directors to alter or repeal our bylaws;

 

·the ability of our Board of Directors to refuse to redeem rights issued under our Common Stock Rights Plan or otherwise to limit or suspend its operation that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board of Directors; and

 

·Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business combination is approved in a prescribed manner.

 

The existence of the foregoing provisions and anti-takeover measures could depress the trading price of our common stock or limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood of obtaining a premium for our common stock in an acquisition.

 

Stock market valuation and liquidity: Our common stock trades on The Nasdaq Stock Market (Nasdaq: ICCC). Our average daily trading volume is lower than the volume for most other companies and the bid/ask stock price spread can be larger and prices can be volatile, which could result in investors facing difficulty selling their stock for proceeds that they may expect or desire. Most companies in the animal health sector have market capitalization values that greatly exceed our current market capitalization of approximately $33 million as of March 19, 2020. Our product sales during the year ended December 31, 2019 were $13.7 million. This means that our market valuation as of March 19, 2020 was equal to approximately 2.4 times our sales during the year ended December 31, 2019. Before gross margin from the sale of new products is achieved, our market capitalization may be heavily dependent on the perceived potential for growth from our products under development and may therefore be negatively affected by the related uncertainties and risks.

 

No expectation to pay any dividends or repurchase stock for the foreseeable future: We do not anticipate paying any dividends to, or repurchasing stock from, our stockholders for the foreseeable future. Instead, we expect to use cash to fund product development costs and investments in our facilities and production equipment, and to increase our working capital and to reduce debt. Stockholders must be prepared to rely on market sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, restrictions imposed by applicable laws, current and anticipated needs for liquidity and other factors our Board of Directors deems relevant.

 

Possible dilution: We may need again to access the capital markets and issue additional common stock in order to fund our growth objectives, as described elsewhere in this report. Such issuances could have a dilutive effect on our existing stockholders.

 

ITEM 1B — UNRESOLVED STAFF COMMENTS

 

None

 

17

 

 

ImmuCell Corporation

 

ITEM 2 — PROPERTIES

 

We own a 35,000 square foot (approximately) building at 56 Evergreen Drive in Portland, Maine. We currently use this space for substantially all of our office, laboratory and manufacturing needs. When we originally purchased this building in 1993, its size was 15,000 square feet, including 5,000 square feet of unfinished space on the second floor. In 2001, we completed a construction project that added approximately 5,200 square feet of new manufacturing space on the first floor and approximately 4,100 square feet of storage space on the second floor. In 2007, we built out the 5,000 square feet of unfinished space on the second floor into usable office space. After moving first floor offices into this new space on the second floor, we modified and expanded the laboratory space on the first floor and added approximately 2,500 additional square feet of storage space on the second floor. During 2009, we added 350 square feet of cold storage space connected to our first floor production area and added an additional 600 square feet to the second floor storage area. During the first quarter of 2015, we completed construction of a two-story addition connected to our facility to provide us with approximately 7,100 additional square feet for cold storage, production and warehouse space for our operations.

 

During the fourth quarter of 2015, we exercised an option to acquire land at 33 Caddie Lane in Portland, Maine which is near our facility at 56 Evergreen Drive, on which we initiated construction of our Drug Substance production facility for Re-Tain during the third quarter of 2016. During the fourth quarter of 2017, we obtained a certificate of occupancy from the City of Portland for our 16,202 square foot (9,803 on the first floor and 6,399 on the second floor) Drug Substance production facility.

 

During the first quarter of 2017, we purchased a 4,114 square foot facility adjacent to the Drug Substance production facility for Re-Tain. We are using this warehouse space primarily for storage of inventory, materials and equipment.

 

During the first quarter of 2017, we entered into a renewable, two-year lease for approximately 1,350 square feet of office, warehouse and garage space in New York to support our farm operations. This lease has been extended through February of 2021.

 

We are renting approximately 960 square feet in Minnesota for a sales office through at least June of 2020.

 

On September 12, 2019, we entered into a lease covering approximately 14,300 square feet of office and warehouse space with a Lease Possession Date of November 15, 2019 and a Lease Commencement Date of February 13, 2020. We are renovating this space to help us expand our production capacity for the First Defense® product line. The lease term is ten years with a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property taxes, utilities, insurance, maintenance and related building and operating expenses.

 

We maintain property insurance in amounts that approximate replacement cost and a modest amount of business interruption insurance. We also maintain access to certain animals, primarily cows as a source of colostrum used in the production of the First Defense® product line, through contractual relationships with commercial dairy farms.

 

ITEM 3 — LEGAL PROCEEDINGS

 

In the ordinary course of business, we may become subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of any such lawsuits, investigations and claims against us, we do not believe that any pending or threatened legal proceedings to which we are or could become a party will have a material adverse effect on our business, results of operations, or financial condition.

 

ITEM 4 — MINE SAFETY DISCLOSURES

 

None

 

18

 

 

ImmuCell Corporation

 

PART II

 

ITEM 5 — MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol ICCC. No dividends have been declared or paid on the common stock since the Company’s inception, and we do not anticipate or contemplate the payment of cash dividends in the foreseeable future. As of March 19, 2020, we had 11,000,000 common shares authorized and 7,212,919 common shares outstanding, and there were approximately 730 shareholders of record. The last sales price of our common stock on March 19, 2020 was $4.53 per share as quoted on The Nasdaq Stock Market. The following table sets forth the high and low sales price information for our common stock as reported by The Nasdaq Stock Market during the period January 1, 2018 through December 31, 2019:

 

   2019   2018 
   Three-Month Periods Ended   Three-Month Periods Ended 
   March 31   June 30   September 30   December 31   March 31   June 30   September 30   December 31 
High  $8.28   $7.05   $6.85   $5.69   $8.79   $8.65   $9.24   $9.30 
Low  $5.55   $5.85   $5.15   $4.70   $6.70   $6.74   $6.50   $6.38 

 

Equity Compensation Plan Information

 

The table below summarizes the common stock reserved for issuance upon the exercise of stock options outstanding as of December 31, 2019 or that could be granted in the future:

 

   Number of shares
to be issued
upon
exercise of
outstanding
options
   Weighted-average
exercise price of
outstanding
options
   Number of shares
remaining available
for future issuance
under stock-based
compensation plans
(excluding shares
reflected in first
column of this table)
 
Equity compensation plans approved by stockholders   388,500   $6.48    168,500 
Equity compensation plans not approved by stockholders            
Total   388,500   $6.48    168,500 

 

ITEM 6 — SELECTED FINANCIAL DATA

 

You should read the following consolidated financial data in conjunction with Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing in Part II, Item 8 — “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

We derived the below statements of operations and statements of cash flows data during the years ended December 31, 2019 and 2018 and the balance sheet data as of December 31, 2019 and 2018 from our audited financial statements appearing in Part II, Item 8 — “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. We derived the statements of operations and statements of cash flows data during the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 from our audited financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

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ImmuCell Corporation

 

The following tables present certain unaudited quarterly financial information during the years ended December 31, 2019 and 2018, respectively (in thousands, except per share amount):

 

   During the Three-Month Periods Ended 
   March 31   June 30   September 30   December 31 
Statement of Operations Data:                
Fiscal 2019:                
Product sales  $4,411   $2,710   $2,970   $3,632 
Gross margin   2,201    1,249    1,451    1,838 
Product development expenses   910    820    985    972 
Selling and administrative expenses   1,026    976    896    1,108 
Net operating income (loss)   265    (547)   (430)   (242)
Other expenses, net   112    65    65    72 
Income (loss) before taxes   154    (612)   (495)   (314)
Net income (loss)   145    (627)   (503)   (310)
Per common share:                    
Basic net income (loss)  $0.03   $(0.09)  $(0.07)  $(0.04)
Diluted net income (loss)  $0.03   $(0.09)  $(0.07)  $(0.04)
Fiscal 2018:                    
Product Sales  $2,881   $3,015   $2,154   $2,937 
Gross margin   1,360    1,487    951    1,396 
Product development expenses   583    762    909    1,263 
Selling and administrative expenses   955    918    891    1,059 
Gain on sale of assets   -    -    700    - 
Net operating loss   (178)   (193)   (149)   (926)
Other expenses, net   92    103    106    112 
Loss before income taxes   (270)   (297)   (256)   (1,038)
Net Loss   (221)   (798)   (250)   (1,052)
Per common share:                    
Basic net loss  $(0.04)  $(0.15)  $(0.05)  $(0.19)
Diluted net loss  $(0.04)  $(0.15)  $(0.05)  $(0.19)

 

The following tables present certain financial information derived from the audited financial statements for the years ended and as of December 31, 2019 through 2015, respectively (in thousands, except per share amounts):

 

   During the Years Ended December 31, 
   2019   2018   2017   2016   2015 
Statement of Operations Data:                    
Product sales  $13,723   $10,986   $10,431   $9,544   $10,229 
Gross margin   6,740    5,194    5,221    5,421    6,251 
Product development expenses   3,688    3,517    2,047    1,244    1,235 
Sales and marketing expenses   2,318    2,085    1,893    1,831    1,607 
Administrative expenses   1,688    1,739    1,525    1,455    1,286 
Gain on sale of assets       700             
Net operating (loss) income   (954)   (1,447)   (243)   890    2,122 
Other expenses, net   314    413    196    132    59 
(Loss) income before income taxes   (1,267)   (1,860)   (438)   758    2,064 
Net (loss) income  $(1,296)  $(2,322)  $(168)  $508   $1,213 
Per common share:                         
Basic net (loss) income  $(0.19)  $(0.42)  $(0.03)  $0.12   $0.40 
Diluted net (loss) income  $(0.19)  $(0.42)  $(0.03)  $0.12   $0.38 
Cash dividend                    
Statement of Cash Flows Data:                         
Net cash provided by (used for) operating activities  $234   $(373)  $1,176   $(222)  $2,900 
Depreciation and amortization expenses  $2,284   $1,538   $920   $811   $529 

 

   As of December 31, 
   2019   2018   2017   2016   2015 
Balance Sheet Data:                    
Cash, cash equivalents, short-term investments and long-term investments  $8,774   $2,521   $3,799   $10,624   $6,534 
Net working capital   10,694    3,856    5,443    12,289    7,087 
Total assets   38,692    32,731    34,299    24,697    14,540 
Stockholders’ equity  $28,991   $21,744   $23,595   $19,722   $10,614 
Per outstanding common share:                         
Cash, cash equivalents, short-term investments and long-term investments  $1.22   $0.45   $0.69   $2.19   $2.14 
Stockholders’ equity  $4.02   $3.90   $4.31   $4.07   $3.47 

20

 

 

ImmuCell Corporation

 

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. One should review Part I, Item 1A — “Risk Factors” of this Annual Report for a discussion of some of the important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Liquidity and Capital Resources

 

We believe that our cash, cash equivalents and short-term investments, together with gross margin anticipated to be earned from ongoing product sales, will be sufficient to meet our working capital and capital expenditure requirements and to finance our ongoing business operations for at least twelve months (which is the period of time required to be addressed for such purposes by accounting disclosure standards) from the date of this filing. We have funded most of our business operations principally from the gross margin on our product sales and equity and debt financings. We were profitable during the unaudited six-month period ended December 31, 2014, during the years ended December 31, 2015 and 2016, during the unaudited nine-month period ended September 30, 2017 and during the unaudited three-month period ended March 31, 2019. The table below summarizes the changes in selected, key accounts (in thousands, except for percentages):

 

   As of
December 31,
   As of
December 31,
   Increase 
   2019   2018   Amount   % 
Cash, cash equivalents and short-term investments  $8,774   $2,521   $6,253    248%
Net working capital  $10,694   $3,856   $6,838    177%
Total assets  $38,692   $32,731   $5,961    18%
Stockholders’ equity  $28,991   $21,744   $7,247    33%
Common shares outstanding(1)   7,213    5,569    1,644    30%

 

(1)There were approximately 389,000 and 394,000 shares of common stock reserved for issuance for stock options that were outstanding as of December 31, 2019 and 2018, respectively.

 

From the first quarter of 2016 through the first quarter of 2019, we raised gross proceeds of approximately $22.5 million (net proceeds were approximately $20.5 million) from five different common equity transactions priced between $5.25 and $7.30 per share. No warrants were issued in connection with any of these transactions, and no convertible or preferred securities were issued.

 

21

 

 

ImmuCell Corporation

 

During 2010 and 2015, we secured two mortgage loans that aggregated $3.5 million with TDBank N.A. During 2016 and 2017, we secured additional debt financing from TDBank N.A. in the form of three different facilities aggregating approximately $6.8 million. As of December 31, 2019, approximately $8.5 million was outstanding under these five facilities. Debt principal repayments (excluding a $500,000 repayment of our line of credit during the first quarter of 2019) were $861,000 and $398,000 during the years ended December 31, 2019 and 2018, respectively. The 2010 mortgage carried a balloon principal payment of approximately $452,000 due during the third quarter of 2020, which was refinanced during the first quarter of 2020 as discussed below. The $500,000 balance outstanding under our $500,000 line of credit with TDBank N.A. as of December 31, 2018 was repaid during the first quarter of 2019, and there was no outstanding balance as of December 31, 2019. On March 11, 2020, we closed on a debt refinancing aggregating $8.6 million plus a line of credit in the amount of $1.0 million. The debt is comprised of a $5.1 million mortgage loan that bears interest at a fixed rate of 3.50% per annum (with a 10-year term and 25-year amortization schedule) and a $3.5 million note that bears interest at a fixed rate of 3.50% per annum (with a 7-year term and amortization schedule). The proceeds were used to provide some additional working capital but mostly to refinance $8.3 million in outstanding bank debt and pay off an interest rate swap termination liability of $165,000. These credit facilities are subject to certain restrictions and financial covenants and are secured by substantially all of our assets, including our facility at 56 Evergreen Drive in Portland (which was independently appraised at $4.2 million in connection with the 2015 financing and at $3 million in connection with the 2020 refinancing) and our facility at 33 Caddie Lane in Portland (which was independently appraised at $3.2 million in connection with the 2017 financing and at $2.5 million in connection with the 2020 refinancing). We were required by a bank debt covenant (before the debt refinancing discussed above) to maintain at least $2 million of otherwise unrestricted cash, cash equivalents and short-term investments. Under the new debt, we are required to hold $1.4 million in escrow (a non-current asset), which reduces the effective availability of our liquid assets for operational needs by that amount. The debt service coverage ratio is a measure of our liquidity and ability to repay bank debt. If we meet or exceed a minimum ratio set by the bank based on our financial performance during the year ending December 31, 2020, the escrow will be released to the extent that we achieve a loan (the amount of principal then outstanding on the $5.1 million mortgage) to value ratio based on new real estate appraisals at that time equal to less than 80%. We met this debt service coverage requirement based on our 2019 results. We were in compliance with all applicable covenants under the old debt as of December 31, 2019 and are in compliance with all applicable covenants under the new debt as of the filing date of this report.

 

Net cash provided by operating activities improved to $234,000 during the year ended December 31, 2019 in contrast to net cash used for operating activities of $373,000 during the year ended December 31, 2018. Cash paid for capital expenditures totaled $1.4 million during the year ended December 31, 2019 in comparison to capital expenditures of $2.0 million during the year ended December 31, 2018. We completed construction of the Drug Substance production facility for Re-Tain™ during the fourth quarter of 2017 for a total cost of $20.8 million and began depreciating these costs at that time. We began equipment installation during the third quarter of 2017 and began depreciating these costs when the equipment was placed into service for its intended purpose (which is to produce Nisin) during the third quarter of 2018. Our total depreciation expense was $2.2 million and $1.5 million during the years ended December 31, 2019 and 2018, respectively. We anticipate that depreciation expense, while not affecting our cash flows from operations, will result in net operating losses until product sales increase sufficiently to offset these non-cash expenses. Going forward, repayments of the indebtedness incurred to acquire these assets will reduce our cash flows. The following table details the amount and timing of the investment in our Drug Substance production facility for Re-Tain on a cash-paid basis (in thousands, except for footnotes):

 

Period  Amount 
Paid through December 31, 2016  $2,080(1)
Paid during the year ended December 31, 2017   17,161(2)
Paid during the ten-month period ended October 31, 2018   1,596(3)
Total cost of investment  $20,837 

 

(1)This amount does not include approximately $1,250,000 that was capitalized as of December 31, 2016 but not paid until the first quarter of 2017.
(2)This amount includes approximately $1,250,000 that was capitalized as of December 31, 2016 but paid during the first quarter of 2017. This amount does not include approximately $641,000 that was capitalized as of December 31, 2017 but not paid until the first quarter of 2018.
(3)This amount includes approximately $641,000 that was capitalized as of December 31, 2017 but paid during the first quarter of 2018.

 

Our Board of Directors has authorized three additional investments aggregating approximately $8 million. The first is an investment of approximately $3.5 million in the First Defense® product line to double our liquid processing capacity and increase our freeze drying capacity by 50%. The original budget for this project of $3 million has been expanded to $3.5 million to include additional cold storage space and other benefits. Approximately $279,000 had been spent on this project as of December 31, 2019. We expect to complete this project during the middle of 2020. The second is an investment of approximately $4 million to develop our own formulation and aseptic filling capability for the Drug Product for Re-Tain™ to end our reliance on third-party Drug Product manufacturing services. We expect this facility to be operational during 2022. Approximately $538,000 had been spent on this project as of December 31, 2019. The third is $500,000 authorized to be spent on routine and necessary capital expenditures during 2020.

 

22

 

 

ImmuCell Corporation

 

As detailed in the following table, our capital expenditures during the five-year period from January 1, 2015 to December 31, 2019 have been larger than our historical norm primarily due to investments to increase our production capacity for the First Defense® product line and to construct and equip our Drug Substance production facility for Re-Tain (in thousands, except for footnotes):

 

   Paid During the Years Ended 
   A   B   C   D   E   F   Total 
December 31, 2015  $914   $1,077   $265   $   $   $463   $2,719 
December 31, 2016       1,173    2,093            320    3,586 
December 31, 2017           17,686            74    17,760 
December 31, 2018           1,596            434    2,030 
December 31, 2019               279    538    574    1,391 
Total  $914   $2,250   $21,640   $279   $538   $1,865   $27,486 

 

PROJECT A is a 7,100 square foot facility addition at 56 Evergreen Drive. An additional $1,041,000 was paid for this addition during the year ended December 31, 2014 to bring the total cost of Project A to $1,955,000. This investment also included the construction and equipping of a pilot plant for small-scale produce the gel tube formats of the First Defense® product line.

 

PROJECT B is an investment to increase the production capacity of the First Defense® product line.

 

PROJECT C is related to the Drug Substance production facility for Re-Tain. This investment includes the $20,837,000 described above plus $331,000 for the land and $472,000 for the acquisition of an adjacent 4,100 square foot warehouse facility.

 

PROJECT D consists of renovations to a 14,300 square foot leased facility and necessary production equipment to expand the production capacity (in terms of annual sales dollars) for the First Defense® product line from approximately $18 million to $27 million. The original budget for this project of $3 million has been expanded to $3.5 million to include additional cold storage space and other benefits.

 

PROJECT E is the investment to bring the formulation and aseptic filling services for Re-Tainin-house. The budget for this project is $4 million.

 

PROJECT F represents other miscellaneous capital investments during the years.

 

During the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces the real estate taxes on our Drug Substance production facility for Re-Tain by 65% over the eleven-year period beginning on July 1, 2017 and ending June 30, 2028 and by 30% during the twelve-month period ending June 30, 2029, at which time the rebate expires. During the second quarter of 2017, the TIF was approved by the Maine Department of Economic and Community Development. The value of the tax savings will increase (decrease) in proportion to any increase (decrease) in the assessment of the building for city real estate tax purposes. The following table discloses the split of the new rates we have generated between the City of Portland and the Company:

 

Assessed Value  Twelve-Month
Period Ended
  Total New
Taxes Generated by
the Project
  

Less:

TIF Credit

  

Net Amount

Paid by

ImmuCell

 
$1.7M @ April 1, 2017  June 30, 2018  $36,000   $22,000   $13,000 
$4.0M @ April 1, 2018  June 30, 2019  $90,000   $58,000   $32,000 
$4.0M @ April 1, 2019  June 30, 2020  $94,000   $60,000   $34,000 

 

23

 

 

ImmuCell Corporation

 

Outlook for the First Defense® product line

 

Having completed (during the first quarter of 2016) an investment of approximately $4.2 million to enlarge our First Defense® production facility and increase our freeze drying capacity by 100% and make other improvements to our liquid processing capacity, we can currently produce product with an annual sales value of approximately $18 million. The actual value of the production output will vary subject to production yields, selling price, product format mix and other factors. Since the third quarter of 2016 and through most of 2017, we had sufficient available inventory and were shipping in accordance with the demand of our distributors. However, we quickly sold out of our initial launch quantities of Tri-Shield First Defense® soon after regulatory approval was obtained during the fourth quarter of 2017. During most of 2018 and into the first half of 2019, we could only accept purchase orders from customers for Tri-Shield® to match available inventory, which required a careful allocation of product supply directly to certain end-users and veterinary clinics. Production of this new product format had not kept pace with demand primarily because of our inability to produce enough of the new, complex rotavirus vaccine that is used to immunize our source cows. We worked on production improvements in our vaccine laboratory throughout 2018. Significant improvements in vaccine yield and process repeatability resolved this shortfall going into 2019. Allowing for the five to six month production cycle to produce inventory, we were able to return to a mass market selling approach through distribution for Tri-Shield® during the second half of 2019. While the shortage of this new product resulted in some missed sales opportunities, it is also a positive indication that the market is accepting our new product offering. Given our projections for future demand for the First Defense® product line, we have initiated an additional investment of approximately $3.5 million to further increase our liquid processing capacity by 100% and our freeze drying capacity by 50%. During the third quarter of 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 to enable our expansion plan. The property is located at 175 Industrial Way, which is near our facility at 56 Evergreen Drive in Portland. We expect to have use of this new space by the end of the second quarter of 2020 after completing the build out of the needed production rooms. By moving the final product formulation, filling and assembly for the First Defense® product line to the leased building, we will free up ample space in our 56 Evergreen Drive facility for the liquid processing and freeze drying capacity increases. We expect that this investment will increase the sales value of our annual production capacity from approximately $18 million to approximately $27 million. As noted above, the actual value of this production output will vary based on production yields, selling price, product format mix and other factors.

 

Results of Operations

 

2019 Compared to 2018

 

Product Sales

 

Investments in the First Defense® product line have created positive results. Total product sales during the year ended December 31, 2019 increased by 25%, or $2.7 million, to $13.7 million, from $11.0 million during 2018, with domestic sales increasing by 28% and international sales increasing by 7% in comparison to 2018. The compound annual growth rate of our total product sales from 2011 to 2019 was approximately 13%. The compound annual growth rate of our total product sales from 2017 to 2019 was approximately 15%. International sales aggregated 11% and 13% of total sales during the years ended December 31, 2019 and 2018, respectively. Having resolved the vaccine manufacturing challenge related to the production of Tri-Shield First Defense® (discussed above), we returned to a mass market distribution strategy for that product during the second half of 2019. With this in mind, we believe that a relevant measurement of our progress is the comparison of the sales results during the second half of 2019 to the second half of 2018. During the six-month period ended December 31, 2019, total product sales increased by 30%, or $1.5 million, to $6.6 million in comparison to the six-month period ended December 31, 2018. The trailing six-month figures are derived by taking sales during the full year less sales through June 30th of that same year.

 

Sales of the First Defense® product line increased by 24% during the year ended December 31, 2019 in comparison to 2018, aggregating 97% of our total product sales during the years ended December 31, 2019 and 2018. Sales of Dual-Force First Defense® (the bivalent formats of our product delivered via either a bolus, gel tube or bulk powder) were generally flat during 2019 in comparison to 2018, and most of our growth is being realized through sales of Tri-Shield First Defense® (the trivalent format of our product delivered via a gel tube). The First Defense® product line continues to benefit from wide acceptance by dairy and beef producers as an effective tool to prevent scours (diarrhea) in newborn calves. Our marketing campaign, Beyond Vaccination®, is all about avoiding unnecessary vaccinations and saving the needles to the mother cows for critical disease vaccinations and instead delivering First Defense® to get the newborn calf off to a healthy start. We believe dairy and beef producers are increasingly coming to understand our value proposition of less needles in cows and less antibiotics in calves. There is a strong link between how we sell our product and the challenges we face in producing it. We know better than most how variable a cow’s response is to any vaccine. We see this in every batch of First Defense® that we produce. The value in First Defense® is that we adjust for this variability in antibody content, as needed, so the newborn is given a steady, equal level of protection with each dose. Plus, an effectively treated calf is much less likely to require expensive antibiotic treatments. We are the only manufacturer within the scour prevention space offering therapeutic polyclonal antibodies. This technology removes a producer’s reliance on variable vaccine responses to generate passive antibody protection and instead protects every calf equally with a measured dose of Immediate Immunityagainst the most common scour pathogens. We are gaining U.S. market share year after year with our Beyond Vaccination® approach. Our share of the market (on a unit volume basis) of scour preventative products administered at the calf-level increased to approximately 36% during 2019 (from 34% during 2018 and 32% during 2017). Our share of calves treated in the US with products administered to calves and those administered to the dam prior to calving (adjusting for two doses of dam-level scour vaccines required for primary vaccination of first-calf-heifers) increased to approximately 11% during 2019 (from 10.3% during 2018 and 9.7% during 2017).

 

24

 

 

ImmuCell Corporation

 

Effective in December of 2018, we implemented an 11% price increase for Tri-Shield First Defense®. Effective January 1, 2019, we implemented a 2% price increase for Dual-Force®. Effective February 1, 2020, we implemented a price increase of approximately 2% on the First Defense® product line (except for Tri-Shield® and the 90-dose bulk powder) and CMT. Going forward, we anticipate implementing annual price increases in line with current rates of inflation.

 

Sales of products other than the First Defense® product line increased by 48%, or $155,000, during the year ended December 31, 2019 in comparison to 2018. Sales of these other products aggregated approximately 3% of our total product sales during the years ended December 31, 2019 and 2018. We acquired several private label products (our second leading source of product sales during 2019 and 2018) in connection with our January 2016 acquisition of certain gel formulation technology. We sell our own CMT (our third leading source of product sales during 2019 and 2018), which is used to detect somatic cell counts in milk. We have made and sold bulk reagents for Isolate™ (our fourth leading source of product sales during 2019 and 2018), which is a drinking water test that is sold by our former distributor in the United Kingdom. Sales of this product amounted to just $24,000 during the year ended December 31, 2018. We made one final sale of this product to this distributor worth $134,000 during the first quarter of 2019. Because this product was non-core to our strategic focus, we sold the underlying cell line assets and intellectual property to our former distributor during the third quarter of 2018 for $700,000. We have retained the rights to all animal health, diagnostic, feed and nutritional applications of this technology.

 

Gross Margin

 

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

 

   During the Six-Month Periods
Ended December 31,
   Increase 
   2019   2018   Amount   % 
Gross margin  $3,289   $2,347   $942    40%
Percent of Product sales   50%   46%   4%   8%

 

   During the Year
Ended December 31,
   Increase 
   2019   2018   Amount   % 
Gross margin  $6,740   $5,194   $1,546    30%
Percent of Product sales   49%   47%   2%   4%

 

The gross margin (product sales less costs of goods sold) as a percentage of product sales was 49% and 47% during the years ended December 31, 2019 and 2018, respectively. This compares to gross a margin percentage of 50% during the year ended December 31, 2017. A number of factors account for the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter. The gross margin percentage for the legacy formats of the First Defense® product line was in line with prior years in excess of 50%. The new gel formats of our product are more complex and more expensive to produce and presently contribute a lower gross margin percentage. However, these new formats are creating sales growth for us, and we are focused on increasing total gross margin dollars, even if that is accomplished with a lower gross margin as a percentage of sales. The gross margin is affected by biological yields from our raw material, which do vary over time. Just as our customers’ cows respond differently to commercial dam-level vaccines, depending on time of year and immune competency, our source cows have similar biological variances in response to our proprietary vaccines. The value of our First Defense® product line is that we compensate for the variability in a cow’s immune response by standardizing each dose of finished product. This impacts our costs of goods sold but ensures that every calf is equally protected, which is something that dam-level commercial scours vaccines cannot offer. Like most U.S. manufacturers, we have also been experiencing increases in the cost of labor and raw materials. We also invest to sustain compliance with current Good Manufacturing Practice (cGMP) regulations in our production processes. Over time, we have been able to reduce the impact of cost increases by implementing yield improvements. We continue to work on yield improvements and other opportunities to reduce costs, while enhancing process knowledge and robustness. As we evaluate our product costs and selling price, it is one of our goals to continue to achieve a gross margin (before related depreciation and amortization expenses) as a percentage of total sales of approximately 50%.

 

25

 

 

ImmuCell Corporation

 

Product Development Expenses

 

During the year ended December 31, 2019, product development expenses increased by 5%, or $171,000, to $3,688,000 in comparison to $3,517,000 during 2018. Product development expenses aggregated 27% and 32% of product sales during the years ended December 31, 2019 and 2018, respectively. It is important to note that these figures include $1,621,000 and $931,000 of non-cash depreciation and stock-based compensation expenses during the years ended December 31, 2019 and 2018, respectively. Excluding these non-cash expenses, cash-based product development expenses decreased by 20%, or $519,000, to $2,067,000 during the year ended December 31, 2019 in comparison to $2,585,000 during 2018. We do expect our product development expenses to decrease when Re-Tain™ is commercialized and most of the costs incurred to maintain and run our Drug Substance production facility become part of our costs of goods sold.

 

The majority of our product development spending has been focused on the development of Re-Tain™, our purified Nisin treatment for subclinical mastitis in lactating dairy cows. Approval by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA) of the New Animal Drug Application (NADA) for Re-Tain™ is required before any sales of the product can be initiated. The NADA is comprised of five principal Technical Sections and one administrative submission that are subject to phased review by the FDA. By statute, each Technical Section submission is generally subject to a six-month review cycle by the FDA. Each Technical Section can be reviewed and approved separately. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows:

 

1)Environmental Impact: During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter from the FDA.

 

2)Target Animal Safety: During the second quarter of 2012, we received the Target Animal Safety Technical Section Complete Letter from the FDA.

 

3)Effectiveness: During the third quarter of 2012, we received the Effectiveness Technical Section Complete Letter from the FDA. The draft product label carries claims for the treatment of subclinical mastitis associated with Streptococcus agalactiae, Streptococcus dysgalactiae, Streptococcus uberis, and coagulase-negative staphylococci in lactating dairy cattle. In our pivotal effectiveness study, statistically significant cure rates were associated with a statistically significant reduction in milk somatic cell count, which is an important measure of milk quality.

 

4)Human Food Safety: During the third quarter of 2018, we received the Human Food Safety Technical Section Complete Letter from the FDA confirming, among other things, a zero milk discard period and a zero meat withhold period during and after treatment with our product.

 

5)Chemistry, Manufacturing and Controls (CMC): Having previously achieved the four different Technical Section Complete Letters from the FDA discussed above, approval of the CMC Technical Section is the fifth and final significant step required before Re-Tain™ product sales can be initiated in the United States. Implementing Nisin Drug Substance (the active pharmaceutical ingredient) production at our commercial facility, which is a required component of the CMC Technical Section, has been the most expensive and lengthy part of this project. We previously entered into an agreement with a multi-national pharmaceutical ingredient manufacturer for our commercial-scale supplies of Nisin. However, we determined during 2014 that the agreement did not offer us the most advantageous supply arrangement in terms of either cost or long-term dependability. We presented this product development opportunity to a variety of large and small animal health companies. While such a corporate partnership could have provided access to a much larger sales and marketing team and allowed us to avoid the large investment in a commercial-scale production facility, we concluded that a partner would have taken an unduly large share of the gross margin from all future product sales of Re-Tain™. The regulatory and marketing feedback about the prospects for this product that we received from prospective partners, following their due diligence, was positive. During the third quarter of 2014, we completed an investment in facility modifications and processing equipment necessary to produce the Nisin Drug Substance at small-scale. This small-scale facility was used to: i) expand our process knowledge and controls, ii) establish operating ranges for critical process parameters, iii) conduct product stability studies, iv) optimize process yields and v) verify the cost of production. We believe these efforts have reduced the risks associated with our investment in the commercial-scale Drug Substance production facility. Having raised equity during 2016 and 2017, we were able to move away from these earlier strategies and assume control over the commercial-scale manufacturing process in our own facility. During the fourth quarter of 2015, we acquired land near our existing Portland facility for the construction of a new commercial-scale Drug Substance production facility. We commenced construction of this facility during the third quarter of 2016 and completed construction during the fourth quarter of 2017. Equipment installation and qualification was initiated during the third quarter of 2017 and completed during the third quarter of 2018. Total construction and equipment costs aggregated approximately $20.8 million.

 

26

 

 

ImmuCell Corporation

 

We have always believed that the fastest route to FDA approval and market launch is with the services of Norbrook Laboratories Limited of Newry, Northern Ireland (an FDA-approved Drug Product manufacturer), benefiting from their demonstrated expertise in aseptic filling. From 2010 to 2015, we had been a party to an exclusive product development and contract manufacturing agreement with Norbrook covering the Drug Product formulation, aseptic filling and final packaging services. Norbrook provided services to us under this contract throughout the FDA process for use in all of our pivotal studies. During the fourth quarter of 2015, this agreement was amended and restated to create a Product Development and Contract Manufacture Agreement (the 2015 Agreement) to, among other things, extend the term of the agreement to January 1, 2024 provided that FDA approval for commercial sales of Re-Tain™ in the United States was obtained by December 19, 2019. It had been our expectation that we would have these services available through both the remainder of the development process to FDA approval and for approximately the first four years of commercial sales of Re-Tain™. Due to unexpected difficulties and delays encountered by Norbrook and the statutory FDA timeline for processing CMC Technical Sections, this December 2019 product approval target date was not achieved. During the third quarter of 2019, we entered into a Development Services and Commercial Supply Agreement (the 2019 Agreement) with Norbrook. The 2019 Agreement replaces and supersedes the 2015 Agreement in its entirety. Under the 2019 Agreement, Norbrook will continue to provide formulation, aseptic filling and final packaging services as required in order for us to make the needed Drug Product submission to obtain the FDA’s approval of the CMC Technical Section. The 2019 Agreement also provides for Norbrook to perform formulation, aseptic filling and final packaging services in accordance with purchase orders that we submit from time to time for inventory build and subsequent product sales of approximately $7 million for orders placed through December 31, 2021 with deliveries extending into the beginning of 2022. We believe that the 2019 Agreement will enable us to commence sales of Re-Tain™ without delay upon receipt of the anticipated FDA approval.

 

Our potential alternative options for the formulation and aseptic filling services are narrowed considerably because our product cannot be formulated or filled in a facility that also processes traditional antibiotics (i.e. beta lactams). As a consequence, we have decided to perform these services internally. Through a public offering of our common stock in March of 2019, we received net proceeds of approximately $8.3 million, of which approximately $4 million has been allocated to the equipping and commencement of operations of our own Drug Product formulation and aseptic filling facility. Our objective is to meet up to the first $7 million of market demand for Re-Tain™ with product produced by Norbrook under the 2019 Agreement until long-term supply is available from our new, in-house facility. Based on current construction plans and equipment ordering and installation timelines, we expect this facility to be operational during 2022. This new facility will be subject to FDA inspection and approval and will have enough formulation and aseptic filling capacity to exceed the expected production capacity of our Drug Substance facility, which is approximately $10 million in annual sales. This production capacity estimate is based on management’s assumptions as to product pricing and does not yet reflect inventory build strategies in advance of product approval or ongoing yield improvement initiatives. The formulation and aseptic filling operation will be located in existing facility space that we had intended to utilize to double our Drug Substance production capacity if warranted by sales volumes during the initial years following market launch. As a result, we would need to further expand our Drug Substance facilities in order to meet Re-Tain™ sales in excess of approximately $10 million per year. Establishing our own Drug Product formulation and aseptic filling capability provides us with the longer-term advantage of controlling the entire manufacturing process for Re-Tain™ in one facility, thereby potentially reducing our manufacturing costs and eliminating international cold chain shipping costs. This integrated manufacturing capability for Re-Tain™ will substantially reduce our dependence on third parties. Upon completion of our formulation and aseptic filling facility, the only significant third-party input for Re-Tain™ will be the Drug Product syringes. It is anticipated that Hubert De Backer of Belgium (HDB) will supply these syringes in accordance with purchase orders that we submit. HDB is a syringe supplier for many of the largest participants in the human and veterinary medical industries, and with whom Norbrook presently works. Based on HDB’s performance history and reputation in the industry, we are confident that HDB will be a dependable supplier of syringes in the quantity and of the quality needed for Re-Tain™. As a consequence, we have discontinued our syringe supply agreement for Re-Tain™ with Nordson Corporation (formerly Plas-Pak Industries, Inc.). We have not yet determined if we will perform the final packaging services in-house or contract to have those services performed by a qualified third party.

 

27

 

 

ImmuCell Corporation

 

Under the FDA’s phased submission process, Phase 1 concerns the Nisin Drug Substance (DS), and Phase 2 concerns the Re-Tain™ Drug Product (formulated Nisin DS filled in a syringe) (DP). This process allows a sponsor to respond to identified queries and/or deficiencies from the first phased DS submission at the time of the second phased DS and DP submission, which will include detailed information about the manufacturing process and controls for the DP. This is a very complex and comprehensive Technical Section. We made our first phased DS submission during the first quarter of 2019. This submission included data from the DS Registration Batches produced at commercial scale in our new DS manufacturing facility. As part of the phased submission process, the FDA issued a Technical Section Incomplete Letter with regard to this first phased DS submission during the third quarter of 2019 with various requests and queries in addition to referring to the fact that the second phased DS and DP submission has yet to be submitted. We expected this response. Having reviewed the comments from the FDA, we see no roadblocks on our path to FDA approval for Re-Tain™. We believe we can respond effectively to the FDA’s comments without significant additional cost or time delays. In addition to responding to comments raised by the FDA regarding the first phased DS submission, one of the key components of the second phased DS and DP submission is demonstrating stability of the product over time using the commercial process and the commercial syringe in its final packaged form. Given a current assessment of the work that needs to be performed, we believe that the second phased DS and DP submission could be made before the end of 2020. A response from the FDA to our second phased DS and DP submission is anticipated six months after the submission date. The response from the FDA to this second phased DS and DP submission determines the critical path to the timeline to FDA approval of our NADA. If the FDA responds with a Technical Section Complete Letter, approval of our NADA can be expected after a final 60-day administrative review period (the last step in the regulatory approval process). If the FDA responds with a Technical Section Incomplete Letter, one or more additional submissions (each subject to its own six-month review period) would be required until the FDA is satisfied that we have adequately responded to their queries before the final 60-day administrative review period.

 

Successful FDA inspections of the manufacturing facilities must also be achieved before the NADA can be approved. During the third quarter of 2019, the FDA conducted a pre-approval inspection of our DS facility. This resulted in the issuance of certain deficiencies under the FDA’s Form 483. We submitted responses and data summaries in a phased manner over the fourth quarter of 2019 and first quarter of 2020. This inspection process has been managed without significant cost or any impact on the timeline to product approval. We expect to remain prepared for subsequent inspections by the FDA on an ongoing basis.

 

Our second most important product development initiative (in terms of dollars invested and, we believe, potential market impact) has been focused on other improvements, extensions or additions to our First Defense® product line. During the second quarter of 2009, we entered into an exclusive license with the Baylor College of Medicine covering the animal health rights to the underlying rotavirus vaccine technology that we use to generate the specific antibodies. This perpetual license (if not terminated for cause) is subject to ongoing royalty payments. We achieved product license approval and initiated market launch of this product, Tri-Shield First Defense®, during the fourth quarter of 2017. During the third quarter of 2018, we obtained approval from the Canadian Food Inspection Agency (CFIA) to sell Tri-Shield® in Canada. We initiated sales in Canada during the fourth quarter of 2019. We achieved USDA approval of our bivalent gel tube formulation (formerly marketed as First Defense Technology®) during the fourth quarter of 2018 and have re-branded this product format as Dual-Force First Defense®. During the first quarter of 2019, we obtained CFIA approval to sell Dual-Force® in Canada and have initiated commercial sales there. We are currently working to establish USDA claims for our bivalent bulk powder formulation of First Defense Technology®. We are also investing in additional studies to further support the First Defense® product line in the market.

 

28

 

 

ImmuCell Corporation

 

At the same time, we are working to expand our product development pipeline of bacteriocins that can be used as alternatives to traditional antibiotics. During the second quarter of 2015, we entered into an exclusive option agreement to license new bacteriocin technology from the University of Massachusetts Amherst. During the first quarter of 2019, we extended this exclusive option agreement through the first quarter of 2021. This technology focuses on bacteriocins having activity against Gram-negative infections (as opposed the Gram-positive coverage offered by Nisin) for use in combating mastitis in dairy cattle. Subject to the availability of resources, we intend to begin new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring, on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.

 

Sales and Marketing Expenses

 

During the year ended December 31, 2019, sales and marketing expenses increased by approximately 11%, or $233,000 to $2,318,000 in comparison to $2,085,000 during 2018, amounting to 17% and 19% of product sales during the years ended December 31, 2019 and 2018, respectively. Sales and marketing expenses included $109,000 and $111,000 of non-cash depreciation and stock-based compensation expenses during the years ended December 31, 2019 and 2018, respectively. We continue to leverage the efforts of our small sales force by using animal health distributors. These expenses have increased due principally to a strategic decision to invest more to support sales of the First Defense® product line. Our current budgetary objective in 2020 is to invest less than 20% of product sales in sales and marketing expenses on an annual basis. This ratio is expected to come down incrementally as sales grow.

 

Administrative Expenses

 

During the year ended December 31, 2019, administrative expenses decreased by approximately 3%, or $51,000, to $1,688,000 in comparison to $1,739,000 during 2018. Administrative expenses included $208,000 and $218,000 of non-cash depreciation and stock-based compensation expenses during the years ended December 31, 2019 and 2018, respectively. We strive to be efficient with these expenses while funding costs associated with complying with the Sarbanes-Oxley Act of 2002 and all the legal, audit and other costs associated with being a publicly-held company. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more active investor relations program, which includes meeting investors in face-to-face meetings in different cities approximately four days per quarter. At the same time, we continue to provide full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year, as well as in Current Reports on Form 8-K when legally required or deemed appropriate by management. These efforts may have helped us access the capital markets to fund our growth objectives. Additional information about us is available in our annual Proxy Statement. All of these reports are filed with the SEC and are available on-line or upon request to the Company.

 

Gain on Sale of Assets

 

We sold the assets underlying our water diagnostic product for $700,000 and recognized the gain as an operating activity during the third quarter of 2018. An upfront payment of $250,000 was received upon closing, a second payment of $250,000 was received during the third quarter of 2019 and a third payment of $200,000 was received during the fourth quarter of 2019. No such transaction has been recorded since then.

 

29

 

 

ImmuCell Corporation

 

Net Operating Loss

 

During the year ended December 31, 2019, our net operating loss was reduced to $954,000 in comparison to $1,447,000 during 2018. The net operating losses included $2,581,000 and $1,865,000 of non-cash depreciation, amortization and stock-based compensation expenses during the years ended December 31, 2019 and 2018, respectively. During both of the years being reported, non-cash depreciation, amortization and stock-based compensation expenses exceeded our net operating loss. Our debt principal payments are a partial offset to these non-cash expenses, as they represent uses of cash that are not recorded as an expense.

 

Other expenses, net

 

During the years ended December 31, 2019 and 2018, other expenses, net, aggregated $314,000 and $413,000, respectively. Interest expense (including non-cash amortization of debt issue costs of approximately $17,000 during the years ended December 31, 2019 and 2018) increased by approximately 1%, or $4,000, to $432,000 during the year ended December 31, 2019 in comparison to $428,000 during 2018. Given the debt refinancing to fixed rate loans during the first quarter of 2020, we now anticipate that our interest expense will be approximately $317,000 during the year ending December 31, 2020. This projected expense reduction is achieved with more principal outstanding under the refinanced debt structure than would have been outstanding had we not refinanced. Interest income increased by approximately 727%, or $104,000, to $118,000 during the year ended December 31, 2019, in comparison to $14,000 during 2018. More interest income was earned during 2019 because we had more cash and short-term investments on hand due largely to cash generated from an equity issuance during the first quarter of 2019 that has not yet been fully invested in capital expenditures.

 

Loss Before Income Taxes

 

During the year ended December 31, 2019, our loss before income taxes of $1,267,000 was in comparison to a loss before income taxes of $1,860,000 during the year ended December 31, 2018. Our losses before income taxes included $2,598,000 and $1,882,000 of non-cash depreciation, amortization, debt issue costs and stock-based compensation expenses during the years ended December 31, 2019 and 2018, respectively. During both of the years being reported, non-cash depreciation, amortization and stock-based compensation expenses exceeded our loss before income taxes. Our debt principal payments are a partial offset to these non-cash expenses, as they represent uses of cash that are not recorded as an expense.

 

Income Taxes and Net Loss

 

For tax return purposes only, our depreciation expense for the Nisin Drug Substance production facility and equipment was approximately $9.2 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively. This significant increase was largely related to accelerated depreciation allowed for tax purposes for our Drug Substance production facility investment. This increased our federal net operating loss carryforward to approximately $11.8 million as of December 31, 2018 from approximately $1.7 million as of December 31, 2017, which will be available to offset future taxable income. As of December 31, 2019, our federal net operating loss carry forward was approximately $12 million.

 

During the second quarter of 2018, we assessed our historical and near-term future profitability and recorded approximately $563,000 in non-cash income tax expense to create a full valuation allowance against our net deferred tax assets (which consist largely of net operating loss carryforwards and federal and state tax credits) based on applicable accounting standards and practices. At that time, we had incurred a net loss for five consecutive quarters, had not been profitable on a year-to-date basis since the nine-month period ended September 30, 2017 and projected additional net losses for some period going forward before returning to profitability. Should future profitability be realized at an adequate level, we would be able to release this valuation allowance (resulting in a non-cash income tax benefit) and realize these net deferred tax assets before they expire. We will continue to assess the need for the valuation allowance at each quarter. No such adjustment has been recorded through December 31, 2019.

 

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During the years ended December 31, 2019 and 2018, we recorded income tax expense at the rate of 2% and 25% of our loss before income taxes. Our net loss of $1.3 million, or $0.19 per share, during the year ended December 31, 2019 was in comparison to a net loss of $2.3 million, or $0.42 per share, during the year ended December 31, 2018. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This legislation makes significant changes in the U.S. tax laws, including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 34% to 21%. Our income tax rate differs from this standard tax rate. While we are recording a full valuation allowance for our net deferred tax assets, as discussed above, and therefore not recognizing a benefit on our tax losses, our income tax expense is largely comprised of the tax effect of our interest rate swap agreements.

 

In addition to the above results from our Statements of Operations, we believe it is important to consider our Statements of Cash Flows in the accompanying financial statements to assess the cash generating ability of our operations.

 

Critical Accounting Policies

 

The financial statements are presented on the basis of accounting principles that are generally accepted in the United States. All professional accounting standards that were effective and applicable to us as of December 31, 2019 have been taken into consideration in preparing the financial statements. The preparation of financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, income taxes, contingencies and the useful lives and carrying values of intangible and long lived assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have chosen to highlight certain policies that we consider critical to the operations of our business and understanding our financial statements.

 

We sell products that provide Immediate Immunity™ to newborn dairy and beef cattle. We recognize revenue in accordance with the five step model in ASC 606. These include i) identification of the contract with the customer, ii) identification of the performance obligations in the contract, iii) determination of the transaction price, iv) allocation of the transaction price to the separate performance obligations in the contract and v) recognition of revenue associated with performance obligations as they are satisfied. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns.

 

Inventory includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method, or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead.

 

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We believe that neither inflation nor interest rates nor currency exchange rates have had a significant effect on our revenues and expenses. However, future increases in inflation or interest rates or the value of the U.S. dollar could affect our customers and the demand for our products. We hope to increase the level of our future sales of products outside the United States. The cost of our products to international customers could be affected by currency fluctuations. The decline of the U.S. dollar against other currencies could make our products less expensive to international customers. Conversely, a stronger U.S. dollar could make our products more costly for international customers. During 2010, we hedged our interest rate exposure to a $1.0 million mortgage with an interest rate swap agreement that effectively converted a floating interest rate to the fixed rate of 6.04%. During 2015, we hedged our interest rate exposure to a $2.5 million mortgage with an interest rate swap agreement that effectively converted a floating interest rate to the fixed rate of 4.38%. As of December 31, 2019, approximately $2.6 million was outstanding under these two mortgages. We had outstanding debt totaling approximately $5.9 million at December 31, 2019 that bears interest at variable rates and is not subject to interest rate swaps.

 

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ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our financial statements, together with the notes thereto and the reports of the independent registered public accounting firms thereon, are set forth on Pages F-1 through F-26 at the end of this report. The index to these financial statements is as follows:

 

Report of Wipfli LLP, Independent Registered Public Accounting Firm F-1
Report of RSM US LLP, Independent Registered Public Accounting Firm F-2
Balance Sheets as of December 31, 2019 and 2018 F-3
Statements of Operations during the years ended December 31, 2019 and 2018 F-4
Statements of Comprehensive Loss during the years ended December 31, 2019 and 2018 F-4
Statements of Stockholders’ Equity during the years ended December 31, 2018 and 2019 F-5
Statements of Cash Flows during the years ended December 31, 2019 and 2018 F-6 to F-7
Notes to Financial Statements F-8 to F-26

 

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

On April 10, 2019, we informed RSM US LLP (RSM) that RSM had been dismissed as our independent registered public accounting firm due to our desire to work with a local firm and to obtain such services at a lower cost. This decision was authorized by our Audit Committee and ratified by our Board of Directors.

 

There were no disagreements between us and RSM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreements in either of RSM’s reports on our financial statements for the years ended December 31, 2018 or 2017. During the years ended December 31, 2018 and 2017, there were no reportable events (as defined in Item 304(a)(l)(v) of Regulation S-K), except for the material weakness in our internal control over financial reporting as disclosed in our Quarterly Reports on Forms 10-Q for the interim periods ended June 30, 2018 and September 30, 2018. None of such reports contained any adverse opinion or disclaimer or were qualified or modified as to uncertainty, audit scope or accounting principles.

 

On April 12, 2019, we engaged Wipfli LLP (Wipfli) as our independent registered public accounting firm for the year ended December 31, 2019 beginning with a customary review of our financial statements as of and for the quarter ended March 31, 2019.

 

During the two most recent fiscal years and the interim periods preceding Wipfli’s engagement, and through the date of their engagement, neither we nor anyone on our behalf had previously consulted with Wipfli regarding either: (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided nor oral advice was provided to us that Wipfli concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue or (b) any matter that was either the subject of a disagreement (as defined in paragraph 304 (a)(l)(iv) of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph 304(a)(l)(v) of Regulation S-K).

 

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ImmuCell Corporation

 

ITEM 9A — CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures. Our management, with the participation of the individual who serves as our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019. Based on this evaluation, that officer concluded that our disclosure controls and procedures were effective as of that date. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

Management’s Annual Report on Internal Control Over Financial Reporting. The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We conducted an evaluation of the effectiveness of the internal controls over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included a review of the documentation of controls, evaluation of the design effectiveness of controls, testing the operating effectiveness of the controls and a conclusion on this evaluation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assesses the effectiveness of the Company’s internal control over financial reporting at the end of each quarter. Based on management’s assessment, we believe that our internal control over financial reporting was effective as of December 31, 2019.

 

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s internal control report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report.

 

Changes in Internal Controls over Financial Reporting. The individual who serves as our principal executive and principal financial officer periodically evaluates any change in internal control over financial reporting which has occurred during the prior fiscal quarter. We have concluded that there was no change in our internal control over financial reporting that occurred during the quarter or year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B — OTHER INFORMATION

 

None

 

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ImmuCell Corporation

 

PART III

 

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Executive Officers of the Company

 

Our executive officers as of March 25, 2020 were as follows:

 

MICHAEL F. BRIGHAM (Age: 59, Officer since 1991, Director since 1999) was appointed to serve as President and Chief Executive Officer in February 2000, while maintaining the titles of Treasurer and Secretary, and was appointed to serve as a Director of the Company in March 1999. He previously had been elected Vice President of the Company in December 1998 and had served as Chief Financial Officer since October 1991. He has served as Secretary since December 1995 and as Treasurer since October 1991. Prior to that, he served as Director of Finance and Administration since originally joining the Company in September 1989. Mr. Brigham served as a member of the Board of Directors of the United Way of York County from 2012 to 2019, serving as its Treasurer until June 2016 and as Chair of the Board of Directors for one year and as a member of its Executive Committee. Mr. Brigham served as the Treasurer of the Board of Trustees of the Kennebunk Free Library from 2005 to 2011. He re-joined the Finance Committee of the library in 2012. Prior to joining the Company, he was employed as an audit manager for the public accounting firm of Ernst & Young. Mr. Brigham earned his Masters in Business Administration from New York University in 1989 and a Bachelor of Arts degree (with a double major in Economics and Spanish) from Trinity College in Hartford, Connecticut in 1983.

 

BOBBI JO BROCKMANN (Age: 43, Officer since February 2015, Director since January 2018) served as a Director of the Company from March 2017 to September 2017 and from January 2018 to the present. She was promoted to Vice President of Sales and Marketing in February 2015. She joined the Company as Director of Sales and Marketing in January 2010. Prior to that, she had been employed as Director of Sales since May 2008 and Sales Manager from February 2004 to April 2008 at APC, Inc. of Ankeny, Iowa, a developer and marketer of functional protein products for animal health and nutrition. Prior to that, she held other sales and marketing positions at APC, W & G Marketing Company, Inc. of Ames, Iowa, The Council for Agricultural Science and Technology of Ames, Iowa and Meyocks Group Advertising of West Des Moines, Iowa after graduating from Iowa State University.

 

JOSEPH H. CRABB, Ph.D. (Age: 65, Officer since 1996) was elected Vice President of the Company in December 1998, while maintaining the title of Chief Scientific Officer. He has served as Chief Scientific Officer since September 1998. Prior to that, he served as Vice President of Research and Development since March 1996. Prior to that, he served as Director of Research and Development and Senior Scientist since originally joining the Company in November 1988. He served as a Director of the Company from March 2001 (having previously served in that capacity from March 1999 until February 2000) until September 2017. He served as Chair of the Board of Directors from June 2009 to February 2013. Concurrent with his employment, he has served on national study sections and advisory panels, served as a peer reviewer, and held several adjunct faculty positions. Prior to joining the Company in 1988, Dr. Crabb earned his Ph.D. in Biochemistry from Dartmouth Medical School and completed postdoctoral studies in microbial pathogenesis at Harvard Medical School, where he also served on the faculty.

 

ELIZABETH L. WILLIAMS (Age: 64, Officer since April 2016) joined the Company in April 2016 as Vice President of Manufacturing Operations. Previously, she led the U.S. Region for Zoetis as Vice President, Global Manufacturing and Supply. Prior to that, she held multiple Site Leader positions at Pfizer Animal Health facilities in Lincoln, Nebraska (2008-2011), Conshohocken, Pennsylvania (2006-2008) and Lee’s Summit, Missouri (2003-2006). She led the manufacturing organization (1999-2003) and the Process and Product Development group (1995-1999), achieving registration, approval and successful scale-up of five new products at the Lee’s Summit facility. She earned her Masters of Business Administration from Rockhurst University in Kansas City, Missouri and her Bachelor’s degree in Biology from the University of Missouri.

 

Information with respect to our directors is incorporated herein by reference to the section of our 2020 Proxy Statement titled “Election of the Board of Directors”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2019. There is no family relationship between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer.

 

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ImmuCell Corporation

 

ITEM 11 — EXECUTIVE COMPENSATION

 

Information regarding compensation paid to our executive officers is incorporated herein by reference to the section of our 2020 Proxy Statement titled “Executive Officer Compensation”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2019.

 

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information regarding ownership of our common stock by certain owners and management is incorporated herein by reference to the section of our 2020 Proxy Statement titled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2019.

 

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the section of our 2020 Proxy Statement titled “Certain Relationships and Related Transactions and Director Independence”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2019.

 

ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information regarding our principal accounting fees and services is incorporated by reference to the section of our 2020 Proxy Statement titled “Principal Accounting Fees and Services”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2019.

 

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ImmuCell Corporation

 

PART IV

 

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s 1987 Registration Statement No. 33-12722 on Form S-1 as filed with the Commission).
3.2 Certificate of Amendment to the Company’s Certificate of Incorporation effective July 23, 1990 (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
3.3 Certificate of Amendment to the Company’s Certificate of Incorporation effective August 24, 1992 (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
3.4 Certificate of Amendment to the Company’s Certificate of Incorporation effective June 16, 2016 (incorporated by reference to Exhibit 3.1 of the Company’s Amended Current Report on Form 8-K/A filed on June 16, 2016).
3.5 Certificate of Amendment to the Company’s Certificate of Incorporation effective June 18, 2018 (incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K filed on June 18, 2018).
3.6 Bylaws of the Company as amended (incorporated by reference to Exhibit 3.4 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
4.1 Rights Agreement dated as of September 5, 1995, between the Company and American Stock Transfer and Trust Co., as Rights Agent, which includes as Exhibit A thereto the form of Right Certificate and as Exhibit B thereto the Summary of Rights to Purchase Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009).
4.1A First Amendment to Rights Agreement dated as of June 30, 2005 (incorporated by reference to Exhibit 4.1A of the Company’s Current Report on Form 8-K filed on July 5, 2005).
4.1B Second Amendment to Rights Agreement dated as of June 30, 2008 (incorporated by reference to Exhibit 4.1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
4.1C Third Amendment to Rights Agreement dated as of August 9, 2011 (incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2011).
4.1D Fourth Amendment to Rights Agreement dated as of June 16, 2014 (incorporated by reference to Exhibit 4.1D of the Company’s Current Report on Form 8-K filed on June 17, 2014).
4.1E Fifth Amendment to Rights Agreement dated as of April 15, 2015 (incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended March 31, 2015).
4.1F Sixth Amendment to Rights Agreement dated as of August 10, 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2017).
10.1 + Form of Indemnification Agreement (updated) entered into with each of the Company’s Directors and Officers (incorporated by reference to Exhibit 10.3A to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006).
10.2 + 2000 Stock Option and Incentive Plan of the Company (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.3 + Form of Incentive Stock Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.4 + Amendment to Employment Agreement between the Company and Michael F. Brigham dated March 26, 2010 (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
10.5 + Amendment to Employment Agreement between the Company and Joseph H. Crabb dated March 26, 2010 (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009).
10.6 + 2010 Stock Option and Incentive Plan of the Company (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).
10.7 + Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).

 

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ImmuCell Corporation

 

10.8 +2017 Stock Option and Incentive Plan of the Company (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2017).
10.9* +Form of Incentive Stock Option Agreement.
10.10 +Incentive Compensation Agreement dated March 21, 2019 between the Company and Elizabeth L. Williams (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).
10.11 +Amended and Restated Incentive Compensation Agreement between the Company Bobbi Jo Brockmann (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 12, 2019).
10.12 Development Services and Commercial Supply Agreement between the Company and Norbrook Laboratories Limited dated as of September 5, 2019 (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on September 11, 2019).
10.13 Termination Agreement between the Company and Nordson Corporation dated as of September 10, 2019 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on September 11, 2019).
10.14 Indenture of Lease for Premises Located in Portland, Maine between the Company and TVP, LLC (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on September 17, 2019).
10.15 Term Note for $5,100,000 between the Company and Gorham Savings Bank dated March 11, 2020 (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 12, 2020).
10.16 Term Note for $3,500,000 between the Company and Gorham Savings Bank dated March 11, 2020 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 12, 2020).
10.17 Loan Agreement for $5,100,000 between the Company and Gorham Savings Bank dated March 11, 2020 (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on March 12, 2020).
10.18 Loan Agreement for $3,500,000 between the Company and Gorham Savings Bank dated March 11, 2020 (incorporated by reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K filed on March 12, 2020.
10.19 Line of Credit Agreement for up to $1,000,000 between the Company and Gorham Savings Bank dated March 11, 2020 (incorporated by reference to Exhibit 99.6 to the Company’s Current report on Form 8-K filed on March 12, 2020).
10.20* Severance Agreement between the Company and Michael F. Brigham dated as of March 25, 2020.
10.21* Amended and Restated Incentive Compensation Agreement between the Company and Bobbi Jo Brockmann dated as of March 25, 2020.
14 Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 of the Company’s Current Report on Form 8-K filed on March 20, 2014).
23.1* Consent of Wipfli LLP.
23.2* Consent of RSM US LLP.
31* Certifications required by Rule 13a-14(a).
32* Certification pursuant to Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

 

+Management contract or compensatory plan or arrangement.
*Filed herewith.

 

37

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of ImmuCell Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of ImmuCell Corporation (the Company) as of December 31, 2019, the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ WIPFLI LLP  

 

We have served as the Company’s auditor since 2019.

 

South Portland, Maine

March 27, 2020

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of ImmuCell Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of ImmuCell Corporation (the Company) as of December 31, 2018, the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ RSM US LLP  

 

We served as the Company’s auditor from 2016 to 2018.

 

Boston, Massachusetts

March 27, 2020

 

F-2

 

 

ImmuCell Corporation

 

BALANCE SHEETS

 

   As of December 31, 
   2019   2018 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents  $6,293,293   $2,521,050 
Short-term investments   2,480,753     
Trade accounts receivable, net   1,637,165    932,298 
Inventory   2,518,256    2,331,671 
Prepaid expenses and other current assets   259,566    635,817 
Total current assets   13,189,033    6,420,836 
           
PROPERTY, PLANT AND EQUIPMENT, net   25,265,738    26,027,549 
           
INTANGIBLE ASSETS, net   114,624    133,728 
GOODWILL   95,557    95,557 
INTEREST RATE SWAPS       40,209 
OTHER ASSETS   26,884    12,953 
TOTAL ASSETS  $38,691,836   $32,730,832 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $1,220,566   $1,220,660 
Current portion of bank debt   1,274,790    844,351 
Line of credit       500,000 
Total current liabilities   2,495,356    2,565,011 
           
LONG-TERM LIABILITIES:          
Bank debt, net of current portion   7,146,676    8,421,487 
Interest rate swaps   58,526     
Total long-term liabilities   7,205,202    8,421,487 
TOTAL LIABILITIES   9,700,558    10,986,498 
           
CONTINGENT LIABILITIES AND COMMITMENTS (See Note 12)          
STOCKHOLDERS’ EQUITY:          
Common stock, $0.10 par value per share, 11,000,000 and 11,000,000 shares authorized, 7,299,009 and 5,662,645 shares issued and 7,212,919 and 5,568,962 shares outstanding, as of December 31, 2019 and 2018, respectively   729,901    566,265 
Additional paid-in capital   31,131,893    22,695,557 
Accumulated deficit   (2,638,285)   (1,342,698)
Treasury stock, at cost, 86,090 and 93,683 shares as of December 31, 2019 and 2018, respectively   (188,336)   (204,947)
Accumulated other comprehensive (loss) income   (43,895)   30,157 
Total stockholders’ equity   28,991,278    21,744,334 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $38,691,836   $32,730,832 

 

The accompanying notes are an integral part of these financial statements.

F-3

 

 

ImmuCell Corporation

 

STATEMENTS OF OPERATIONS

 

   During the Years Ended
December 31,
 
   2019   2018 
Product sales  $13,722,872   $10,986,297 
Costs of goods sold   6,983,152    5,792,392 
Gross margin   6,739,720    5,193,905 
OPERATING EXPENSES (INCOME):          
Product development expenses   3,687,609    3,516,619 
Sales and marketing expenses   2,318,112    2,084,903 
Administrative expenses   1,687,907    1,738,953 
Gain on sale of assets       (700,000)
Operating activities, net   7,693,628    6,640,475 
           
NET OPERATING LOSS   (953,908)   (1,446,570)
           
Other expenses, net   313,505    413,481 
           
LOSS BEFORE INCOME TAXES   (1,267,413)   (1,860,051)
           
Income tax expense   28,174    461,620 
           
NET LOSS  $(1,295,587)  $(2,321,671)
           
Basic weighted average common shares outstanding   6,818,960    5,486,154 
Basic net loss per share  $(0.19)  $(0.42)
           
Diluted weighted average common shares outstanding   6,818,960    5,486,154 
Diluted net loss per share  $(0.19)  $(0.42)

 

STATEMENTS OF COMPREHENSIVE LOSS

 

   During the Years Ended
December 31,
 
   2019   2018 
Net loss  $(1,295,587)  $(2,321,671)
Other comprehensive (loss) income:          
Interest rate swaps, before taxes   (98,735)   41,206 
Income tax applicable to interest rate swaps   24,683    (10,411)
Other comprehensive (loss) income, net of taxes   (74,052)   30,795 
Total comprehensive loss  $(1,369,639)  $(2,290,876)

 

The accompanying notes are an integral part of these financial statements.

F-4

 

 

ImmuCell Corporation

 

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   Common Stock   Retained   Treasury Stock   Accumulated   Total 
   Shares   Amount   Additional
paid-in
capital
  

Earnings

(Accumulated

Deficit)

   Shares   Amount   Other
Comprehensive
(Loss) Income
   Stockholders’
Equity
 
BALANCE,                                
December 31, 2017   5,662,645   $566,265   $22,458,219   $978,973    186,448   $(407,879)  $(638)  $23,594,940 
                                         
Net loss               (2,321,671)               (2,321,671)
Other comprehensive income, net of taxes                           30,795    30,795 
Exercise of stock options           (106,678)       (92,765)   202,932        96,254 
Stock-based compensation           344,016                    344,016 
                                         
BALANCE,                                        
December 31, 2018   5,662,645   $566,265   $22,695,557   $(1,342,698)   93,683   $(204,947)  $30,157   $21,744,334 
                                         
Net loss               (1,295,587)               (1,295,587)
Other comprehensive loss, net of taxes                           (74,052)   (74,052)
Public offering of common stock, net of $696,566 of offering costs   1,636,364    163,636    8,139,800                    8,303,436 
Exercise of stock options           (16,608)       (7,593)   16,611        3 
Stock-based compensation           313,144                    313,144 
                                         
BALANCE,                                        
December 31, 2019   7,299,009   $729,901   $31,131,893   $(2,638,285)   86,090   $(188,336)  $(43,895)  $28,991,278 
                                         

 

The accompanying notes are an integral part of these financial statements.

 

F-5

 

 

ImmuCell Corporation

 

STATEMENTS OF CASH FLOWS

 

   During the Years Ended
December 31,
 
   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,295,587)  $(2,321,671)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:          
Depreciation   2,248,317    1,501,607 
Amortization   19,104    19,104 
Amortization of debt issuance costs   16,976    16,829 
Deferred income taxes   24,684    462,315 
Stock-based compensation   313,144    344,016 
Gain on sale of assets       (700,000)
Loss on disposal of fixed assets   2,469    1,733 
           
Changes in:          
Trade accounts receivable, gross   (704,867)   411,724 
Accrued interest income   (27,753)    
Inventory   (186,585)   (281,939)
Prepaid expenses and other current assets   (73,749)   128,849 
Other assets   (13,931)   (12,033)
Accounts payable and accrued expenses   (88,711)   80,162 
Deferred revenue       (24,100)
Net cash provided by (used for) operating activities   233,511    (373,404)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property, plant and equipment   (1,391,446)   (2,029,895)
Maturities of investment   7,670,000     
Purchases of investments   (10,123,000)    
Payment of contingent royalties related to 2016 acquisition   (8,914)   (14,077)
Proceeds from sale of assets   450,000    250,000 
Net cash used for investing activities   (3,403,360)   (1,793,972)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from public offering, net   8,303,436     
Proceeds from debt issuance       693,640 
Proceeds from line of credit       500,000 
Debt principal repayments   (861,347)   (398,308)
Line of credit repayment   (500,000)    
Payments of debt issue costs       (1,971)
Proceeds from exercise of stock options   3    96,254 
Net cash provided by financing activities   6,942,092    889,615 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   3,772,243    (1,277,761)
BEGINNING CASH AND CASH EQUIVALENTS   2,521,050    3,798,811 
ENDING CASH AND CASH EQUIVALENTS  $6,293,293   $2,521,050 

 

The accompanying notes are an integral part of these financial statements

 

F-6

 

 

ImmuCell Corporation

 

STATEMENT OF CASH FLOWS

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

   During the Years Ended
December 31,
 
   2019   2018 
CASH PAID FOR:        
Income taxes  $3,566   $4,222 
Interest expense  $420,956   $403,535 
           
NON-CASH ACTIVITIES:          
Change in capital expenditures included in accounts payable and accrued expenses  $97,530   $(568,695)
Net change in fair value of interest rate swaps, net of taxes  $74,052   $(30,795)
Fixed asset disposals, gross  $62,055   $22,681 

 

The accompanying notes are an integral part of these financial statements.

 

F-7

 

 

ImmuCell Corporation

Notes to Audited 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 market products that provide Immediate Immunity to newborn dairy and beef cattle. We are developing improved formulations of the First Defense® product line for the prevention of scours in 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 audited financial statements reflecting all adjustments that are, in our opinion, necessary in order to ensure that the financial statements are not misleading. We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, earnings per share and cash flows. References to GAAP in these footnotes are to the FASB Accounting Standards Codification™ (Codification). Accordingly, we believe that the disclosures are adequate to ensure that the information presented is not misleading.

 

(b) Cash, Cash Equivalents and Short-Term Investments

 

We consider all highly liquid investment instruments that mature within three months of their purchase dates to be cash equivalents. Cash equivalents are principally invested in securities backed by the U.S. government. Certain cash balances in excess of Federal Deposit Insurance Corporation (FDIC) limits of $250,000 per financial institution per depositor are maintained in money market accounts at financial institutions that are secured, in part, by the Securities Investor Protection Corporation. Amounts in excess of these FDIC limits per bank that are not invested in securities backed by the U.S. government aggregated $5,792,993 and $2,268,737 as of December 31, 2019 and 2018, respectively. Short-term investments are classified as held to maturity and are comprised of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Short-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. We account for investments in marketable securities in accordance with Codification Topic 320, Investments — Debt and Equity Securities. See Note 3.

 

(c) Accounts Receivable

 

Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are considered to be past due if a portion of the receivable balance is outstanding for more than 30 days. Past due accounts receivable are subject to an interest charge. Accounts receivable are written off when deemed uncollectible. The amount of accounts receivable written off during all periods reported was immaterial. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019 and 2018, we determined that no allowance for doubtful accounts was necessary. See Note 4.

 

F-8

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

(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. 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 years ended December 31, 2019 or 2018. See Notes 2(h), 8 and 9 for additional disclosures.

 

(g) Fair Value Measurements

 

In determining fair value measurements, we follow the provisions of Codification Topic 820, Fair Value Measurements and Disclosures. Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. As of December 31, 2019 and 2018, the carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, inventory, other assets, accounts payable, deferred revenue and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value based on similar instruments with similar maturities. The three-level hierarchy is as follows:

 

Level 1 — Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.

 

Level 2 —Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.

 

Level 3 — Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

F-9

 

 

ImmuCell Corporation

Notes to Audited 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 years ended December 31, 2019 and 2018, there were no transfers between levels. As of December 31, 2019 and 2018, our Level 1 assets measured at fair value by quoted prices in active markets consisted of bank savings accounts and money market funds. As of December 31, 2019 our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2019 and 2018, our interest rate swaps were classified as Level 2 and were measured by observable market data in combination with expected cash flows for each instrument. There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018.

 

   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 

 

   As of December 31, 2018 
   Level 1   Level 2   Level 3   Total 
Assets:                
Cash and money market accounts  $2,521,050   $   $   $2,521,050 
Interest rate swaps       40,209        40,209 
Total  $2,521,050   $40,209   $   $2,561,259 

 

 

F-10

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

(h) Valuation of Long-Lived Assets

 

We periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held for use approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable. No impairment was recognized during the years ended December 31, 2019 and 2018.

 

(i) Concentration of Risk

 

Concentration of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses when deemed necessary, but historically we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:

 

   During the Years Ended
December 31,
 
   2019   2018 
Company A   42%   43%
Company B   27%   23%

 

Trade accounts receivable due from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Company B   48%   36%
Company A   28%   35%
Company C   *    15%

* Amount is less than 10%.

 

(j) Interest Rate Swap Agreements

 

All derivatives are recognized on the balance sheet at their fair value. We entered into interest rate swap agreements in 2010 and 2015. On the dates the agreements were entered into, we designated the derivatives as hedges of the variability of cash flows to be paid related to our long-term debt. The agreements have been determined to be highly effective in hedging the variability of identified cash flows, so changes in the fair market value of the interest rate swap agreements are recorded as comprehensive income (loss), until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). We formally documented the relationship between the interest rate swap agreements and the related hedged items. We also formally assess, both at the interest rate swap agreements’ inception and on an ongoing basis, whether the agreements are highly effective in offsetting changes in cash flow of hedged items. See Note 11.

 

F-11

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

(k) Revenue Recognition

 

For periods beginning on or after January 1, 2018, we recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 is a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. The core principle is that we recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods or services to customers when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We conduct our business with customers through valid purchase orders or sales orders which are considered contracts and are not interdependent on one another. A performance obligation is a promise in a contract to transfer a distinct product to the customer. The transaction price is the amount of consideration we expect to receive under the arrangement. Revenue is measured based on consideration specified in a contract with a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized when or as the customer receives the benefit of the performance obligation. Product transaction prices on a purchase or sale order are discrete and stand-alone. We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product delivery occurs. Consideration is typically paid approximately 30 days from the time control is transferred. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost in costs of goods sold. We have enhanced disclosures related to disaggregation of revenue sources and accounting policies prospectively as a result of adopting these standards. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns. See Note 14.

 

(l) Expense Recognition

 

In 2018, we adopted ASC 340-40, Accounting for Other Assets and Deferred Costs, which requires sales commissions and other third party acquisition costs resulting directly from securing contracts with customers to be recognized as an asset when incurred and to be expensed over the associated contract term or estimated customer life depending on the nature of the underlying contract. We do not incur costs in connection with product sales to customers that are eligible for capitalization. Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $58,483 and $28,415 during the years ended December 31, 2019 and 2018, respectively. All product development expenses are expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production cycle, and these costs are charged to costs of goods sold when the inventory is sold to a customer. Adoption of the amended provisions of ASC 340-40 did not have a material impact on our financial statements.

 

(m) 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.

 

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 exist as of December 31, 2019 or 2018. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 17.

 

F-12

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

(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 $313,144 and $344,016 during the years ended December 31, 2019 and 2018, respectively.

 

(o) Net Loss Per Common Share

 

Net loss per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The net loss per share has been computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All stock options have been excluded from the denominator in the calculation of dilutive earnings per share when we are in a loss position, as the inclusion would be anti-dilutive. The weighted average number of shares outstanding was 6,818,960 and 5,486,154 during the years ended December 31, 2019 and 2018, respectively. Outstanding stock options that were not included in this calculation because the effect would be anti-dilutive amounted to 388,500 and 394,000 as of December 31, 2019 and 2018, respectively.

 

(p) 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. 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.

 

(q) New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU and its amendments became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted. We elected to adopt this ASU effective January 1, 2019. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of Topic 842. In July 2018, the FASB issued ASU 2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that 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 have concluded that we are 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 will be accounted for in accordance with Topic 842 during the first quarter of 2020.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. Topic 718 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this guidance during the three-month period ended March 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.

 

F-13

 

 

ImmuCell Corporation

Notes to Audited 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 this guidance is not expected to have a material impact on our financial statements.

 

3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

Cash, cash equivalents and short-term investments (at amortized cost plus accrued interest) consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Cash and cash equivalents  $6,293,293   $2,521,050 
Short-term investments   2,480,753     
Total  $8,774,046   $2,521,050 

 

Held to maturity securities (certificates of deposit) are carried at amortized cost. We are required by a bank debt covenant to maintain at least $2,000,000 of otherwise unrestricted cash, cash equivalents and short-term investments.

 

4. TRADE ACCOUNTS RECEIVABLE, net

 

Trade accounts receivable amounted to $1,637,165 and $932,298 as of December 31, 2019 and 2018, respectively. No allowance for bad debt and product returns was recorded as of December 31, 2019 or 2018.

 

5. INVENTORY

 

Inventory consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Raw materials  $791,558   $338,991 
Work-in-process   1,207,457    1,337,035 
Finished goods   519,241    655,645 
Total  $2,518,256   $2,331,671 

 

F-14

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Prepaid expenses  $218,232   $142,528 
Other receivables(1)   40,534    493,289 
Security deposits   800    - 
Total  $259,566   $635,817 

 

(1)This amount as of December 31, 2018 includes $450,000 due from a third party for the sale of assets. See Note 15.

 

7. PROPERTY, PLANT AND EQUIPMENT, net

 

Property, plant and equipment consisted of the following:

 

   Estimated
Useful Lives
(in years)
  As of
December 31, 2019
   As of
December 31, 2018
 
Laboratory and manufacturing equipment  3-10  $15,437,724   $15,092,252 
Building and improvements  10-39   17,078,829    17,018,316 
Office furniture and equipment  3-10   719,323    731,510 
Construction in progress  n/a   1,124,189    91,067 
Land  n/a   516,867    516,867 
Property, plant and equipment, gross      34,876,932    33,450,012 
Accumulated depreciation      (9,611,194)   (7,422,463)
Property, plant and equipment, net     $25,265,738   $26,027,549 

 

As of December 31, 2019, construction in progress consisted principally of payments toward the First Defense® production capacity expansion project and equipment needed to bring the aseptic filling for Re-Tain in-house. As of December 31, 2018, construction in progress consisted principally of down payments towards two pieces of manufacturing equipment. Approximately $62,055 and $22,681 of property, plant and equipment was disposed of during the years ended December 31, 2019 and 2018, respectively. Depreciation expense was $2,248,317 and $1,501,607 during the years ended December 31, 2019 and 2018, respectively.

 

8. BUSINESS ACQUISITION

 

On January 4, 2016, we acquired certain business assets and processes from DAY 1™ Technology, LLC of Minnesota. The acquired rights and know-how are primarily related to formulating our bovine antibodies into a gel solution (or paste) for an oral delivery option to newborn calves via a syringe (or tube). This product format offers customers an alternative delivery option to the bolus (the standard delivery format of the bivalent First Defense® product since first approval by the U.S. Department of Agriculture (USDA) and product launch in 1991). This gel formulation had been sold as a feed product without disease claims since 2012. During the fourth quarter of 2018, we achieved USDA approval of an improved bivalent gel formulation and began marketing this product as Dual-Force First Defense®. We achieved Canadian approval of this product during the first quarter of 2019. We were also interested in a gel formulation in anticipation of the launch of Tri-Shield First Defense® (which was approved by the USDA during the fourth quarter of 2017) because the additional rotavirus antibodies in this new product would not fit in a bolus full of E. coli and coronavirus antibodies. This purchase also included certain other related private-label products. The total purchase price was approximately $532,000 (comprised of a $368,000 up front payment, a $97,000 technology transfer payment and estimated royalty of $67,000). Actual royalties paid based on sales from January 1, 2016 through December 31, 2018 were $36,000, and no further royalties are payable under this agreement. The estimated fair values of the assets purchased in this transaction included inventory of approximately $113,000, machinery and equipment of approximately $132,000, a developed technology intangible of approximately $191,000 (which includes an immaterial amount of value associated with customer relationships and a non-compete agreement, and was valued using the relief from royalty method) and goodwill of approximately $96,000. The goodwill arising from the acquisition consists largely of the estimated value of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction was closed as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies.

 

F-15

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

9. INTANGIBLE ASSETS

 

The intangible assets described in Note 8 are being amortized to costs of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization expense was $19,104 during both of the years ended December 31, 2019 and 2018. The net value of these intangibles was $114,624 and $133,728 as of December 31, 2019 and 2018, respectively. A summary of intangible amortization expense estimated for the periods subsequent to December 31, 2019 is as follows:

 

During the Years Ending December 31,  Amount 
2020   19,104 
2021   19,104 
2022   19,104 
2023   19,104 
2024   19,104 
2025   19,104 
Total  $114,624 

 

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 

 

Intangible assets as of December 31, 2018 consisted of the following:

 

   Gross
Carrying
Value
   Accumulated
Amortization
   Net Book
Value
 
Developed technology  $184,100   $(55,230)  $128,870 
Customer relationships   1,300    (390)   910 
Non-compete agreements   5,640    (1,692)   3,948 
Total  $191,040   $(57,312)  $133,728 

 

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Accounts payable – trade  $401,958   $531,048 
Accounts payable – capital   170,220    72,695 
Accrued payroll   399,501    358,451 
Accrued professional fees   73,781    93,050 
Accrued other   175,106    165,416 
Total  $1,220,566   $1,220,660 

 

F-16

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

11. BANK DEBT

 

We have in place five credit facilities and a line of credit with TD Bank N.A. These five credit facilities are secured by substantially all of our assets and are subject to certain restrictions and financial covenants.

 

Proceeds from a $1,000,000 first mortgage on our corporate headquarters and production and research facility at 56 Evergreen Drive in Portland (Loan #1) were received during the third quarter of 2010 with monthly principal and interest payments due for ten years, calculated based on a fifteen-year amortization schedule. A balloon principal payment of $451,885 will be due during the third quarter of 2020. As of December 31, 2019, $493,696 was outstanding under Loan #1.

 

Proceeds from a $2,500,000 second mortgage on this corporate headquarters (Loan #2) were received during the third quarter of 2015 with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,550,000 will be due during the third quarter of 2025. As of December 31, 2019, $2,143,771 was outstanding under Loan #2.

 

We hedged our interest rate exposures on Loan #1 and Loan #2 with interest rate swap agreements that effectively converted floating interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to fixed rates of 6.04% and 4.38%, respectively. As of the debt principal repayment date immediately preceding December 31, 2019, the variable rates on these two mortgage notes were 4.99% and 4.04%, respectively. All derivatives are recognized on the balance sheet at their fair value. At the time of the closings and thereafter, the agreements were determined to be highly effective in hedging the variability of the identified cash flows and have been designated as cash flow hedges of the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreements are recorded in other comprehensive income, net of taxes. The original notional amounts of the interest rate swap agreements of $1,000,000 and $2,500,000 amortize in accordance with the amortization of the mortgage notes. The notional amount of the interest rate swaps was $2,637,467 as of December 31, 2019. The fair values of the interest rate swaps have been determined using observable market-based inputs or unobservable inputs that are corroborated by market data. Accordingly, the interest rate swaps are classified as level 2 within the fair value hierarchy provided in Codification Topic 820, Fair Value Measurements and Disclosures.

 

   During the Year
Ended December 31,
 
   2019   2018 
(Receipts) payments required by interest rate swaps  $(675)  $9,581 
Other comprehensive (loss) income, net of taxes  $(74,052)  $30,795 

 

During the first quarter of 2016, we entered into two additional credit facilities (Loans #3 and #4) aggregating up to approximately $4,500,000. As a result of loan amendments entered into during the first quarter of 2017, these two credit facilities were increased to up to $6,500,000. Loan #3 is a construction loan of $3,940,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through September 2018, at which time the loan converted to a seven-year term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019) with monthly principal and interest payments due based on a seven-year amortization schedule. As of December 31, 2019, $3,236,429 was outstanding under Loan #3. Loan #4 is a construction loan of $2,560,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through March 2018, at which time the loan converted to a term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019) with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,408,000 will be due during the first quarter of 2027. As of December 31, 2019, $2,336,000 was outstanding under Loan #4.

 

Proceeds from a $340,000 first mortgage on our 4,114 square foot warehouse and cold storage facility near our Re-Tain™ production facility (Loan #5) were received during the first quarter of 2017. This note bears interest at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% (which was equal to 4.01% as of December 31, 2019) with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $206,000 will be due during the first quarter of 2027. As of December 31, 2019, $309,182 was outstanding under Loan #5.

 

F-17

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

In connection with Loan #1 and Loan #2, we incurred debt issue costs of $26,489 and $34,125, respectively. In connection with Loan #3, Loan #4 and Loan #5, we incurred total debt issue costs of $114,806. The 2017 amendments to Loan #3 and Loan #4 were accounted for as modifications. The amortization of debt issue costs is being recorded as a component of interest expense, included with other expenses, net, and is being amortized over the underlying terms of the respective credit facilities.

 

Debt proceeds received and principal repayments made during the years ended December 31, 2019 and 2018 are reflected in the following table by year and by loan:

 

   During the Year
Ended December 31, 2019
   During the Year
Ended December 31, 2018
 
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
 
Loan #1  $   $(68,908)  $   $(64,876)
Loan #2       (89,997)       (86,097)
Loan #3       (562,857)   426,499    (140,714)
Loan #4       (128,000)   267,141    (96,000)
Loan #5       (11,585)       (10,621)
Total  $   $(861,347)  $693,640   $(398,308)

 

Principal payments (net of debt issue costs) due under bank loans outstanding as of December 31, 2019 (excluding our $500,000 line of credit) are reflected in the following table by the year that payments are due:

 

   During the Years Ended December 31,  

After

December 31,

   Total 
   2020   2021   2022   2023   2024   2024     
Loan #1  $493,696   $   $   $   $   $   $493,696 
Loan #2   94,005    98,538    103,077    107,769    112,623    1,627,759    2,143,771 
Loan #3(1)   562,857    562,857    562,857    562,857    562,857    422,144    3,236,429 
Loan #4(1)   128,000    128,000    128,000    128,000    128,000    1,696,000    2,336,000 
Loan #5(2)   12,575    13,088    13,623    14,180    14,760    240,956    309,182 
Subtotal  $1,291,133   $802,483   $807,557   $812,806   $818,240   $3,986,859    8,519,078 
Debt Issuance Costs                                 (97,612)
Total                                $8,421,466 

 

(1)These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 3.96%. The actual interest rate and principal payments will be different.
(2)This note bears interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 4.01%. The actual interest rate and principal payments will be different.

 

During the third quarter of 2010, we entered into a $500,000 line of credit with TD Bank N.A., which is secured by substantially all of our assets and is subject to certain restrictions and financial covenants. This line of credit has been renewed approximately annually since then, is available as needed and has been extended through May 31, 2020. There was no outstanding balance under this line of credit as of December 31, 2019. As of December 31, 2018, $500,000 was outstanding under this line of credit, which was repaid during the first quarter of 2019. Interest on borrowings against the line of credit is variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.

 

F-18

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

12. 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 December 31, 2019. 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 December 31, 2019.

 

We are committed to purchasing certain key parts (syringes) and services (final 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 two contractors. We are investing in the necessary equipment to perform the final formulation, aseptic filling and final packaging 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 were accrued as of December 31, 2017 and paid in January 2018. Royalties of $10,396 were accrued as of December 31, 2018 and paid in January 2019. Royalties of $76,876 were accrued as of December 31, 2019 and paid in January 2020.

 

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. The lease term is ten years with a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property taxes, utilities, insurance, maintenance and related building and operating expenses.

 

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 $2,318,000 to increase our production capacity for the First Defense® product line, $1,245,000 to construct and equip our own formulation and aseptic filling facility for Re-Tain, $547,000 to the purchase of inventory and $145,000 to other obligations as of December 31, 2019.

 

F-19

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

13. STOCKHOLDERS’ EQUITY

 

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.

 

F-20

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

In June 2010, our stockholders approved the 2010 Stock Option and Incentive Plan (the “2010 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at no less than fair market value on the date of grant. At that time, 300,000 shares of common stock were reserved for issuance under the 2010 Plan and subsequently no additional shares have been reserved for the 2010 Plan. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. All options granted under the 2010 Plan expire no later than ten years from the date of grant. The 2010 Plan expires in June 2020, after which date no further options 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.

 

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.

 

Activity under the stock option plans described above was as follows:

 

   2000 Plan   2010 Plan   2017 Plan   Weighted
Average
Exercise
Price
  

Aggregate
Intrinsic
Value(1)

 
Outstanding at December 31, 2017   117,500    242,500       $4.58   $1,513,980 
Grants       48,500    122,500   $7.38      
Terminations       (19,000)   (11,000)  $6.63      
Exercises   (105,000)   (2,000)      $1.89      
Outstanding at December 31, 2018   12,500    270,000    111,500   $6.37   $266,020 
Grants       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)
Vested at December 31, 2019       67,500       $6.13   $(65,890)
Vested and expected to vest at                         
December 31, 2019       255,000    133,500   $6.48   $(516,475)
Reserved for future grants       1,000    167,500           

 

(1)Intrinsic value is the difference between the fair market value as of the date indicated and as of the date of the option grant.

 

The following table displays additional information about the stock option plans described above:

 

   Number of
Shares
   Weighted
Average
Fair Value at
Grant Date
   Weighted
Average
Exercise
Price
 
Non-vested stock options as of January 1, 2019   334,000   $3.63   $6.64 
Non-vested stock options as of December 31, 2019   321,000   $3.49   $6.55 
Stock options granted during the year ended December 31, 2019   51,000   $2.93   $5.90 
Stock options that vested during the year ended December 31, 2019   36,000   $4.10   $6.87 
Stock options that were forfeited during the year ended December 31, 2019   29,000   $3.39   $6.05 

 

F-21

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

During the year ended December 31, 2019, one director and two employees exercised stock options covering 27,500 shares by the surrender of 19,907 shares of common stock with a fair market value of $120,172 at the time of exercise and the payment of $3 in cash. During the year ended December 31, 2018, seven employees exercised stock options covering an aggregate of 107,000 shares, of which 51,500 of these shares were acquired for cash, resulting in total proceeds of $96,240, and 55,500 of these shares were acquired by the surrender of 14,235 shares of common stock with a fair market value of $105,785 at the time of exercise and the payment of $14 in cash.

 

The weighted average remaining life of the options outstanding under the 2010 Plan and the 2017 Plan as of December 31, 2019 was approximately 6 years and 4 months. The weighted average remaining life of the options exercisable under these plans as of December 31, 2019 was approximately 4 years and 10 months. The exercise prices of the options outstanding as of December 31, 2019 ranged from $3.15 to $8.90 per share. The 51,000 stock options granted during the year ended December 31, 2019 had exercise prices between $5.175 and $7.50 per share. The 171,000 stock options granted during the year ended December 31, 2018 had exercise prices between $6.81 and $8.43 per share. The aggregate intrinsic value of options exercised during 2019 and 2018 approximated $46,091 and $582,590, respectively. The weighted-average grant date fair values of options granted during 2019 and 2018 were $2.93 and $3.83 per share, respectively. As of December 31, 2019, total unrecognized stock-based compensation related to non-vested stock options aggregated $386,887, which will be recognized over a weighted average period of 1 year and 2 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 years ended December 31, 2019 and 2018:

 

   During the
Year Ended
December 31,
2019
   During the
Year Ended
December 31,
2018
 
Risk-free interest rate   1.9%   2.6%
Dividend yield   0%   0%
Expected volatility   51%   56%
Expected life   6 years    5.4 years 

 

The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected option term, while the other assumptions are derived from averages of our historical data.

 

Common Stock Rights Plan

 

In September 1995, our Board of Directors adopted a Common Stock Rights Plan (the “Rights Plan”) and declared a dividend of one common share purchase right (a “Right”) for each of the then outstanding shares of the common stock of the Company. Each Right entitles the registered holder to purchase from the Company one share of common stock at an initial purchase price of $70.00 per share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as Rights Agent.

 

The Rights (as amended) become exercisable and transferable apart from the common stock upon the earlier of i) 10 days following a public announcement that a person or group (Acquiring Person) has, without the prior consent of the Continuing Directors (as such term is defined in the Rights Agreement), acquired beneficial ownership of 20% or more of the outstanding common stock or ii) 10 days following commencement of a tender offer or exchange offer the consummation of which would result in ownership by a person or group of 20% or more of the outstanding common stock (the earlier of such dates being called the Distribution Date).

 

Upon the Distribution Date, the holder of each Right not owned by the Acquiring Person would be entitled to purchase common stock at a discount to the initial purchase price of $70.00 per share, effectively equal to one half of the market price of a share of common stock on the date the Acquiring Person becomes an Acquiring Person. If, after the Distribution Date, the Company should consolidate or merge with any other entity and the Company were not the surviving company, or, if the Company were the surviving company, all or part of the Company’s common stock were changed or exchanged into the securities of any other entity, or if more than 50% of the Company’s assets or earning power were sold, each Right would entitle its holder to purchase, at the Rights’ then-current purchase price, a number of shares of the acquiring company’s common stock having a market value at that time equal to twice the Right’s exercise price.

 

F-22

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

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.

 

14. REVENUE

 

We primarily offer the First DefenseÒ 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 years ended December 31, 2019 or December 31, 2018 (under ASC 606). We do not have any contract assets such as contracts for which we have satisfied the performance obligations but do not yet have the right to bill for or contract liabilities such as customer advances. All trade receivables on our balance 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 Years Ended
December 31,
 
   2019   2018 
United States  $12,191,108   $9,559,142 
Other   1,531,764    1,427,155 
Total product sales  $13,722,872   $10,986,297 

 

The following table presents our product sales disaggregated by major product category:

 

   During the Years Ended
December 31,
 
   2019   2018 
First Defense® product line  $13,244,396   $10,663,265 
Other animal health   344,875    298,932 
Other   133,601    24,100 
Total product sales  $13,722,872   $10,986,297 

 

F-23

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

15. GAIN ON SALE OF ASSETS

 

During the third quarter of 2018, we sold the assets underlying our water diagnostic product for $700,000. This sale of assets was recognized as an operating activity at that time in accordance with ASC 610: Other Income and ASC 810: Consolidation. An upfront payment of $250,000 was received upon closing, a second payment of $250,000 was received during the third quarter of 2019 and a third payment of $200,000 was received during the fourth quarter of 2019 (these latter two payments were recorded in prepaid expenses and other current assets as of December 31, 2018).

 

16. OTHER EXPENSES, NET

 

Other expenses, net, consisted of the following:

 

   During the Years Ended
December 31,
 
   2019   2018 
Interest expense  $431,788   $427,782 
Interest income   (118,283)   (14,301)
Other expenses, net  $313,505   $413,481 

 

17. INCOME TAXES

 

Our income tax expense aggregated $28,174 and $461,620 (amounting to 2% and 25% of our loss before income taxes, respectively) for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we had federal net operating loss carryforwards of $11,949,860 of which $10,237,953 does not expire and $1,711,907 expires 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. No subsequent adjustments were recorded.

 

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.

 

F-24

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

The income tax provision consisted of the following:

 

   During the Year Ended
December 31,
 
   2019   2018 
Current        
Federal  $   $ 
State   3,490    (820)
Current subtotal   3,490    (820)
Deferred          
Federal   (240,458)   (274,495)
State   (31,205)   (504,072)
Deferred subtotal, gross   (271,663)   (778,567)
Valuation allowance   296,347    1,241,007 
Deferred subtotal, net   24,684    462,440 
Income tax expense  $28,174   $461,620 

 

The actual income tax expense differs from the expected tax computed by applying the U.S. federal corporate tax rate of 21% to the loss before income taxes during the years ended December 31, 2019 and 2018 respectively, as follows:

 

   During the Year Ended
December 31,
 
   2019   2018 
   $   %   $   % 
Computed expected income tax expense rate  $(266,157)   (21.00)%  $(390,610)   (21.00)%
State income taxes, net of federal expense   (21,894)   (1.73)   136,843    7.36 
Share-based compensation   37,811    2.98    67,181    3.61 
Tax credits   (27,815)   (2.19)   (602,813)   (32.41)
Valuation allowance   296,347    23.38    1,241,007    66.72 
Other   9,882    0.78    10,012    0.54 
Income tax expense/rate  $28,174    2.22%  $461,620    24.82%

 

The significant components of our deferred tax assets, net, consisted of the following:

 

   As of December 31, 
   2019   2018 
Product rights  $6,709   $14,226 
Property, plant and equipment   (2,306,435)   (2,534,799)
Federal general business tax credits   434,838    407,023 
Federal net operating loss carryforwards   2,509,471    2,486,263 
State tax credits carryover   841,558    845,967 
Interest rate swaps   14,632    (10,052)
Prepaid expenses and other   (12,070)   13,354 
UNICAP   16,756    19,025 
Incentive compensation   31,895     
Valuation allowance   (1,537,354)   (1,241,007)
Deferred tax assets, net  $   $ 

 

F-25

 

 

ImmuCell Corporation

Notes to Audited Financial Statements (continued)

 

18. 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 97% of our total product sales during the years ended December 31, 2019 and 2018. Our primary customers for the majority of our product sales (89% and 87% during the years ended December 31, 2019 and 2018, respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 10% and 13% of our total product sales during the years ended December 31, 2019 and 2018, respectively.

 

19. 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 DefenseÒ product line and CMT), and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $490,323 and $527,819 of products from us during the years ended December 31, 2019 and 2018, respectively, on terms consistent with those offered to other distributors of similar status. We made marketing-related payments of $975 and $12,380 to these affiliated companies during the years ended December 31, 2019 and 2018, respectively, that were expensed as incurred. Our accounts receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated $0 and $16,283 as of December 31, 2019 and 2018, respectively.

 

20. 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 $126,638 and $104,843 into the plan for the years ended December 31, 2019 and 2018, respectively.

 

21. SUBSEQUENT EVENTS

 

We have evaluated subsequent events through the time of filing on March 27, 2020, the date we have issued this Annual Report on Form 10-K. The global coronavirus 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. 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 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 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 (1) month LIBOR plus 2.15% per annum. The proceeds were used to repay all bank debt outstanding at the time of closing (see Note 11) and to provide some additional working capital. We were required by a bank debt covenant (before the debt refinancing discussed above) to maintain at least $2 million of otherwise unrestricted cash, cash equivalents and short-term investments. Under the new debt, we are required to hold $1.4 million in escrow (a non-current asset), which reduces the effective availability of our liquid assets for operational needs by that amount. This debt is secured by liens on substantially all of our assets. As of the time of filing on March 27, 2020, there were no other material, reportable subsequent events.

 

F-26

 

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ImmuCell Corporation
  Registrant
     
Date: March 27, 2020 By: /s/ Michael F. Brigham
   

Michael F. Brigham President,

Chief Executive Officer and

Principal Financial Officer

 

POWER OF ATTORNEY

 

We, the undersigned directors of ImmuCell Corporation, hereby severally constitute and appoint Michael F. Brigham our true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for us and in our stead, in any and all capacities, to sign any and all amendments to this report and all documents relating thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing necessary or advisable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or to be done by virtue hereof.

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: March 23, 2020 By: /s/ Michael F. Brigham
      Michael F. Brigham
      President, Chief Executive Officer,
      Principal Financial Officer and Director
       
Date: March 23, 2020 By: /s/ Bobbi Jo Brockmann
      Bobbi Jo Brockmann,
Vice President of Sales and Marketing and
Director
       
Date: March 23, 2020 By: /s/ David S. Cunningham
      David S. Cunningham, Director
       
Date: March 23, 2020 By: /s/ Steven T. Rosgen
      Steven T. Rosgen, Director
       
Date: March 23, 2020 By: /s/ Jonathan E. Rothschild
      Jonathan E. Rothschild, Director
       
Date: March 23, 2020 By: /s/ David S. Tomsche
      David S. Tomsche, DVM, Director
       
Date: March 23, 2020 By: /s/ Paul R. Wainman
      Paul R. Wainman, Director

 

 

38

 

 

EXHIBIT 10.9

 

IMMUCELL CORPORATION

 

2017 STOCK OPTION AND INCENTIVE PLAN

 

INCENTIVE STOCK OPTION AGREEMENT

 

ImmuCell Corporation, a Delaware corporation (hereinafter the “Company”), hereby grants to ____________ (the “Optionee”), pursuant to the Company’s 2017 Stock Option and Incentive Plan (hereinafter the “2017 Plan”), a copy of which is attached hereto as Exhibit A, an Incentive Stock Option (the “Option”) to purchase ___________(______) shares of common stock of the Company at the price of $ per share, such price being equal to the Fair Market Value (as defined in the 2017 Plan) of the common stock on the date hereof.

 

This Option is specifically subject to all of the terms and conditions of the 2017 Plan with the same force and effect as if fully set forth in this Option. In the event of any inconsistency or misunderstanding with respect to the terms of this Option, as compared with the provisions of the 2017 Plan, the provisions of the 2017 Plan shall control and prevail.

 

1. EXERCISE.

 

This Option may be exercised in full or in part pursuant to the procedures and requirements set forth in the 2017 Plan. This Option shall be exercisable according to the following schedule:

 

(i)______________________________; and

 

(ii)In the event of a change in control of the Company, the Optionee’s right to purchase Shares subject to the Option shall vest immediately. For purposes of this clause, ‘change in control’ shall mean any one of the following events:

 

(a) Any person shall become beneficial owner, directly or indirectly, of securities representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding stock.

 

As used in this Paragraph 1. (ii) (a), ‘beneficial owner’ shall have the meaning ascribed to it from time to time under rules promulgated by the Securities and Exchange Commission pursuant to Section 13 (d) of the Securities Exchange Act of 1934, or any similar successor statute or rule and a ‘person’ shall include any natural person, corporation, partnership, trust, association, or any group or combination thereof, whose ownership of the Company stock would be reportable pursuant to such provision of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder;

 

(b) The Company’s stockholders approve (i) any consolidation or merger of the Company (other than a reincorporation or similar consolidation or merger not changing the stock ownership of the surviving or resulting entity from the stock ownership of the Company immediately prior to such transaction) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company common stock would be converted into cash, securities or other property, or (ii) any sale, lease, exchange, liquidation or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company.

 

 

 

 

(c) Any other event which a majority of all the Company’s Directors who are not employees of the Company determines constitutes a change of control.

 

The purchase price for the shares purchased upon exercise of this Option shall be paid (i) in cash or certified check, or at the discretion of the Compensation and Stock Option Committee of the Board of Directors of the Company, (ii) by the delivery of shares of the Company’s common stock with a Fair Market Value at the time of exercise equal to the total option price, or (iii) by any combination of the methods described in (i) and (ii). As soon as practicable following an exercise of this Option by delivery to the Company of the exercise price, the Company shall provide the Optionee with a certificate for the shares being purchased. Such certificate shall have endorsed thereon any legends required under federal or state securities laws.

 

2. NON-TRANSFERABILITY.

 

Except as otherwise provided in the 2017 Plan, this Option is not transferable by the Optionee, and is exercisable only pursuant to the terms and limitations of the 2017 Plan.

 

3. TERMINATION OF OPTION.

 

Unless earlier terminated pursuant to the terms of the 2017 Plan, this Option shall terminate ten (10) years from the date hereof, on ____________, and may not be exercised after that date. If the Optionee’s employment by the Company shall terminate for any reason other than disability or death, his or her rights under this Option shall be governed by Section II.2.(c) (ii) of the 2017 Plan; if the Optionee’s employment by the Company shall terminate by reason of disability, his or her rights under this Option shall be governed by Section II.2. (c) (iii) of the 2017 Plan; and if the Optionee’s employment by the Company shall terminate by death, his or her rights under this Option shall be governed by Section II.2 (c) (iv) of the 2017 Plan.

 

4. ACKNOWLEDGEMENT OF OPTIONEE.

 

The Optionee hereby accepts the grant of the foregoing Option and agrees to be bound by its terms and provisions. The Optionee further acknowledges receipt of a copy of the 2017 Plan, that he or she has read and understood the same, and agrees to be bound by its terms, conditions and restrictions.

 

5. DATE OF OPTION.

 

The Option is granted as of ______________.

 

  IMMUCELL CORPORATION
   
  By:  
  Its: President and Chief Executive Officer
   
  Optionee
   
   

 

 

 

 

 

EXHIBIT 10.20

 

SEVERANCE AGREEMENT

 

This Severance Agreement, dated as of March 25, 2020, is by and between IMMUCELL CORPORATION, a Delaware corporation (the “Company”) and MICHAEL F. BRIGHAM (the Executive”).

 

WHEREAS, the Executive serves as the Company’s President, Chief Executive Officer and Treasurer; and

 

WHEREAS, the Company wishes to provide the Executive with certain benefits and assurances in connection with the termination of the Executive’s employment under certain circumstances, as more fully set forth herein, in order to induce the Executive to continue his employment with the Company;

 

NOW THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Company and the Executive hereby agree as follows:

 

1. At-Will Nature of Executive’s Employment. The parties agree and acknowledge that the Executive’s employment with the Company is “at will”, and that nothing contained in this Agreement shall be deemed to modify the “at will” nature of such employment.

 

2.  Termination of Employment.

 

(a) Death or Disability. The Executive’s employment hereunder shall terminate automatically upon the Executive’s death. If the Company determines in good faith that a Disability of the Executive has occurred (pursuant to the definition of Disability set forth below), it may provide to the Executive written notice of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the “Disability Termination Date”); provided, that within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months as determined by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

 

(b) Cause. The Company may terminate the Executive’s employment at any time for Cause or without Cause. For purposes of this Agreement, “Cause” shall mean any of the following:

 

(i) the Executive’s having engaged in willful misconduct or gross negligence in the performance of any of his duties to the Company, which, if capable of being cured, is not cured to the reasonable satisfaction of the Board of Directors of the Company (the “Board”) within thirty (30) days after the Executive receives from the Board written notice of such willful misconduct or gross negligence;

 

(ii) the Executive’s willful failure or refusal to perform reasonably assigned directives of the Board or to cooperate with an internal investigation being conducted by or at the direction of the Board which, if capable of being cured, is not cured to the reasonable satisfaction of the Board within thirty (30) days after the Executive receives from the Board written notice of such failure or refusal;

 

(iii) any indictment of the Executive for, any conviction of the Executive of, or plea of guilty or nolo contendere by the Executive to, (x) any felony or (y) any crime (whether or not a felony) involving fraud, theft, breach of trust or similar acts, in any case, whether under the laws of the United States or any state thereof or any foreign law to which the Executive may be subject;

 

(iv) the Executive’s willful or continued failure to comply with any written rules, regulations, policies or procedures of the Company which, if not complied with, would reasonably be expected to have a material adverse effect on the business, financial condition or reputation of the Company, as determined by the Company in its reasonable discretion, which, in the case of a failure that is capable of being cured, is not cured to the reasonable satisfaction of the Board within thirty (30) days after the Executive receives from the Company written notice of such failure; or

 

 

 

 

(v) the Executive’s abuse of alcohol or another controlled substance that would reasonably be expected to result in a material adverse effect on the business, financial condition or reputation of the Company, as determined by the Board in its reasonable discretion.

 

(c) Good Reason. The Executive’s employment may be terminated by the Executive at any time with Good Reason, or without Good Reason. For purposes of this Agreement, “Good Reason” shall mean one or more of the following conditions arising without the consent of the Executive:

 

(i) A material diminution in the Executive’s annual base salary or annual bonus opportunity;

 

(ii) A material diminution in the Executive’s authority, duties, or responsibilities; provided that, for the avoidance of doubt, if at any time, (x) the Executive ceases to be the President and Chief Executive Officer of the Company, the entity surviving any Business Combination (as defined below) (if not the Company), or the Person that ultimately controls the Company or such surviving entity, or (y) if the Executive is required to report to a corporate officer or employee instead of reporting directly to the Board, then, in each case, a material diminution of the Executive’s authority, duties, or responsibilities shall be deemed to have occurred;

 

(iii) A material diminution in the budget over which the Executive retains authority; or

 

(iv) A material change in the geographic location at which the Executive must perform services.

 

(d) Notice of Termination.

 

(i) The Company may terminate the Executive’s employment hereunder other than for Cause, or due to Disability at any time upon not less than thirty (30) days’ written notice, and the Executive may terminate his employment hereunder for any reason at any time upon not less than sixty (60) days’ written notice. The Company may terminate the Executive’s employment hereunder for Cause at any time. Any termination by the Company (either for Cause or other than for Cause), or by the Executive for any reason (including for Good Reason), shall be effected by Notice of Termination being provided to the other party hereto. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause, as applicable, shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

 

(ii) Prior to any termination for Cause becoming effective, the Executive shall be entitled to a hearing before the Board at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than fifteen (15) days’ prior written notice to the Executive stating the Board’s intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board believes constitute(s) Cause for termination.

 

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(iii) Any Notice of Termination for Good Reason must be given to the Company within sixty (60) days of the initial existence of one or more conditions described in Section 2(c)(i) through (iv) which the Executive believes constitute(s) Good Reason. In the event that the Executive provides the Company with a Notice of Termination for Good Reason, the Company shall be entitled to a period of thirty (30) days during which it may remedy the condition(s) described in Section 2(c)(i) through (iv) giving rise to the alleged Good Reason. Failing such remedy, a termination of employment by the Executive for Good Reason shall be effective on the day following the expiration of such thirty (30) day period. It is intended that termination of employment by the Executive due to one or more of the conditions described in Section 2(c)(i) through (iv), pursuant to notice given in accordance with this Section 2(d)(iii), shall be treated as an involuntary separation from service pursuant to the good reason safe harbor set forth in Treasury Regulation Section 1.409A-1(n)(2)(ii).

 

(e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, the date of the Executive’s receipt of the Notice of Termination or any later date specified by the Company, as the case may be; provided, that this date may be delayed in order to ensure the Company’s compliance with Section 2(d)(ii); (ii) if the Executive’s employment terminated by the Executive for Good Reason, subject to the Executive’s compliance with Section 2(d)(iii) and the Company’s failure to cure as set forth in Section 2(d)(iii), the date of the expiration of the cure period; (iii) if the Executive’s employment is terminated by the Executive other than for Good Reason, the sixtieth (60th) day following the Company’s receipt of the Executive’s Notice of Termination, or any earlier or later date as shall be agreed by the Company; (iv) if the Executive’s employment is terminated by the Company other than for Cause or by reason of Disability or death, the thirtieth (30th) day following the Executive’s receipt of the Notice of Termination or any later date specified by the Company; and (v) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Termination Date, as the case may be. Whether the Executive has had a termination of employment shall be determined by the Company on the basis of all relevant facts and circumstances with reference to Treasury Regulations Section 1.409A-1(h) regarding a “separation from service” and the default provisions set forth in Treasury Regulation Section 1.409A-1(h)(1)(ii).

 

3. Obligations of the Company Upon Termination.

 

(a) Other Than for Cause, Death, Disability or By the Executive for Good Reason. If the Company shall terminate the Executive’s employment other than for Cause, or if the Executive’s employment is terminated by reason of his death or Disability, or by the Executive for Good Reason:

 

(i) the Company shall pay to the Executive in a lump sum in cash the following amounts: the sum of (1) the Executive’s base salary as then in effect through the Date of Termination to the extent not theretofore paid, (2) any unused paid time off (vacation or sick time), paid out at the per-business-day base salary rate then in effect with respect to the Executive, (3) any additional vested benefits in accordance with the applicable terms of applicable Company arrangements, and (4) any unreimbursed expenses (the sum of the amounts described in clauses (1), (2), (3) and (4) shall be hereinafter referred to as the “Accrued Obligations”); and

 

(ii) subject, in each case, to Sections 9 and 10 hereof and the Executive’s continued compliance with the covenants and obligations set forth in the Confidential Information, Inventions and Noncompete Agreement, dated as of March 26, 2010 (the “Noncompete Agreement”), the Company shall provide the Executive with:

 

A. payment equal to the product of (x) 0.75, multiplied by (y) the Executive’s annual base salary then in effect;

 

B. subject to the Executive’s timely election of continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), a lump sum cash payment in an amount equal to the employer portion of the costs of continued health benefits for the Executive and his covered dependents (based on the level of coverage in effect as of the Date of Termination (the “Severance Period”) in effect at the Date of Termination) (the “Health Benefits Payment”) for the nine (9) month period following the Date of Termination; provided, however, that if the Company’s provision of the Health Benefits Payment to the Executive under this Section 3(a)(ii)(B) would violate the nondiscrimination rules applicable to health plans or self-insured plans under Section 105(h) of the Code, or result in the imposition of penalties under the Patient Protection and Affordable Care Act of 2010 and the related regulations and guidance promulgated thereunder (the “PPACA”), the parties agree to reform this Section 3(a)(ii)(B) in a manner as is necessary to comply with the PPACA and the Code; provided, further, that nothing herein provided shall be construed to extend the period of time over which COBRA continuation coverage otherwise may be provided to the Executive and/or his dependents in accordance with applicable law; and

 

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C. for purposes of any equity incentive awards granted to the Executive that remain outstanding on the Date of Termination, and notwithstanding anything to the contrary in the applicable award agreement or plan (or any predecessor or successor equity compensation plan), or elsewhere, such equity incentive awards that would otherwise be scheduled to vest during the Severance Period shall continue to vest during such period in accordance with the vesting schedule in effect prior to the Date of Termination. In addition (i) any options that were vested immediately prior to the Date of Termination shall be exercisable for (x) ninety (90) days following the Date of Termination, or (y) nine (9) months following the date of termination if the Executive is “Retirement”-eligible (as defined in the applicable award agreement governing the Options) as of the Date of Termination, and (ii) any options that vest during the Severance Period pursuant to the foregoing sentence shall be exercisable for ninety (90) days following the conclusion of the Severance Period.

 

(b) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated by the Company for Cause, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive the Accrued Obligations. If the Executive voluntarily terminates employment, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the obligation to pay to the Executive the Accrued Obligations. In such cases, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination.

 

(c) Time of Payment. Amounts payable under this Section 3 following an Executive’s termination of employment, other than those expressly payable on a deferred basis, will be paid in the payroll period next following the payroll period in which termination of employment occurs except as otherwise provided in Sections 9 or 10; provided, however, that the Executive shall be entitled to defer the payment of any amount payable to him under Section 3(a)(ii)(A) hereof until the date designated by him in a written notice to the Board within five (5) business days after the date of termination, which deferred payment date shall not be more than twelve (12) months after the Date of Termination.

 

4. Resignation of all Positions. Upon and following the termination of the Executive’s employment with the Company for any reason, if at any time the Board determines in its sole discretion to request that the Executive step down from the his role as a director of the Company and no longer serve in such capacity, the Executive shall promptly tender such resignation as a director of the Company, and if the Executive fails to tender such resignation on a timely basis, the Executive shall be deemed to have resigned, as of the Date of Termination. In addition, upon the termination of the Executive’s employment with the Company for any reason and except as expressly set forth above, the Executive shall resign, as of the Date of Termination, from all positions the Executive then holds as an officer, director, employee and member of the boards of directors (and any committee thereof) of the Company and its subsidiaries and affiliates. The Executive shall be required to execute such writings as are required, in the sole discretion of the Company, to effectuate the foregoing.

 

5. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f) shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.

 

6. Full Settlement.

 

(a) In the event of the termination of the Executive’s employment upon a Change of Control or during the Change of Control Period (other than a termination by the Company for Cause), the Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive (under this Agreement or otherwise) or others. Regardless of the reason for or timing of the Executive’s termination of employment (whether prior to or upon a Change of Control or during or following the Change of Control Period), the Executive shall in no event be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise provided in this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment.

 

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(b) For the purpose of this Agreement, a “Change of Control” shall mean:

 

(i) The acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (x) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (a) any acquisition directly from the Company, (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (d) any acquisition by any corporation pursuant to a transaction which satisfies the criteria set forth in clauses (x), (y) and (z) of subsection (iii) of this Section 6(b); or

 

(ii) A change in the composition of the Board, as a result of which fewer than one-half of the incumbent directors are directors who either (x) had been directors of the Company 24 months prior to such change or (y) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or

 

(iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, immediately following such Business Combination, (x) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock or the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than a majority of, respectively, the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, of the corporation resulting from such Business Combination (which as used in this Section 6(b)(iii) shall include, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, (y) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation and (z) at least half of the members of the board of directors of the corporation resulting from such Business Combination were members of the Company’s Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

 

(iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially all of the assets of the Company.

 

Notwithstanding the foregoing, for any payments or benefits hereunder that are subject to Section 409A of the Code, the foregoing event must constitute a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(i).

 

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7. Confidential Information; Restrictive Covenants.

 

(a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. The Executive agrees that any breach of the terms of this Section 7 or the Noncompete Agreement would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law. The Executive therefore also agrees that in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all Persons acting for and/or with the Executive, without having to prove damages, in addition to any other remedies to which the Company may be entitled at law or in equity, including, without limitation, the obligation of the Executive to return any portion of the severance payments and benefits set forth in Section 3(a)(ii) paid by the Company to the Executive. The terms of this Section 7(a) shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including, without limitation, the recovery of damages from the Executive. The Executive and the Company further agree that the provisions of the covenants contained in this Section 7 and the Noncompete Agreement, in each case, reasonable and necessary to protect the businesses of the Company and its affiliated companies because of the Executive’s access to confidential information and the Executive’s material participation in the operation of such businesses.

 

(b) From and after the Effective Date, including at all times following the Date of Termination, (i) the Executive agrees not to make any statement that is intended to become public, or that should reasonably be expected to become public, and that criticizes, ridicules, disparages or is otherwise derogatory of the Company, any of its affiliated companies, or their respective employees, officers, directors or stockholders, and (ii) the Company shall direct its officers, directors, and other authorized representatives not to make any statement that is intended to become public, or that should reasonably be expected to become public, and that criticizes, ridicules, disparages or is otherwise derogatory of the Executive. No provision of this Agreement or the Noncompete Agreement shall be interpreted so as to impede the Executive from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the United States Congress, and any agency Inspector General, or making any other disclosures under the whistleblower provisions of United States federal law or regulation. The Executive does not need the Company’s prior authorization to make any such reports or disclosures, and the Executive shall not be required to notify the Company that such reports or disclosures have been made. In addition, no provision of this Agreement or the Noncompete Agreement precludes the Executive from providing truthful testimony when lawfully subpoenaed or otherwise required to do so by law.

 

8. Successors.

 

(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

 

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

 

(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid.

 

9. Section 409A Compliance.

 

(a) It is intended that each payment or benefit or installment of payments and benefits under this Agreement shall be treated as a “separate payment” for purposes of Section 409A of the Code. Neither the Company nor the Executive shall have the right to accelerate or defer the delivery of any payments or benefits except to the extent specifically permitted or required by this Agreement and by Section 409A.

 

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(b) If any payment, compensation or other benefit provided to the Executive in connection with his employment termination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code and the Executive is a Specified Employee as defined in Section 409A(a)(2)(B)(i), no part of such payments shall be paid before the day that is six (6) months plus one (1) day after the date of termination, or, if earlier, the Executive’s death (the “New Payment Date”). The aggregate of any payments that otherwise would have been paid to the Executive during the period between the date of termination and the New Payment Date shall be paid to the Executive in a lump sum on such New Payment Date. Thereafter, any payments that remain outstanding as of the day immediately following the New Payment Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Agreement.

 

(c) For purposes of this Agreement, a “Specified Employee” shall mean an employee of the Company who satisfies the requirements for being designated a “key employee” under Section 416(i)(1)(A)(i), (ii) or (iii) of the Code without regard to Section 416(i)(5) of the Code at any time during a calendar year, in which case such employee shall be considered a Specified Employee for the twelve-month period beginning on the first day of the fourth month immediately following the end of such calendar year. Notwithstanding the foregoing, all employees who are nonresident aliens during an entire calendar year are excluded for purposes of determining which employees meet the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code without regard to Section 416(i)(5) of the Code for such calendar year. The term “nonresident alien” as used herein shall have the meaning set forth in Regulations Section 1.409A-1(j). In the event of any corporate spinoff or merger, the determination of which employees meet the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code without regard to Section 416(i)(5) of the Code for any calendar year shall be determined in accordance with Regulations Section 1.409A-1(i)(6).

 

(d) The terms of this Agreement are intended to comply with or be exempt from Section 409A of the Code and the guidance issued thereunder and shall be interpreted consistently therewith. The parties acknowledge and agree that the interpretation of Section 409A and its application to the terms of this Agreement is uncertain and may be subject to change as additional guidance and interpretations become available. Anything to the contrary herein notwithstanding, all benefits or payments provided by the Company to the Executive that would be deemed to constitute “nonqualified deferred compensation” within the meaning of Section 409A are intended to comply with Section 409A. If, however, any such benefit or payment is deemed to not comply with Section 409A, the Company and the Executive agree to renegotiate in good faith any such benefit or payment (including, without limitation, as to the timing of any severance payments payable hereunder) so that either (i) Section 409A will not apply or (ii) compliance with Section 409A will be achieved; provided, however, that any resulting renegotiated terms shall provide to the Executive the after-tax economic equivalent of what otherwise has been provided to the Executive pursuant to the terms of this Agreement, and provided further, that any deferral of payments or other benefits shall be only for such time period as may be required to comply with Section 409A.

 

10. Release. As a condition of receipt of the severance payments and benefits set forth in Section 3(a)(ii) the Executive shall be required to sign a release of claims in substantially the form attached hereto as Exhibit A (the “Release”) and to abide by the provisions thereof. The Release contains a release and waiver of any claims the Executive or his representatives may have against the Company, any of its affiliated companies, and any of their respective officers, directors, affiliates and/or representatives, and shall release those entities and persons from any liability for such claims including, but not limited to, all employment discrimination claims. Payments and benefits under this Agreement will be paid when and as provided herein following the Executive’s termination of employment provided the Executive has executed and submitted the Release and the statutory period during which the Executive is entitled to revoke the Release has expired on or before that payment date. If the Executive fails to so execute or revokes the Release, the Executive will not be entitled to receive any of the severance payments or benefits, the receipt of which is made contingent upon such execution and non-revocation, as set forth in Section 3(a)(ii) hereof.

 

11. Miscellaneous.

 

(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Maine, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

 

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(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by e-mail, read receipt requested, addressed as follows:

 

If to the Executive:

 

at the address and e-mail address on file in the Company’s records

 

If to the Company:

ImmuCell Corporation

56 Evergreen Drive

Portland, Maine 04103

Attn: Chair of the Board of Directors

 

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

 

(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

 

(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

 

(e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 2(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision of or right under this Agreement.

 

(f) From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, and supersedes all prior communications, agreements and understandings, written or oral, with the Company or any of its affiliates or predecessors with respect to the terms and conditions of the Executive’s employment.

 

(g) The Executive agrees that jurisdiction and venue for any action arising from or relating to this Agreement or the relationship between the parties, including but not limited to matters concerning validity, construction, performance, or enforcement, shall be exclusively in the federal and Maine state courts located in Cumberland County (collectively, the “Selected Courts”) (provided, that a final judgment in any such action shall be conclusive and enforceable in other jurisdictions) and further agree that service of process may be made in any manner permitted by law. The Executive irrevocably waives and agrees not to assert (i) any objection which he may ever have to the laying of venue of any action or proceeding arising out of this Agreement or the transactions contemplated hereby in the Selected Courts, and (ii) any claim that any such action brought in any such court has been brought in an inconvenient forum. This Section 11(g) is intended to fix the location of potential litigation between the parties and does not create any causes of action or waive any defenses or immunities to suit, or obviate the rights of the parties to agree to arbitration with respect to any conflicts related to this Agreement or the Executive’s employment hereunder. EACH PARTY WAIVES ANY RIGHT TO A TRIAL BY JURY, TO THE EXTENT LAWFUL, AND AGREES THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY IN ANY LITIGATION WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR THE CONTEMPLATED TRANSACTIONS.

 

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(h) Whenever possible, each provision or portion of any provision of this Agreement, including those contained in the Noncompete Agreement, will be interpreted in such manner as to be effective and valid under applicable law but the invalidity or unenforceability of any provision or portion of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision or portion of any provision, in any other jurisdiction. In addition, should a court or arbitrator determine that any provision or portion of any provision of this Agreement, including those contained in the Noncompete Agreement, is not reasonable or valid, either in period of time, geographical area, or otherwise, the parties hereto agree that such provision should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable or valid.

 

(i) This Agreement may be executed by .pdf or facsimile signatures in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument.

 

 

 IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

 

  EXECUTIVE:
   
  /s/ Michael F. Brigham
  Michael F. Brigham
   
  COMPANY:
  IMMUCELL CORPORATION
   
  By: /s/ David S. Tomsche
  Name: David S. Tomsche
  Title: Chair, Board of Directors

 

 

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EXHIBIT 10.21

 

AMENDED AND RESTATED INCENTIVE COMPENSATION AGREEMENT

 

This Amended and Restated Incentive Compensation Agreement, dated as of March 25, 2020, is by and between ImmuCell Corporation, a Delaware corporation (the “Company”) and Bobbi Jo Brockmann (the “Executive”), and replaces and supersedes in its entirety the Incentive Compensation Agreement, dated as of April 11, 2019, between the Company and the Executive.

 

WITNESSETH:

 

WHEREAS, the Company wishes to provide to the Executive additional incentive compensation opportunities in order to induce the Executive to remain in the Company’s employ and to further incentivize her to continue her leadership efforts toward increasing sales of the First Defense® product line and implementing the successful commercialization of Re-Tain™; and

 

WHEREAS, the Executive, in partial consideration of such potential additional compensation, is willing to agree to expand the obligations set forth in the Agreement in Connection with Employment by ImmuCell Corporation, dated as of November 15, 2009, between the Company and the Executive;

 

NOW, THEREFORE, in consideration of the mutual promises of the parties contained herein and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

 

1. Incentive Compensation.

 

(a) The Company agrees to pay to the Executive (i) $50,000 upon the sale by the Company of any doses of Re-Tain™ within twelve (12) months after receipt by the Company of all necessary regulatory approvals to sell Re-Tain™ in the United States, and (ii) an additional $50,000 (if the amount contemplated by clause (i) has been paid to the Executive) on the date that is twenty-four (24) months after receipt by the Company of all necessary regulatory approvals to sell Re-Tain™ in the United States; provided, however, that such payments shall be due and payable only if the Executive is employed by the Company at the applicable payment date. Such payments shall be subject to all required tax withholdings.

 

In addition, if the Company undergoes a Change of Control or sells or licenses all or substantially all of the rights to manufacture and sell Re-Tain™, and at the time of such Change of Control, sale or license the Executive is an employee of the Company, the Company will make the payments to the Executive described in the first paragraph of this Section 1(a). For purposes hereof, “Change of Control” means (a) the sale of all or substantially all of the Company’s assets, or (b) the sale or issuance of capital stock of the Company, in a single transaction or series of related transactions, or a merger, consolidation or similar transaction to which the Company is party, the result of which is one or more persons or entities acting together directly or indirectly acquiring a majority of the outstanding capital stock of the Company or of the surviving or resulting entity in such transaction. For purposes hereof, a license of all or substantially all of the rights to manufacture and sell Re-Tain™ shall not include a transaction in which the Company continues to perform manufacturing services to or for the benefit of the licensee.

 

 

 

 

(b) In addition to the incentive compensation potentially payable to the Executive pursuant to Section 1(a) hereof, the Company will pay and, if applicable, issue to the Executive, not later than February 28, 2021, the amount of cash (up to $22,750), and if applicable, incentive stock options (up to 20,000 shares) earned if certain sales growth and selling expense control objectives are achieved pursuant to the bonus payout schedule set forth in Exhibit A; provided, however, that such payments and issuances shall be due and payable or issuable only if the Executive is employed by the Company at the applicable payment and issuance date. Such payments shall be subject to all required tax withholdings and, in the case of incentive stock options, to execution of standard Company documentation in accordance with the Company’s incentive stock option plan.

 

2. Non-Solicitation. The Executive agrees, during the period in which she is employed by the Company and for one (1) year thereafter, not to solicit, or assist or induce any other person or entity in the soliciting, any person who at that time is (or within the preceding ninety (90) days was) an employee of, or a consultant or independent contractor to, the Company to leave his or her employment, consultancy or independent contractor status with the Company.

 

  IMMUCELL CORPORATION
   
  By: /s/ Michael F. Brigham
    Michael F. Brigham, its President
   
    /s/ Bobbi Jo Brockmann
    Bobbi Jo Brockmann, its Vice President of
    Sales and Marketing

 

 

 

 

EXHIBIT 23.1

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the Registration Statements (Nos. 333-214641 and 333-228479) on Form S-3 and the Registration Statements (Nos. 333-02631, 333-65514, 333-167721 and 333-237428) on Form S-8 of ImmuCell Corporation of our report dated March 27, 2020, relating to the financial statements of ImmuCell Corporation, appearing in this Annual Report on Form 10-K of ImmuCell Corporation for the year ended December 31, 2019.

 

/s/ WIPFLI LLP  
   
South Portland, Maine  
March 27, 2020  

EXHIBIT 23.2

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the Registration Statements (Nos. 333-214641 and 333-228479) on Form S-3 and the Registration Statements (Nos. 333-02631, 333-65514, 333-167721 and 333-237428) on Form S-8 of ImmuCell Corporation of our report dated March 22, 2019, relating to the financial statements of ImmuCell Corporation, appearing in this Annual Report on Form 10-K of ImmuCell Corporation for the year ended December 31, 2019.

 

/s/ RSM US LLP  
   
Boston, Massachusetts  
March 27, 2020  

 

EXHIBIT 31

 

CERTIFICATIONS REQUIRED BY RULE 13a-14(a)

 

I, Michael F. Brigham, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of ImmuCell Corporation (the Company);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Company is made known to me by others within the Company, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: March 27, 2020

 

/s/ Michael F. Brigham  
Michael F. Brigham  
President, Chief Executive Officer and Principal Financial Officer  

EXHIBIT 32

 

CERTIFICATION REQUIRED BY SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-K of ImmuCell Corporation (the “Company”) for the period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael F. Brigham, President, Chief Executive Officer and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the Exchange Act); and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition, results of operations and cash flows of the Company.

 

This certification is provided pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (Item 601(b)(32)) promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

/s/ Michael F. Brigham  
Michael F. Brigham  
President, Chief Executive Officer and Principal Financial Officer  
March 27, 2020  

 

A signed original of this written statement required by Section 906 has been provided to ImmuCell Corporation and will be retained by ImmuCell Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

v3.20.1
Contingent Liabilities and Commitments (Details) - USD ($)
12 Months Ended
Sep. 12, 2019
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Contingent Liabilities and Commitments (Textual)            
Purchase of inventory       $ 547,000    
Other obligations       145,000    
Capital expenditures committed       2,318,000    
Construct and equip commitment       1,245,000    
Royalty, percentage   4.00%        
Growth assumption, percentage     6.00%      
Royalties due for 2017       5,000    
Royalties due for 2018       10,000    
Royalties due for 2019       15,000    
Royalties due for 2020       20,000    
Royalties due for 2021 (and thereafter)       25,000    
Royalties       $ 76,876 $ 10,396 $ 5,000
Lease, description 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. The lease term is ten years with a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property taxes, utilities, insurance, maintenance and related building and operating expenses.          
v3.20.1
Bank Debt (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Debt Disclosure [Abstract]    
(Receipts) payments required by interest rate swaps $ (675) $ 9,581
Other comprehensive (loss) income, net of taxes $ (74,052) $ 30,795
v3.20.1
Balance Sheets - USD ($)
Dec. 31, 2019
Dec. 31, 2018
CURRENT ASSETS:    
Cash and cash equivalents $ 6,293,293 $ 2,521,050
Short-term investments 2,480,753
Trade accounts receivable, net 1,637,165 932,298
Inventory 2,518,256 2,331,671
Prepaid expenses and other current assets 259,566 635,817
Total current assets 13,189,033 6,420,836
PROPERTY, PLANT AND EQUIPMENT, net 25,265,738 26,027,549
INTANGIBLE ASSETS, net 114,624 133,728
GOODWILL 95,557 95,557
INTEREST RATE SWAPS 40,209
OTHER ASSETS 26,884 12,953
TOTAL ASSETS 38,691,836 32,730,832
CURRENT LIABILITIES:    
Accounts payable and accrued expenses 1,220,566 1,220,660
Current portion of bank debt 1,274,790 844,351
Line of credit 500,000
Total current liabilities 2,495,356 2,565,011
LONG-TERM LIABILITIES:    
Bank debt, net of current portion 7,146,676 8,421,487
Interest rate swaps 58,526
Total long-term liabilities 7,205,202 8,421,487
TOTAL LIABILITIES 9,700,558 10,986,498
CONTINGENT LIABILITIES AND COMMITMENTS (See Note 12)
STOCKHOLDERS' EQUITY:    
Common stock, $0.10 par value per share, 11,000,000 and 11,000,000 shares authorized, 7,299,009 and 5,662,645 shares issued and 7,212,919 and 5,568,962 shares outstanding, as of December 31, 2019 and 2018, respectively 729,901 566,265
Additional paid-in capital 31,131,893 22,695,557
Accumulated deficit (2,638,285) (1,342,698)
Treasury stock, at cost, 86,090 and 93,683 shares as of December 31, 2019 and 2018, respectively (188,336) (204,947)
Accumulated other comprehensive (loss) income (43,895) 30,157
Total stockholders' equity 28,991,278 21,744,334
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,691,836 $ 32,730,832
v3.20.1
Stockholders' Equity (Details Textual)
1 Months Ended 12 Months Ended
Mar. 29, 2019
USD ($)
$ / shares
shares
Feb. 03, 2016
USD ($)
$ / shares
shares
Dec. 31, 1995
$ / shares
Nov. 20, 2018
USD ($)
Dec. 21, 2017
USD ($)
$ / shares
shares
Jul. 27, 2017
USD ($)
$ / shares
shares
Oct. 21, 2016
USD ($)
$ / shares
shares
Oct. 28, 2015
USD ($)
Jun. 30, 2010
shares
Jun. 30, 2000
shares
Dec. 31, 2019
USD ($)
Director
$ / shares
shares
Dec. 31, 2018
USD ($)
$ / shares
shares
Dec. 31, 2017
$ / shares
Jun. 30, 2017
shares
Jun. 30, 2001
shares
Stockholders' Equity (Textual)                              
Potential issuance or sale of equity | $               $ 10,000,000              
Gross proceeds | $ $ 9,000,000 $ 5,900,000     $ 3,050,000                    
Net proceeds | $ $ 8,303,000 $ 5,313,000     $ 2,734,000                    
Common stock shares sold 1,636,364 1,123,810     417,807                    
Sale of stock, per share | $ / shares $ 5.50 $ 5.25     $ 7.30                    
Common stock, shares authorized                     11,000,000 11,000,000      
Stock option and incentive plan, description                     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.        
Proceeds from exercise of stock options | $                     $ 3 $ 96,254      
Potential issuance cost in equity securities | $       $ 20,000,000                      
Registration statement, description               Having raised $10,000,000 in gross proceeds under the February 2016, July 2017 and December 2017 equity transactions.              
Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Number of directors exercised stock options | Director                     1        
Aggregate intrinsic value of options exercised | $                     $ 46,091 $ 582,590      
Weighted-average grant date fair values of options granted | $ / shares                     $ 2.93 $ 3.83      
Total unrecognized stock-based compensation related to non-vested stock options | $                     $ 386,887        
Exercise prices of options outstanding | $ / shares                     $ 6.48 6.37 $ 4.58    
Weighted average remaining life of unrecognized stock-based compensation related to non-vested                     1 year 2 months        
Exercise prices | $ / shares                     $ 4.37 $ 1.89      
Equity Option [Member]                              
Stockholders' Equity (Textual)                              
Stock option granted during the period                     51,000        
Weighted-average grant date fair values of options granted | $ / shares                     $ 2.93        
Share-based payment, description                     Stock options covering 27,500 shares by the surrender of 19,907 shares of common stock with a fair market value of $120,172 at the time of exercise and the payment of $3 in cash. Seven employees exercised stock options covering an aggregate of 107,000 shares, of which 51,500 of these shares were acquired for cash, resulting in total proceeds of $96,240, and 55,500 of these shares were acquired by the surrender of 14,235 shares of common stock with a fair market value of $105,785 at the time of exercise and the payment of $14 in cash.      
2000 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Common stock reserved for issuance under the plan                            
Number of stock options exercised                            
Stock option granted during the period                          
Weighted average remaining life of options outstanding                     6 years 4 months        
2010 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Common stock reserved for issuance under the plan                     1,000        
Number of stock options exercised                     27,500        
Stock option granted during the period                     26,000 48,500      
Weighted average remaining life of options outstanding                     6 years 4 months        
2010 Plan [Member] | Employee Stock Option [Member] | Minimum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 5.175        
2010 Plan [Member] | Employee Stock Option [Member] | Maximum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 7.50        
2017 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Common stock reserved for issuance under the plan                     167,500        
Stock option granted during the period                     25,000 122,500      
2017 Plan [Member] | Employee Stock Option [Member] | Minimum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 3.15        
2017 Plan [Member] | Employee Stock Option [Member] | Maximum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 8.90        
Common Stock Rights Plan [Member]                              
Stockholders' Equity (Textual)                              
Share-based payment, description     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).                        
Common stock purchase price | $ / shares     $ 70.00                        
Employee stock, plan description     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).               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.        
Sale of common stock, description     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                        
Option expiry date                     Sep. 19, 2022        
Investor [Member]                              
Stockholders' Equity (Textual)                              
Gross proceeds | $           $ 1,050,000                  
Net proceeds | $           $ 1,034,000                  
Common stock shares issued           200,000                  
Closing share price | $ / shares           $ 5.25                  
Employee [Member] | Employee Stock Option [Member] | Minimum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 5.175 $ 6.81      
Employee [Member] | Employee Stock Option [Member] | Maximum [Member]                              
Stockholders' Equity (Textual)                              
Exercise prices | $ / shares                     $ 7.50 $ 8.43      
Employee [Member] | 2000 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Stock option and incentive plan, description                   No less than 85% of fair market value on the date of grant in the case of non-qualified stock options.          
Common stock reserved for issuance under the plan                   250,000         500,000
Stock option expiration period                   10 years          
Stock option granted during the period                     51,000        
Weighted average remaining life of options exercisable                     4 years 10 months        
Option expiry date                   Feb. 28, 2010          
Employee [Member] | 2010 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Common stock reserved for issuance under the plan                 300,000            
Stock option expiration period                 10 years            
Stock option granted during the period                     171,000        
Weighted average remaining life of options exercisable                     4 years 10 months        
Share-based payment, description                 The 2010 Plan expires in June 2020, after which date no further options can be granted under the 2010 Plan.            
Option expiry date                 Jun. 30, 2020            
Employee [Member] | 2017 Plan [Member] | Employee Stock Option [Member]                              
Stockholders' Equity (Textual)                              
Common stock reserved for issuance under the plan                           300,000  
Stock option granted during the period                     51,000        
Weighted average remaining life of options exercisable                     4 years 10 months        
Private Placement [Member]                              
Stockholders' Equity (Textual)                              
Gross proceeds | $             $ 3,464,000                
Net proceeds | $             $ 3,161,000                
Common stock shares sold             659,880                
Closing share price | $ / shares             $ 5.25                
v3.20.1
Statements of Stockholders' Equity - USD ($)
Common Stock
Additional paid-in capital
Retained Earnings (Accumulated Deficit)
Treasury Stock
Accumulated Other Comprehensive (Loss) Income
Total
Balance at Dec. 31, 2017 $ 566,265 $ 22,458,219 $ 978,973 $ (407,879) $ (638) $ 23,594,940
Balance, Shares at Dec. 31, 2017 5,662,645     186,448    
Net loss (2,321,671) (2,321,671)
Other comprehensive loss, net of taxes 30,795 30,795
Exercise of stock options (106,678) $ 202,932 96,254
Exercise of stock options, Shares     (92,765)    
Stock-based compensation 344,016 344,016
Balance at Dec. 31, 2018 $ 566,265 22,695,557 (1,342,698) $ (204,947) 30,157 21,744,334
Balance, Shares at Dec. 31, 2018 5,662,645     93,683    
Net loss (1,295,587) (1,295,587)
Other comprehensive loss, net of taxes (74,052) (74,052)
Public offering of common stock, net of $696,566 of offering costs $ 163,636 8,139,800 8,303,436
Public offering of common stock, net of $696,566 of offering costs, Shares 1,636,364          
Exercise of stock options (16,608) $ 16,611 3
Exercise of stock options, Shares     (7,593)    
Stock-based compensation 313,144 313,144
Balance at Dec. 31, 2019 $ 729,901 $ 31,131,893 $ (2,638,285) $ (188,336) $ (43,895) $ 28,991,278
Balance, Shares at Dec. 31, 2019 7,299,009     86,090    
v3.20.1
Summary of Significant Accounting Policies (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Assets:    
Cash and money market accounts $ 6,293,293 $ 2,521,050
Bank certificates of deposit 2,480,753
Interest rate swaps   40,209
Liabilities:    
Interest rate swaps (58,526)  
Total, net 8,715,520 2,561,259
Fair Value, Inputs, Level 1 [Member]    
Assets:    
Cash and money market accounts 6,293,293 2,521,050
Bank certificates of deposit  
Interest rate swaps  
Liabilities:    
Interest rate swaps  
Total, net 6,293,293 2,521,050
Fair Value, Inputs, Level 2 [Member]    
Assets:    
Cash and money market accounts
Bank certificates of deposit 2,480,753  
Interest rate swaps   40,209
Liabilities:    
Interest rate swaps (58,526)  
Total, net 2,422,227 40,209
Fair Value, Inputs, Level 3 [Member]    
Assets:    
Cash and money market accounts
Bank certificates of deposit  
Interest rate swaps  
Liabilities:    
Interest rate swaps  
Total, net
v3.20.1
Cash, Cash Equivalents and Short-Term Investments (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash and Cash Equivalents [Abstract]      
Cash and cash equivalents $ 6,293,293 $ 2,521,050 $ 3,798,811
Short-term investments 2,480,753  
Total $ 8,774,046 $ 2,521,050  
v3.20.1
Segment Information
12 Months Ended
Dec. 31, 2019
Segment Reporting [Abstract]  
SEGMENT INFORMATION

18. 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 97% of our total product sales during the years ended December 31, 2019 and 2018. Our primary customers for the majority of our product sales (89% and 87% during the years ended December 31, 2019 and 2018, respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 10% and 13% of our total product sales during the years ended December 31, 2019 and 2018, respectively.

v3.20.1
Revenue
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
REVENUE

14. REVENUE

 

We primarily offer the First DefenseÒ 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 years ended December 31, 2019 or December 31, 2018 (under ASC 606). We do not have any contract assets such as contracts for which we have satisfied the performance obligations but do not yet have the right to bill for or contract liabilities such as customer advances. All trade receivables on our balance 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 Years Ended
December 31,
 
   2019   2018 
United States  $12,191,108   $9,559,142 
Other   1,531,764    1,427,155 
Total product sales  $13,722,872   $10,986,297 

 

The following table presents our product sales disaggregated by major product category:

 

   During the Years Ended
December 31,
 
   2019   2018 
First Defense® product line  $13,244,396   $10,663,265 
Other animal health   344,875    298,932 
Other   133,601    24,100 
Total product sales  $13,722,872   $10,986,297 
v3.20.1
Inventory (Tables)
12 Months Ended
Dec. 31, 2019
Inventory Disclosure [Abstract]  
Schedule of inventory
   As of
December 31,
2019
   As of
December 31,
2018
 
Raw materials  $791,558   $338,991 
Work-in-process   1,207,457    1,337,035 
Finished goods   519,241    655,645 
Total  $2,518,256   $2,331,671 
v3.20.1
Accounts Payable and Accrued Expenses (Tables)
12 Months Ended
Dec. 31, 2019
Payables and Accruals [Abstract]  
Schedule of accounts payable and accrued expenses
   As of
December 31,
2019
   As of
December 31,
2018
 
Accounts payable – trade  $401,958   $531,048 
Accounts payable – capital   170,220    72,695 
Accrued payroll   399,501    358,451 
Accrued professional fees   73,781    93,050 
Accrued other   175,106    165,416 
Total  $1,220,566   $1,220,660 
v3.20.1
Prepaid Expenses and Other Current Assets
12 Months Ended
Dec. 31, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
PREPAID EXPENSES AND OTHER CURRENT ASSETS

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Prepaid expenses  $218,232   $142,528 
Other receivables(1)   40,534    493,289 
Security deposits   800    - 
Total  $259,566   $635,817 

 

(1)This amount as of December 31, 2018 includes $450,000 due from a third party for the sale of assets. See Note 15.
v3.20.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of Presentation

 

We have prepared the accompanying audited financial statements reflecting all adjustments that are, in our opinion, necessary in order to ensure that the financial statements are not misleading. We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, earnings per share and cash flows. References to GAAP in these footnotes are to the FASB Accounting Standards Codification™ (Codification). Accordingly, we believe that the disclosures are adequate to ensure that the information presented is not misleading.

 

(b) Cash, Cash Equivalents and Short-Term Investments

 

We consider all highly liquid investment instruments that mature within three months of their purchase dates to be cash equivalents. Cash equivalents are principally invested in securities backed by the U.S. government. Certain cash balances in excess of Federal Deposit Insurance Corporation (FDIC) limits of $250,000 per financial institution per depositor are maintained in money market accounts at financial institutions that are secured, in part, by the Securities Investor Protection Corporation. Amounts in excess of these FDIC limits per bank that are not invested in securities backed by the U.S. government aggregated $5,792,993 and $2,268,737 as of December 31, 2019 and 2018, respectively. Short-term investments are classified as held to maturity and are comprised of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Short-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. We account for investments in marketable securities in accordance with Codification Topic 320, Investments — Debt and Equity Securities. See Note 3.

 

(c) Accounts Receivable

 

Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are considered to be past due if a portion of the receivable balance is outstanding for more than 30 days. Past due accounts receivable are subject to an interest charge. Accounts receivable are written off when deemed uncollectible. The amount of accounts receivable written off during all periods reported was immaterial. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019 and 2018, 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. 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 years ended December 31, 2019 or 2018. See Notes 2(h), 8 and 9 for additional disclosures.

 

(g) Fair Value Measurements

 

In determining fair value measurements, we follow the provisions of Codification Topic 820, Fair Value Measurements and Disclosures. Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. As of December 31, 2019 and 2018, the carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, inventory, other assets, accounts payable, deferred revenue and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value based on similar instruments with similar maturities. The three-level hierarchy is as follows:

 

Level 1 — Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.

 

Level 2 —Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.

 

Level 3 — Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. From time to time, we also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments is based on their closing published net asset value.

 

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 years ended December 31, 2019 and 2018, there were no transfers between levels. As of December 31, 2019 and 2018, our Level 1 assets measured at fair value by quoted prices in active markets consisted of bank savings accounts and money market funds. As of December 31, 2019 our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2019 and 2018, our interest rate swaps were classified as Level 2 and were measured by observable market data in combination with expected cash flows for each instrument. There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018.

 

   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 

 

   As of December 31, 2018 
   Level 1   Level 2   Level 3   Total 
Assets:                
Cash and money market accounts  $2,521,050   $   $   $2,521,050 
Interest rate swaps       40,209        40,209 
Total  $2,521,050   $40,209   $   $2,561,259 

 

(h) Valuation of Long-Lived Assets

 

We periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held for use approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable. No impairment was recognized during the years ended December 31, 2019 and 2018.

 

(i) Concentration of Risk

 

Concentration of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses when deemed necessary, but historically we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:

 

   During the Years Ended
December 31,
 
   2019   2018 
Company A   42%   43%
Company B   27%   23%

 

Trade accounts receivable due from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Company B   48%   36%
Company A   28%   35%
Company C   *    15%

* Amount is less than 10%.

 

(j) Interest Rate Swap Agreements

 

All derivatives are recognized on the balance sheet at their fair value. We entered into interest rate swap agreements in 2010 and 2015. On the dates the agreements were entered into, we designated the derivatives as hedges of the variability of cash flows to be paid related to our long-term debt. The agreements have been determined to be highly effective in hedging the variability of identified cash flows, so changes in the fair market value of the interest rate swap agreements are recorded as comprehensive income (loss), until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). We formally documented the relationship between the interest rate swap agreements and the related hedged items. We also formally assess, both at the interest rate swap agreements' inception and on an ongoing basis, whether the agreements are highly effective in offsetting changes in cash flow of hedged items. See Note 11.

 

(k) Revenue Recognition

 

For periods beginning on or after January 1, 2018, we recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 is a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. The core principle is that we recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods or services to customers when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We conduct our business with customers through valid purchase orders or sales orders which are considered contracts and are not interdependent on one another. A performance obligation is a promise in a contract to transfer a distinct product to the customer. The transaction price is the amount of consideration we expect to receive under the arrangement. Revenue is measured based on consideration specified in a contract with a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized when or as the customer receives the benefit of the performance obligation. Product transaction prices on a purchase or sale order are discrete and stand-alone. We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product delivery occurs. Consideration is typically paid approximately 30 days from the time control is transferred. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost in costs of goods sold. We have enhanced disclosures related to disaggregation of revenue sources and accounting policies prospectively as a result of adopting these standards. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns. See Note 14.

 

(l) Expense Recognition

 

In 2018, we adopted ASC 340-40, Accounting for Other Assets and Deferred Costs, which requires sales commissions and other third party acquisition costs resulting directly from securing contracts with customers to be recognized as an asset when incurred and to be expensed over the associated contract term or estimated customer life depending on the nature of the underlying contract. We do not incur costs in connection with product sales to customers that are eligible for capitalization. Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $58,483 and $28,415 during the years ended December 31, 2019 and 2018, respectively. All product development expenses are expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production cycle, and these costs are charged to costs of goods sold when the inventory is sold to a customer. Adoption of the amended provisions of ASC 340-40 did not have a material impact on our financial statements.

 

(m) 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.

 

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 exist as of December 31, 2019 or 2018. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 17.

 

(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 $313,144 and $344,016 during the years ended December 31, 2019 and 2018, respectively.

 

(o) Net Loss Per Common Share

 

Net loss per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The net loss per share has been computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All stock options have been excluded from the denominator in the calculation of dilutive earnings per share when we are in a loss position, as the inclusion would be anti-dilutive. The weighted average number of shares outstanding was 6,818,960 and 5,486,154 during the years ended December 31, 2019 and 2018, respectively. Outstanding stock options that were not included in this calculation because the effect would be anti-dilutive amounted to 388,500 and 394,000 as of December 31, 2019 and 2018, respectively.

 

(p) 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. 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.

 

(q) New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU and its amendments became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted. We elected to adopt this ASU effective January 1, 2019. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of Topic 842. In July 2018, the FASB issued ASU 2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that 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 have concluded that we are 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 will be accounted for in accordance with Topic 842 during the first quarter of 2020.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. Topic 718 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this guidance during the three-month period ended March 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance is intended to more closely align hedge accounting with entities' hedging strategies, simplify the application of hedge accounting and increase the transparency of hedging programs. Topic 815 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, Topic 815 must be applied through a cumulative-effect adjustment. The amended presentation and disclosure guidance is required only prospectively. The adoption of Topic 815 did not have a material impact on our financial statements as of January 1, 2019.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. Topic 820 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.

v3.20.1
Accounts Payable and Accrued Expenses
12 Months Ended
Dec. 31, 2019
Payables and Accruals [Abstract]  
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Accounts payable – trade  $401,958   $531,048 
Accounts payable – capital   170,220    72,695 
Accrued payroll   399,501    358,451 
Accrued professional fees   73,781    93,050 
Accrued other   175,106    165,416 
Total  $1,220,566   $1,220,660 
v3.20.1
Employee Benefits (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Employee Benefits (Textual)    
Employee benefits, description All employees completing one month of service with the Company are eligible to participate.  
Defined benefit plans general information, description 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.  
Benefits paid $ 126,638 $ 104,843
v3.20.1
Gain on Sale of Assets (Details) - USD ($)
3 Months Ended 12 Months Ended
Dec. 31, 2018
Dec. 31, 2019
Gain on Sale of Assets (Textual)    
Sale of technology $ 700,000  
Upfront payment received   $ 250,000
Third Quarter [Member]    
Gain on Sale of Assets (Textual)    
Second payment due   250,000
Fourth Quarter [Member]    
Gain on Sale of Assets (Textual)    
Third payment due   $ 200,000
v3.20.1
Income Taxes (Details 2) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Income Tax Disclosure [Abstract]    
Product rights $ 6,709 $ 14,226
Property, plant and equipment (2,306,435) (2,534,799)
Federal general business tax credits 434,838 407,023
Federal net operating loss carryforwards 2,509,471 2,486,263
State tax credits carryover 841,558 845,967
Interest rate swaps 14,632 (10,052)
Prepaid expenses and other (12,070) 13,354
UNICAP 16,756 19,025
Incentive compensation 31,895
Valuation allowance (1,537,354) (1,241,007)
Deferred tax assets, net
v3.20.1
Intangible Assets (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Summary of intangible amortization expense    
2020 $ 19,104  
2021 19,104  
2022 19,104  
2023 19,104  
2024 19,104  
2025 19,104  
Total $ 114,624 $ 133,728
v3.20.1
Prepaid Expenses and Other Current Assets (Details Textual)
Dec. 31, 2018
USD ($)
Prepaid Expenses and Other Current Assets (Textual)  
Due from a third party $ 450,000
v3.20.1
Cash, Cash Equivalents and Short-Term Investments (Tables)
12 Months Ended
Dec. 31, 2019
Cash and Cash Equivalents [Abstract]  
Schedule of cash, cash equivalents and short-term investments
   As of
December 31,
2019
   As of
December 31,
2018
 
Cash and cash equivalents  $6,293,293   $2,521,050 
Short-term investments   2,480,753     
Total  $8,774,046   $2,521,050 
v3.20.1
Intangible Assets (Tables)
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of intangible amortization expense
During the Years Ending December 31,  Amount 
2020   19,104 
2021   19,104 
2022   19,104 
2023   19,104 
2024   19,104 
2025   19,104 
Total  $114,624 
Schedule of intangible assets

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  

 

Intangible assets as of December 31, 2018 consisted of the following:

 

    Gross
Carrying
Value
    Accumulated
Amortization
    Net Book
Value
 
Developed technology   $ 184,100     $ (55,230 )   $ 128,870  
Customer relationships     1,300       (390 )     910  
Non-compete agreements     5,640       (1,692 )     3,948  
Total   $ 191,040     $ (57,312 )   $ 133,728  

v3.20.1
Bank Debt
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
BANK DEBT

11. BANK DEBT

 

We have in place five credit facilities and a line of credit with TD Bank N.A. These five credit facilities are secured by substantially all of our assets and are subject to certain restrictions and financial covenants.

 

Proceeds from a $1,000,000 first mortgage on our corporate headquarters and production and research facility at 56 Evergreen Drive in Portland (Loan #1) were received during the third quarter of 2010 with monthly principal and interest payments due for ten years, calculated based on a fifteen-year amortization schedule. A balloon principal payment of $451,885 will be due during the third quarter of 2020. As of December 31, 2019, $493,696 was outstanding under Loan #1.

 

Proceeds from a $2,500,000 second mortgage on this corporate headquarters (Loan #2) were received during the third quarter of 2015 with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,550,000 will be due during the third quarter of 2025. As of December 31, 2019, $2,143,771 was outstanding under Loan #2.

 

We hedged our interest rate exposures on Loan #1 and Loan #2 with interest rate swap agreements that effectively converted floating interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to fixed rates of 6.04% and 4.38%, respectively. As of the debt principal repayment date immediately preceding December 31, 2019, the variable rates on these two mortgage notes were 4.99% and 4.04%, respectively. All derivatives are recognized on the balance sheet at their fair value. At the time of the closings and thereafter, the agreements were determined to be highly effective in hedging the variability of the identified cash flows and have been designated as cash flow hedges of the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreements are recorded in other comprehensive income, net of taxes. The original notional amounts of the interest rate swap agreements of $1,000,000 and $2,500,000 amortize in accordance with the amortization of the mortgage notes. The notional amount of the interest rate swaps was $2,637,467 as of December 31, 2019. The fair values of the interest rate swaps have been determined using observable market-based inputs or unobservable inputs that are corroborated by market data. Accordingly, the interest rate swaps are classified as level 2 within the fair value hierarchy provided in Codification Topic 820, Fair Value Measurements and Disclosures.

 

   During the Year
Ended December 31,
 
   2019   2018 
(Receipts) payments required by interest rate swaps  $(675)  $9,581 
Other comprehensive (loss) income, net of taxes  $(74,052)  $30,795 

 

During the first quarter of 2016, we entered into two additional credit facilities (Loans #3 and #4) aggregating up to approximately $4,500,000. As a result of loan amendments entered into during the first quarter of 2017, these two credit facilities were increased to up to $6,500,000. Loan #3 is a construction loan of $3,940,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through September 2018, at which time the loan converted to a seven-year term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019) with monthly principal and interest payments due based on a seven-year amortization schedule. As of December 31, 2019, $3,236,429 was outstanding under Loan #3. Loan #4 is a construction loan of $2,560,000. As amended, interest only was payable at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through March 2018, at which time the loan converted to a term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019) with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $1,408,000 will be due during the first quarter of 2027. As of December 31, 2019, $2,336,000 was outstanding under Loan #4.

 

Proceeds from a $340,000 first mortgage on our 4,114 square foot warehouse and cold storage facility near our Re-Tain™ production facility (Loan #5) were received during the first quarter of 2017. This note bears interest at a variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% (which was equal to 4.01% as of December 31, 2019) with monthly principal and interest payments due for ten years, calculated based on a twenty-year amortization schedule. A balloon principal payment of approximately $206,000 will be due during the first quarter of 2027. As of December 31, 2019, $309,182 was outstanding under Loan #5.

 

In connection with Loan #1 and Loan #2, we incurred debt issue costs of $26,489 and $34,125, respectively. In connection with Loan #3, Loan #4 and Loan #5, we incurred total debt issue costs of $114,806. The 2017 amendments to Loan #3 and Loan #4 were accounted for as modifications. The amortization of debt issue costs is being recorded as a component of interest expense, included with other expenses, net, and is being amortized over the underlying terms of the respective credit facilities.

 

Debt proceeds received and principal repayments made during the years ended December 31, 2019 and 2018 are reflected in the following table by year and by loan:

 

   During the Year
Ended December 31, 2019
   During the Year
Ended December 31, 2018
 
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
 
Loan #1  $   $(68,908)  $   $(64,876)
Loan #2       (89,997)       (86,097)
Loan #3       (562,857)   426,499    (140,714)
Loan #4       (128,000)   267,141    (96,000)
Loan #5       (11,585)       (10,621)
Total  $   $(861,347)  $693,640   $(398,308)

 

Principal payments (net of debt issue costs) due under bank loans outstanding as of December 31, 2019 (excluding our $500,000 line of credit) are reflected in the following table by the year that payments are due:

 

   During the Years Ended December 31,  

After

December 31,

   Total 
   2020   2021   2022   2023   2024   2024     
Loan #1  $493,696   $   $   $   $   $   $493,696 
Loan #2   94,005    98,538    103,077    107,769    112,623    1,627,759    2,143,771 
Loan #3(1)   562,857    562,857    562,857    562,857    562,857    422,144    3,236,429 
Loan #4(1)   128,000    128,000    128,000    128,000    128,000    1,696,000    2,336,000 
Loan #5(2)   12,575    13,088    13,623    14,180    14,760    240,956    309,182 
Subtotal  $1,291,133   $802,483   $807,557   $812,806   $818,240   $3,986,859    8,519,078 
Debt Issuance Costs                                 (97,612)
Total                                $8,421,466 

 

(1)These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 3.96%. The actual interest rate and principal payments will be different.
(2)This note bears interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 4.01%. The actual interest rate and principal payments will be different.

 

During the third quarter of 2010, we entered into a $500,000 line of credit with TD Bank N.A., which is secured by substantially all of our assets and is subject to certain restrictions and financial covenants. This line of credit has been renewed approximately annually since then, is available as needed and has been extended through May 31, 2020. There was no outstanding balance under this line of credit as of December 31, 2019. As of December 31, 2018, $500,000 was outstanding under this line of credit, which was repaid during the first quarter of 2019. Interest on borrowings against the line of credit is variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.

v3.20.1
Property, Plant and Equipment, Net
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment [Abstract]  
PROPERTY, PLANT AND EQUIPMENT, net

7. PROPERTY, PLANT AND EQUIPMENT, net

 

Property, plant and equipment consisted of the following:

 

   Estimated
Useful Lives
(in years)
  As of
December 31, 2019
   As of
December 31, 2018
 
Laboratory and manufacturing equipment  3-10  $15,437,724   $15,092,252 
Building and improvements  10-39   17,078,829    17,018,316 
Office furniture and equipment  3-10   719,323    731,510 
Construction in progress  n/a   1,124,189    91,067 
Land  n/a   516,867    516,867 
Property, plant and equipment, gross      34,876,932    33,450,012 
Accumulated depreciation      (9,611,194)   (7,422,463)
Property, plant and equipment, net     $25,265,738   $26,027,549 

 

As of December 31, 2019, construction in progress consisted principally of payments toward the First Defense® production capacity expansion project and equipment needed to bring the aseptic filling for Re-Tain in-house. As of December 31, 2018, construction in progress consisted principally of down payments towards two pieces of manufacturing equipment. Approximately $62,055 and $22,681 of property, plant and equipment was disposed of during the years ended December 31, 2019 and 2018, respectively. Depreciation expense was $2,248,317 and $1,501,607 during the years ended December 31, 2019 and 2018, respectively.

v3.20.1
Cash, Cash Equivalents and Short-Term Investments
12 Months Ended
Dec. 31, 2019
Cash and Cash Equivalents [Abstract]  
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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
December 31,
2019
   As of
December 31,
2018
 
Cash and cash equivalents  $6,293,293   $2,521,050 
Short-term investments   2,480,753     
Total  $8,774,046   $2,521,050 

 

Held to maturity securities (certificates of deposit) are carried at amortized cost. We are required by a bank debt covenant to maintain at least $2,000,000 of otherwise unrestricted cash, cash equivalents and short-term investments.

v3.20.1
Subsequent Events (Details) - Subsequent Event [Member]
Mar. 11, 2020
USD ($)
Subsequent Events (Textual)  
Debt financing $ 8,600,000
Line of credit $ 1,000,000
Subsequent events, description The debt is comprised of a $5,100,000 mortgage note 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 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 (1) month LIBOR plus 2.15% per annum. The proceeds were used to repay all bank debt outstanding at the time of closing (see Note 11) and to provide some additional working capital. We were required by a bank debt covenant (before the debt refinancing discussed above) to maintain at least $2 million of otherwise unrestricted cash, cash equivalents and short-term investments. Under the new debt, we are required to hold $1.4 million in escrow (a non-current asset), which reduces the effective availability of our liquid assets for operational needs by that amount.
v3.20.1
Revenue (Details 1) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Total product sales $ 13,722,872 $ 10,986,297
First Defense product line [Member]    
Total product sales 13,244,396 10,663,265
Other animal health [Member]    
Total product sales 344,875 298,932
Other [Member]    
Total product sales $ 133,601 $ 24,100
v3.20.1
Income Taxes (Details 1) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Income Tax Disclosure [Abstract]    
Computed expected income tax expense $ (266,157) $ (390,610)
State income taxes, net of federal expense (21,894) 136,843
Share-based compensation 37,811 67,181
Tax credits (27,815) (602,813)
Valuation allowance 296,347 1,241,007
Other 9,882 10,012
Income tax expense (benefit) $ 28,174 $ 461,620
Computed expected income tax expense rate (21.00%) (21.00%)
State income taxes, net of federal expense, rate (1.73%) 7.36%
Share-based compensation, rate 2.98% 3.61%
Tax credits, rate (2.19%) (32.41%)
Valuation allowance, rate 23.38% 66.72%
Other, rate 0.78% 0.54%
Income tax expense (benefit), rate 2.22% 24.82%
v3.20.1
Related Party Transactions (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Related Party Transactions (Textual)    
Revenues from transactions with related party $ 490,323 $ 527,819
Marketing-related payments 975 12,380
Accounts receivable $ 0 $ 16,283
v3.20.1
Intangible Assets (Details 1) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Value $ 191,040 $ 191,040
Accumulated Amortization (76,416) (57,312)
Net Book Value 114,624 133,728
Developed technology [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Value 184,100 184,100
Accumulated Amortization (73,640) (55,230)
Net Book Value 110,460 128,870
Customer relationships [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Value 1,300 1,300
Accumulated Amortization (520) (390)
Net Book Value 780 910
Non-compete agreements [Member]    
Finite-Lived Intangible Assets [Line Items]    
Gross Carrying Value 5,640 5,640
Accumulated Amortization (2,256) (1,692)
Net Book Value $ 3,384 $ 3,948
v3.20.1
Property, Plant and Equipment, Net (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 34,876,932 $ 33,450,012
Accumulated depreciation (9,611,194) (7,422,463)
Property, plant and equipment, net 25,265,738 26,027,549
Laboratory and manufacturing equipment [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 15,437,724 15,092,252
Laboratory and manufacturing equipment [Member] | Minimum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 3 years  
Laboratory and manufacturing equipment [Member] | Maximum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 10 years  
Buildings and improvements [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 17,078,829 17,018,316
Buildings and improvements [Member] | Minimum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 10 years  
Buildings and improvements [Member] | Maximum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 39 years  
Office furniture and equipment [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 719,323 731,510
Office furniture and equipment [Member] | Minimum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 3 years  
Office furniture and equipment [Member] | Maximum [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, Estimated Useful Lives 10 years  
Construction in progress [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 1,124,189 91,067
Land [Member]    
Property, Plant and Equipment [Line Items]    
Property, plant and equipment, gross $ 516,867 $ 516,867
v3.20.1
Revenue (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Total product sales $ 13,722,872 $ 10,986,297
United States [Member]    
Total product sales 12,191,108 9,559,142
Other [Member]    
Total product sales $ 1,531,764 $ 1,427,155
v3.20.1
Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Common stock, par value (in dollars per share) $ 0.10 $ 0.10
Common stock, shares authorized 11,000,000 11,000,000
Common stock, shares issued 7,299,009 5,662,645
Common stock, shares outstanding 7,212,919 5,568,962
Treasury stock, shares 86,090 93,683
v3.20.1
Statements of Stockholders' Equity (Parenthetical)
12 Months Ended
Dec. 31, 2019
USD ($)
Statement of Stockholders' Equity [Abstract]  
Common stock, public offering costs $ 696,566
v3.20.1
Stockholders' Equity (Details) - Stock Option [Member] - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Weighted Average Exercise Price, Outstanding, Beginning $ 6.37 $ 4.58
Weighted Average Exercise Price, Grants 5.90 7.38
Weighted Average Exercise Price, Terminations 6.05 6.63
Weighted Average Exercise Price, Exercises 4.37 1.89
Weighted Average Exercise Price, Outstanding, Ending 6.48 $ 6.37
Weighted Average Exercise Price, Vested 6.13  
Weighted average exercise price, Vested and expected to vest $ 6.48  
Aggregate Intrinsic Value, Outstanding, Beginning [1] $ 266,020 $ 1,513,980
Aggregate Intrinsic Value, Outstanding, Ending [1] (516,475) $ 266,020
Aggregate Intrinsic Value, Vested [1] (65,890)  
Aggregate Intrinsic Value, Vested and expected to vest [1] $ (516,475)  
2000 Plan [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Outstanding, Beginning balance 12,500 117,500
Grants
Terminations
Exercises (12,500) (105,000)
Outstanding, Ending balance 12,500
Vested  
Vested and expected to vest  
Reserved for future grants  
2010 Plan [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Outstanding, Beginning balance 270,000 242,500
Grants 26,000 48,500
Terminations (26,000) (19,000)
Exercises (15,000) (2,000)
Outstanding, Ending balance 255,000 270,000
Vested 67,500  
Vested and expected to vest 255,000  
Reserved for future grants 1,000  
2017 Plan [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Outstanding, Beginning balance 111,500
Grants 25,000 122,500
Terminations (3,000) (11,000)
Exercises
Outstanding, Ending balance 133,500 111,500
Vested  
Vested and expected to vest 133,500  
Reserved for future grants 167,500  
[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.
v3.20.1
Bank Debt (Details 1) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Debt Instrument [Line Items]    
Proceeds from Debt Issue $ 693,640
Debt Principal Repayments (861,347) (398,308)
Loan #1 [Member]    
Debt Instrument [Line Items]    
Proceeds from Debt Issue
Debt Principal Repayments (68,908) (64,876)
Loan #2 [Member]    
Debt Instrument [Line Items]    
Proceeds from Debt Issue
Debt Principal Repayments (89,997) (86,097)
Loan #3 [Member]    
Debt Instrument [Line Items]    
Proceeds from Debt Issue 426,499
Debt Principal Repayments (562,857) (140,714)
Loan #4 [Member]    
Debt Instrument [Line Items]    
Proceeds from Debt Issue 267,141
Debt Principal Repayments (128,000) (96,000)
Loan #5 [Member]    
Debt Instrument [Line Items]    
Proceeds from Debt Issue
Debt Principal Repayments $ (11,585) $ (10,621)
v3.20.1
Income Taxes (Tables)
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Schedule of income tax provision
   During the Year Ended
December 31,
 
   2019   2018 
Current        
Federal  $   $ 
State   3,490    (820)
Current subtotal   3,490    (820)
Deferred          
Federal   (240,458)   (274,495)
State   (31,205)   (504,072)
Deferred subtotal, gross   (271,663)   (778,567)
Valuation allowance   296,347    1,241,007 
Deferred subtotal, net   24,684    462,440 
Income tax expense  $28,174   $461,620 
Schedule of income tax expense differs from US Federal tax rate
   During the Year Ended
December 31,
 
   2019   2018 
   $   %   $   % 
Computed expected income tax expense rate  $(266,157)   (21.00)%  $(390,610)   (21.00)%
State income taxes, net of federal expense   (21,894)   (1.73)   136,843    7.36 
Share-based compensation   37,811    2.98    67,181    3.61 
Tax credits   (27,815)   (2.19)   (602,813)   (32.41)
Valuation allowance   296,347    23.38    1,241,007    66.72 
Other   9,882    0.78    10,012    0.54 
Income tax expense/rate  $28,174    2.22%  $461,620    24.82%
Schedule of components of our deferred tax assets, net
   As of December 31, 
   2019   2018 
Product rights  $6,709   $14,226 
Property, plant and equipment   (2,306,435)   (2,534,799)
Federal general business tax credits   434,838    407,023 
Federal net operating loss carryforwards   2,509,471    2,486,263 
State tax credits carryover   841,558    845,967 
Interest rate swaps   14,632    (10,052)
Prepaid expenses and other   (12,070)   13,354 
UNICAP   16,756    19,025 
Incentive compensation   31,895     
Valuation allowance   (1,537,354)   (1,241,007)
Deferred tax assets, net  $   $ 
v3.20.1
Summary of Significant Accounting Policies (Details Textual) - USD ($)
3 Months Ended 12 Months Ended
Jun. 30, 2018
Dec. 31, 2019
Dec. 31, 2018
Summary of Significant Accounting Policies (Textual)      
Federal deposit insurance corporation limits   $ 250,000  
Property, plant and equipment, description   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.  
Concentration risk percentage, description   Sales to significant customers that amounted to 10% or more of total product sales.  
U.S. government aggregated in excess of FDIC limits   $ 5,792,993 $ 2,268,737
Advertising expenses   58,483 28,415
Stock-based compensation   $ 313,144 $ 344,016
Non-cash income tax expense to create a full valuation allowance against our net deferred tax assets $ 563,252    
Outstanding stock options not included in the calculation because the effect would be anti-dilutive   388,500 394,000
Weighted average number of shares outstanding   6,818,960 5,486,154
v3.20.1
Related Party Transactions
12 Months Ended
Dec. 31, 2019
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS

19. 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 DefenseÒ product line and CMT), and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $490,323 and $527,819 of products from us during the years ended December 31, 2019 and 2018, respectively, on terms consistent with those offered to other distributors of similar status. We made marketing-related payments of $975 and $12,380 to these affiliated companies during the years ended December 31, 2019 and 2018, respectively, that were expensed as incurred. Our accounts receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated $0 and $16,283 as of December 31, 2019 and 2018, respectively.

v3.20.1
Gain on Sale of Assets
12 Months Ended
Dec. 31, 2019
Gain on Sale of Assets [Abstract]  
GAIN ON SALE OF ASSETS

15. GAIN ON SALE OF ASSETS

 

During the third quarter of 2018, we sold the assets underlying our water diagnostic product for $700,000. This sale of assets was recognized as an operating activity at that time in accordance with ASC 610: Other Income and ASC 810: Consolidation. An upfront payment of $250,000 was received upon closing, a second payment of $250,000 was received during the third quarter of 2019 and a third payment of $200,000 was received during the fourth quarter of 2019 (these latter two payments were recorded in prepaid expenses and other current assets as of December 31, 2018).

v3.20.1
Intangible Assets
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
INTANGIBLE ASSETS

9. INTANGIBLE ASSETS

 

The intangible assets described in Note 8 are being amortized to costs of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization expense was $19,104 during both of the years ended December 31, 2019 and 2018. The net value of these intangibles was $114,624 and $133,728 as of December 31, 2019 and 2018, respectively. A summary of intangible amortization expense estimated for the periods subsequent to December 31, 2019 is as follows:

 

During the Years Ending December 31,  Amount 
2020   19,104 
2021   19,104 
2022   19,104 
2023   19,104 
2024   19,104 
2025   19,104 
Total  $114,624 

 

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 

 

Intangible assets as of December 31, 2018 consisted of the following:

 

   Gross
Carrying
Value
   Accumulated
Amortization
   Net Book
Value
 
Developed technology  $184,100   $(55,230)  $128,870 
Customer relationships   1,300    (390)   910 
Non-compete agreements   5,640    (1,692)   3,948 
Total  $191,040   $(57,312)  $133,728 
v3.20.1
Inventory
12 Months Ended
Dec. 31, 2019
Inventory Disclosure [Abstract]  
INVENTORY

5. INVENTORY

 

Inventory consisted of the following:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Raw materials  $791,558   $338,991 
Work-in-process   1,207,457    1,337,035 
Finished goods   519,241    655,645 
Total  $2,518,256   $2,331,671 
v3.20.1
Bank Debt (Tables)
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Schedule of interest rate swaps classified as level 2 fair value

   During the Year
Ended December 31,
 
   2019   2018 
(Receipts) payments required by interest rate swaps  $(675)  $9,581 
Other comprehensive (loss) income, net of taxes  $(74,052)  $30,795 
Schedule of debt proceeds received and principal repayments made during the year

   During the Year
Ended December 31, 2019
   During the Year
Ended December 31, 2018
 
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
   Proceeds
from Debt
Issuance
   Debt
Principal
Repayments
 
Loan #1  $   $(68,908)  $   $(64,876)
Loan #2       (89,997)       (86,097)
Loan #3       (562,857)   426,499    (140,714)
Loan #4       (128,000)   267,141    (96,000)
Loan #5       (11,585)       (10,621)
Total  $   $(861,347)  $693,640   $(398,308)
Schedule of principal payments due under debt outstanding

   During the Years Ended December 31,  

After

December 31,

   Total 
   2020   2021   2022   2023   2024   2024     
Loan #1  $493,696   $   $   $   $   $   $493,696 
Loan #2   94,005    98,538    103,077    107,769    112,623    1,627,759    2,143,771 
Loan #3(1)   562,857    562,857    562,857    562,857    562,857    422,144    3,236,429 
Loan #4(1)   128,000    128,000    128,000    128,000    128,000    1,696,000    2,336,000 
Loan #5(2)   12,575    13,088    13,623    14,180    14,760    240,956    309,182 
Subtotal  $1,291,133   $802,483   $807,557   $812,806   $818,240   $3,986,859    8,519,078 
Debt Issuance Costs                                 (97,612)
Total                                $8,421,466 

 

(1)These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 3.96%. The actual interest rate and principal payments will be different.
(2)This note bears interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 4.01%. The actual interest rate and principal payments will be different.
v3.20.1
Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Basis of Presentation

(a) Basis of Presentation

 

We have prepared the accompanying audited financial statements reflecting all adjustments that are, in our opinion, necessary in order to ensure that the financial statements are not misleading. We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, earnings per share and cash flows. References to GAAP in these footnotes are to the FASB Accounting Standards Codification™ (Codification). Accordingly, we believe that the disclosures are adequate to ensure that the information presented is not misleading.

Cash, Cash Equivalents and Short-Term Investments

(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 $5,792,993 and $2,268,737 as of December 31, 2019 and 2018, respectively. Short-term investments are classified as held to maturity and are comprised of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Short-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. We account for investments in marketable securities in accordance with Codification Topic 320, Investments — Debt and Equity Securities. See Note 3.

Accounts Receivable

(c) Accounts Receivable

 

Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are considered to be past due if a portion of the receivable balance is outstanding for more than 30 days. Past due accounts receivable are subject to an interest charge. Accounts receivable are written off when deemed uncollectible. The amount of accounts receivable written off during all periods reported was immaterial. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019 and 2018, we determined that no allowance for doubtful accounts was necessary. See Note 4.

Inventory

(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. 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.

Property, Plant and Equipment

(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.

Intangible Assets and Goodwill

(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 years ended December 31, 2019 or 2018. See Notes 2(h), 8 and 9 for additional disclosures.

Fair Value Measurements

(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 December 31, 2019 and 2018, the carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, inventory, other assets, accounts payable, deferred revenue and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value based on similar instruments with similar maturities. The three-level hierarchy is as follows:

 

Level 1 — Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.

 

Level 2 —Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.

 

Level 3 — Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. From time to time, we also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments is based on their closing published net asset value.

 

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 years ended December 31, 2019 and 2018, there were no transfers between levels. As of December 31, 2019 and 2018, our Level 1 assets measured at fair value by quoted prices in active markets consisted of bank savings accounts and money market funds. As of December 31, 2019 our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2019 and 2018, our interest rate swaps were classified as Level 2 and were measured by observable market data in combination with expected cash flows for each instrument. There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018.

 

   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 

 

   As of December 31, 2018 
   Level 1   Level 2   Level 3   Total 
Assets:                
Cash and money market accounts  $2,521,050   $   $   $2,521,050 
Interest rate swaps       40,209        40,209 
Total  $2,521,050   $40,209   $   $2,561,259 
Valuation of Long-Lived Assets

(h) Valuation of Long-Lived Assets

 

We periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held for use approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable. No impairment was recognized during the years ended December 31, 2019 and 2018.

Concentration of Risk

(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 Years Ended
December 31,
 
   2019   2018 
Company A   42%   43%
Company B   27%   23%

 

Trade accounts receivable due from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:

 

   As of
December 31,
2019
   As of
December 31,
2018
 
Company B   48%   36%
Company A   28%   35%
Company C   *    15%

* Amount is less than 10%.

Interest Rate Swap Agreements

(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.

Revenue Recognition

(k) Revenue Recognition

 

For periods beginning on or after January 1, 2018, we recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 is a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. The core principle is that we recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods or services to customers when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We conduct our business with customers through valid purchase orders or sales orders which are considered contracts and are not interdependent on one another. A performance obligation is a promise in a contract to transfer a distinct product to the customer. The transaction price is the amount of consideration we expect to receive under the arrangement. Revenue is measured based on consideration specified in a contract with a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized when or as the customer receives the benefit of the performance obligation. Product transaction prices on a purchase or sale order are discrete and stand-alone. We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product delivery occurs. Consideration is typically paid approximately 30 days from the time control is transferred. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost in costs of goods sold. We have enhanced disclosures related to disaggregation of revenue sources and accounting policies prospectively as a result of adopting these standards. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns. See Note 14.

Expense Recognition

(l) Expense Recognition

 

In 2018, we adopted ASC 340-40, Accounting for Other Assets and Deferred Costs, which requires sales commissions and other third party acquisition costs resulting directly from securing contracts with customers to be recognized as an asset when incurred and to be expensed over the associated contract term or estimated customer life depending on the nature of the underlying contract. We do not incur costs in connection with product sales to customers that are eligible for capitalization. Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $58,483 and $28,415 during the years ended December 31, 2019 and 2018, respectively. All product development expenses are expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production cycle, and these costs are charged to costs of goods sold when the inventory is sold to a customer. Adoption of the amended provisions of ASC 340-40 did not have a material impact on our financial statements.

Income Taxes

(m) 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.

 

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 exist as of December 31, 2019 or 2018. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 17.

Stock-Based Compensation

(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 $313,144 and $344,016 during the years ended December 31, 2019 and 2018, respectively.

Net Loss Per Common Share

(o) Net Loss Per Common Share

 

Net loss per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The net loss per share has been computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All stock options have been excluded from the denominator in the calculation of dilutive earnings per share when we are in a loss position, as the inclusion would be anti-dilutive. The weighted average number of shares outstanding was 6,818,960 and 5,486,154 during the years ended December 31, 2019 and 2018, respectively. Outstanding stock options that were not included in this calculation because the effect would be anti-dilutive amounted to 388,500 and 394,000 as of December 31, 2019 and 2018, respectively.

Use of Estimates

(p) 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. 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.

New Accounting Pronouncements

(q) New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU and its amendments became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted. We elected to adopt this ASU effective January 1, 2019. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of Topic 842. In July 2018, the FASB issued ASU 2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that 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 have concluded that we are 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 will be accounted for in accordance with Topic 842 during the first quarter of 2020.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. Topic 718 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this guidance during the three-month period ended March 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance is intended to more closely align hedge accounting with entities' hedging strategies, simplify the application of hedge accounting and increase the transparency of hedging programs. Topic 815 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, Topic 815 must be applied through a cumulative-effect adjustment. The amended presentation and disclosure guidance is required only prospectively. The adoption of Topic 815 did not have a material impact on our financial statements as of January 1, 2019.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. Topic 820 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.

v3.20.1
Prepaid Expenses and Other Current Assets (Tables)
12 Months Ended
Dec. 31, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Schedule of prepaid expenses and other current assets

    As of
December 31,
2019
    As of
December 31,
2018
 
Prepaid expenses   $ 218,232     $ 142,528  
Other receivables(1)     40,534       493,289  
Security deposits     800       -  
Total   $ 259,566     $ 635,817  

 

  (1) This amount as of December 31, 2018 includes $450,000 due from a third party for the sale of assets. See Note 15.

v3.20.1
Business Acquisition (Details) - USD ($)
36 Months Ended
Jan. 04, 2016
Dec. 31, 2018
Business Acquisition (Textual)    
Total purchase price $ 532,000  
Amount paid on acquisition 368,000  
Technology transfer payment 97,000  
Aggregate royalties payment 67,000  
Royalty expense   $ 36,000
Estimated fair values of inventory 113,000  
Estimated fair values of machinery and equipment 132,000  
Estimated fair values of intangible assets 191,000  
Estimated fair values of goodwill $ 96,000  
v3.20.1
Prepaid Expenses and Other Current Assets (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]    
Prepaid expenses $ 218,232 $ 142,528
Other receivables [1] 40,534 493,289
Security deposits 800
Total $ 259,566 $ 635,817
[1] This amount as of December 31, 2018 includes $450,000 due from a third party for the sale of assets. See Note 15.
v3.20.1
Accounts Payable and Accrued Expenses (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Payables and Accruals [Abstract]    
Accounts payable - trade $ 401,958 $ 531,048
Accounts payable - capital 170,220 72,695
Accrued payroll 399,501 358,451
Accrued professional fees 73,781 93,050
Accrued other 175,106 165,416
Total $ 1,220,566 $ 1,220,660
v3.20.1
Other Expenses, Net (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Other Income and Expenses [Abstract]    
Interest expense $ 431,788 $ 427,782
Interest income (118,283) (14,301)
Other expenses, net $ 313,505 $ 413,481
v3.20.1
Income Taxes (Details Textual) - USD ($)
3 Months Ended 12 Months Ended
Jun. 30, 2018
Dec. 31, 2019
Dec. 31, 2018
Income Taxes (Textual)      
Income tax expense (benefit)   $ 28,174 $ 461,620
(Loss) income before income taxes, rate   2.22% 24.82%
State net operating loss carryforwards   $ 3,299,929  
Federal net operating loss carryforwards   11,949,860  
Federal net operating loss carryforwards does not expire amount   10,237,953  
Federal net operating loss carryforwards expires amount   1,711,907  
Federal general business tax credit carryforwards   434,838 $ 407,023
Tax credit carryforward, description     Federal net operating loss carryforwards of $11,949,860 of which $10,237,953 does not expire and $1,711,907 expires 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).
State tax credit carryforwards   $ 763,350  
Non-cash income tax expense to create a full valuation allowance against our net deferred tax assets $ 563,252    
U.S. federal corporate tax rate   (21.00%) (21.00%)
v3.20.1
Cash, Cash Equivalents and Short-Term Investments (Details Textual)
12 Months Ended
Dec. 31, 2019
Cash and Cash Equivalents and Short-Term Investments (Textual)  
Debt covenant, description Bank debt covenant to maintain at least $2,000,000 of otherwise unrestricted cash, cash equivalents and short-term investments.
v3.20.1
Revenue (Tables)
12 Months Ended
Dec. 31, 2019
Geographic Area [Member]  
Disaggregation of Revenue [Line Items]  
Schedule of revenue disaggregated by geographic area and major product category
   During the Years Ended
December 31,
 
   2019   2018 
United States  $12,191,108   $9,559,142 
Other   1,531,764    1,427,155 
Total product sales  $13,722,872   $10,986,297 
Major Product Category [Member]  
Disaggregation of Revenue [Line Items]  
Schedule of revenue disaggregated by geographic area and major product category
  During the Years Ended
December 31,
 
   2019   2018 
First Defense® product line  $13,244,396   $10,663,265 
Other animal health   344,875    298,932 
Other   133,601    24,100 
Total product sales  $13,722,872   $10,986,297 
v3.20.1
Summary of Significant Accounting Policies (Details 1)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Company A [Member]    
Revenue, Major Customer [Line Items]    
Concentration risk percentage 42.00% 43.00%
Company B [Member]    
Revenue, Major Customer [Line Items]    
Concentration risk percentage 27.00% 23.00%
v3.20.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Mar. 19, 2020
Jun. 30, 2019
Document and Entity Information [Abstract]      
Entity Registrant Name IMMUCELL CORP /DE/    
Entity Central Index Key 0000811641    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Document Type 10-K    
Document Period End Date Dec. 31, 2019    
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2019    
Entity Filer Category Non-accelerated Filer    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Small Business true    
Entity Emerging Growth Company false    
Entity Current Reporting Status Yes    
Entity Shell Company false    
Entity Interactive Data Current Yes    
Entity Incorporation State Country Code DE    
Entity File Number 001-12934    
Entity Public Float     $ 40,669,000
Entity Common Stock, Shares Outstanding   7,212,919  
v3.20.1
Statements of Comprehensive Loss - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net loss $ (1,295,587) $ (2,321,671)
Other comprehensive (loss) income:    
Interest rate swaps, before taxes (98,735) 41,206
Income tax applicable to interest rate swaps 24,683 (10,411)
Other comprehensive (loss) income, net of taxes (74,052) 30,795
Total comprehensive loss $ (1,369,639) $ (2,290,876)
v3.20.1
Stockholders' Equity (Details 2)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Equity [Abstract]    
Risk-free interest rate 1.90% 2.60%
Dividend yield 0.00% 0.00%
Expected volatility 51.00% 56.00%
Expected life 6 years 5 years 4 months 24 days
v3.20.1
Bank Debt (Details Textual)
12 Months Ended
Dec. 31, 2019
USD ($)
ft²
Dec. 31, 2018
USD ($)
Mar. 31, 2017
USD ($)
Mar. 31, 2016
USD ($)
Sep. 30, 2010
USD ($)
Bank Debt (Textual)          
Debt issue costs $ 1,971      
Interest Rate Swap [Member]          
Bank Debt (Textual)          
Variable interest rate with LIBOR, description Interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to fixed rates of 6.04% and 4.38%, respectively. As of the debt principal repayment date immediately preceding December 31, 2019, the variable rates on these two mortgage notes were 4.99% and 4.04%, respectively        
Original notional amount $ 2,637,467        
Line of Credit [Member]          
Bank Debt (Textual)          
Credit facility aggregate value     $ 6,500,000 $ 4,500,000  
Variable interest rate with LIBOR, description   Interest on borrowings against the line of credit is variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.      
Outstanding under line of credit $ 500,000      
Line of Credit [Member] | Loan 1 and Loan 2 [Member]          
Bank Debt (Textual)          
Debt issue costs 26,489        
Line of Credit [Member] | Loan 1 and Loan 2 [Member]          
Bank Debt (Textual)          
Debt issue costs 34,125        
Line of Credit [Member] | Loan 3 and Loan 4 and Loan 5 [Member]          
Bank Debt (Textual)          
Debt issue costs $ 114,806        
Loan Four [Member] | Line of Credit [Member]          
Bank Debt (Textual)          
Variable interest rate with LIBOR, description These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%.        
Variable interest rate 3.96%        
Loan Five [Member] | Line of Credit [Member]          
Bank Debt (Textual)          
Variable interest rate with LIBOR, description This note bears interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%.        
Variable interest rate 4.01%        
Td Bank [Member] | Line of Credit [Member]          
Bank Debt (Textual)          
Credit facility aggregate value         $ 500,000
Td Bank [Member] | Loan One [Member]          
Bank Debt (Textual)          
Proceeds from issuance of loan $ 1,000,000        
Interest payments, term 10 years        
Loan amortization, term 15 years        
Balloon principal payment $ 451,885        
Balloon principal payment due, description Due during the third quarter of 2020.        
Outstanding amount of loan $ 493,696        
Td Bank [Member] | Loan Two [Member]          
Bank Debt (Textual)          
Proceeds from issuance of loan $ 2,500,000        
Interest payments, term 10 years        
Loan amortization, term 20 years        
Balloon principal payment $ 1,550,000        
Balloon principal payment due, description Due during the third quarter of 2025.        
Outstanding amount of loan $ 2,143,771        
Td Bank [Member] | Loan Three [Member]          
Bank Debt (Textual)          
Proceeds from issuance of loan $ 3,940,000        
Loan amortization, term 7 years        
Outstanding amount of loan $ 3,236,429        
Variable interest rate with LIBOR, description Variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through September 2018, at which time the loan converted to a seven-year term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019)        
Loan conversion, term 7 years        
Td Bank [Member] | Loan Four [Member]          
Bank Debt (Textual)          
Proceeds from issuance of loan $ 2,560,000        
Interest payments, term 10 years        
Loan amortization, term 20 years        
Balloon principal payment $ 1,408,000        
Balloon principal payment due, description Due during the first quarter of 2027.        
Outstanding amount of loan $ 2,336,000        
Variable interest rate with LIBOR, description Variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% through March 2018, at which time the loan converted to a term loan facility at the same variable interest rate (which was equal to 3.96% as of December 31, 2019)        
Td Bank [Member] | Loan Five [Member]          
Bank Debt (Textual)          
Proceeds from issuance of loan $ 340,000        
Interest payments, term 10 years        
Loan amortization, term 20 years        
Balloon principal payment $ 206,000        
Balloon principal payment due, description Due during the first quarter of 2027.        
Outstanding amount of loan $ 309,182        
Variable interest rate with LIBOR, description Variable rate equal to the one-month LIBOR (adjusted at each monthly payment date) plus a margin of 2.25% (which was equal to 4.01% as of December 31, 2019)        
Warehouse and storage facility | ft² 4,114        
v3.20.1
Business Operations
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS OPERATIONS

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 market products that provide Immediate Immunity to newborn dairy and beef cattle. We are developing improved formulations of the First Defense® product line for the prevention of scours in 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.

v3.20.1
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES

17. INCOME TAXES

 

Our income tax expense aggregated $28,174 and $461,620 (amounting to 2% and 25% of our loss before income taxes, respectively) for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we had federal net operating loss carryforwards of $11,949,860 of which $10,237,953 does not expire and $1,711,907 expires 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. No subsequent adjustments were recorded.

 

Net operating loss carryforwards, credits, and other tax attributes are subject to review and possible adjustment by the Internal Revenue Service. Section 382 of the Internal Revenue Code contains provisions that could place annual limitations on the future utilization of net operating loss carryforwards and credits in the event of a change in ownership of the Company, as defined.

 

The Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. We currently have no tax examinations in progress. We also have not paid additional taxes, interest or penalties as a result of tax examinations nor do we have any unrecognized tax benefits for any of the periods in the accompanying financial statements.

 

The income tax provision consisted of the following:

 

   During the Year Ended
December 31,
 
   2019   2018 
Current        
Federal  $   $ 
State   3,490    (820)
Current subtotal   3,490    (820)
Deferred          
Federal   (240,458)   (274,495)
State   (31,205)   (504,072)
Deferred subtotal, gross   (271,663)   (778,567)
Valuation allowance   296,347    1,241,007 
Deferred subtotal, net   24,684    462,440 
Income tax expense  $28,174   $461,620 

 

The actual income tax expense differs from the expected tax computed by applying the U.S. federal corporate tax rate of 21% to the loss before income taxes during the years ended December 31, 2019 and 2018 respectively, as follows:

 

   During the Year Ended
December 31,
 
   2019   2018 
   $   %   $   % 
Computed expected income tax expense rate  $(266,157)   (21.00)%  $(390,610)   (21.00)%
State income taxes, net of federal expense   (21,894)   (1.73)   136,843    7.36 
Share-based compensation   37,811    2.98    67,181    3.61 
Tax credits   (27,815)   (2.19)   (602,813)   (32.41)
Valuation allowance   296,347    23.38    1,241,007    66.72 
Other   9,882    0.78    10,012    0.54 
Income tax expense/rate  $28,174    2.22%  $461,620    24.82%

 

The significant components of our deferred tax assets, net, consisted of the following:

 

   As of December 31, 
   2019   2018 
Product rights  $6,709   $14,226 
Property, plant and equipment   (2,306,435)   (2,534,799)
Federal general business tax credits   434,838    407,023 
Federal net operating loss carryforwards   2,509,471    2,486,263 
State tax credits carryover   841,558    845,967 
Interest rate swaps   14,632    (10,052)
Prepaid expenses and other   (12,070)   13,354 
UNICAP   16,756    19,025 
Incentive compensation   31,895     
Valuation allowance   (1,537,354)   (1,241,007)
Deferred tax assets, net  $   $ 

v3.20.1
Stockholders' Equity
12 Months Ended
Dec. 31, 2019
Equity [Abstract]  
STOCKHOLDERS' EQUITY

13. STOCKHOLDERS' EQUITY

 

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.

 

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.

 

Activity under the stock option plans described above was as follows:

 

   2000 Plan   2010 Plan   2017 Plan   Weighted
Average
Exercise
Price
  

Aggregate
Intrinsic
Value(1)

 
Outstanding at December 31, 2017   117,500    242,500       $4.58   $1,513,980 
Grants       48,500    122,500   $7.38      
Terminations       (19,000)   (11,000)  $6.63      
Exercises   (105,000)   (2,000)      $1.89      
Outstanding at December 31, 2018   12,500    270,000    111,500   $6.37   $266,020 
Grants       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)
Vested at December 31, 2019       67,500       $6.13   $(65,890)
Vested and expected to vest at                         
December 31, 2019       255,000    133,500   $6.48   $(516,475)
Reserved for future grants       1,000    167,500           

 

(1)Intrinsic value is the difference between the fair market value as of the date indicated and as of the date of the option grant.

 

The following table displays additional information about the stock option plans described above:

 

   Number of
Shares
   Weighted
Average
Fair Value at
Grant Date
   Weighted
Average
Exercise
Price
 
Non-vested stock options as of January 1, 2019   334,000   $3.63   $6.64 
Non-vested stock options as of December 31, 2019   321,000   $3.49   $6.55 
Stock options granted during the year ended December 31, 2019   51,000   $2.93   $5.90 
Stock options that vested during the year ended December 31, 2019   36,000   $4.10   $6.87 
Stock options that were forfeited during the year ended December 31, 2019   29,000   $3.39   $6.05 

 

During the year ended December 31, 2019, one director and two employees exercised stock options covering 27,500 shares by the surrender of 19,907 shares of common stock with a fair market value of $120,172 at the time of exercise and the payment of $3 in cash. During the year ended December 31, 2018, seven employees exercised stock options covering an aggregate of 107,000 shares, of which 51,500 of these shares were acquired for cash, resulting in total proceeds of $96,240, and 55,500 of these shares were acquired by the surrender of 14,235 shares of common stock with a fair market value of $105,785 at the time of exercise and the payment of $14 in cash.

 

The weighted average remaining life of the options outstanding under the 2010 Plan and the 2017 Plan as of December 31, 2019 was approximately 6 years and 4 months. The weighted average remaining life of the options exercisable under these plans as of December 31, 2019 was approximately 4 years and 10 months. The exercise prices of the options outstanding as of December 31, 2019 ranged from $3.15 to $8.90 per share. The 51,000 stock options granted during the year ended December 31, 2019 had exercise prices between $5.175 and $7.50 per share. The 171,000 stock options granted during the year ended December 31, 2018 had exercise prices between $6.81 and $8.43 per share. The aggregate intrinsic value of options exercised during 2019 and 2018 approximated $46,091 and $582,590, respectively. The weighted-average grant date fair values of options granted during 2019 and 2018 were $2.93 and $3.83 per share, respectively. As of December 31, 2019, total unrecognized stock-based compensation related to non-vested stock options aggregated $386,887, which will be recognized over a weighted average period of 1 year and 2 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 years ended December 31, 2019 and 2018:

 

   During the
Year Ended
December 31,
2019
   During the
Year Ended
December 31,
2018
 
Risk-free interest rate   1.9%   2.6%
Dividend yield   0%   0%
Expected volatility   51%   56%
Expected life   6 years    5.4 years 

 

The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected option term, while the other assumptions are derived from averages of our historical data.

 

Common Stock Rights Plan

 

In September 1995, our Board of Directors adopted a Common Stock Rights Plan (the "Rights Plan") and declared a dividend of one common share purchase right (a "Right") for each of the then outstanding shares of the common stock of the Company. Each Right entitles the registered holder to purchase from the Company one share of common stock at an initial purchase price of $70.00 per share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and American Stock Transfer & Trust Co., as Rights Agent.

 

The Rights (as amended) become exercisable and transferable apart from the common stock upon the earlier of i) 10 days following a public announcement that a person or group (Acquiring Person) has, without the prior consent of the Continuing Directors (as such term is defined in the Rights Agreement), acquired beneficial ownership of 20% or more of the outstanding common stock or ii) 10 days following commencement of a tender offer or exchange offer the consummation of which would result in ownership by a person or group of 20% or more of the outstanding common stock (the earlier of such dates being called the Distribution Date).

 

Upon the Distribution Date, the holder of each Right not owned by the Acquiring Person would be entitled to purchase common stock at a discount to the initial purchase price of $70.00 per share, effectively equal to one half of the market price of a share of common stock on the date the Acquiring Person becomes an Acquiring Person. If, after the Distribution Date, the Company should consolidate or merge with any other entity and the Company were not the surviving company, or, if the Company were the surviving company, all or part of the Company's common stock were changed or exchanged into the securities of any other entity, or if more than 50% of the Company's assets or earning power were sold, each Right would entitle its holder to purchase, at the Rights' then-current purchase price, a number of shares of the acquiring company's common stock having a market value at that time equal to twice the Right's exercise price.

 

At any time after a person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding common stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject to adjustment). At any time prior to 14 days following the date that any person or group becomes an Acquiring Person (subject to extension by the Board of Directors), the Board of Directors of the Company may redeem the then outstanding Rights in whole, but not in part, at a price of $0.005 per Right, subject to adjustment.

 

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.

v3.20.1
Subsequent Events
12 Months Ended
Dec. 31, 2019
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS

21. SUBSEQUENT EVENTS

 

We have evaluated subsequent events through the time of filing on March 27, 2020, the date we have issued this Annual Report on Form 10-K. The global coronavirus 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. 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 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 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 (1) month LIBOR plus 2.15% per annum. The proceeds were used to repay all bank debt outstanding at the time of closing (see Note 11) and to provide some additional working capital. We were required by a bank debt covenant (before the debt refinancing discussed above) to maintain at least $2 million of otherwise unrestricted cash, cash equivalents and short-term investments. Under the new debt, we are required to hold $1.4 million in escrow (a non-current asset), which reduces the effective availability of our liquid assets for operational needs by that amount. This debt is secured by liens on substantially all of our assets. As of the time of filing on March 27, 2020, there were no other material, reportable subsequent events.

v3.20.1
Other Expenses, Net (Tables)
12 Months Ended
Dec. 31, 2019
Other Income and Expenses [Abstract]  
Schedule of other expenses, net
   During the Years Ended
December 31,
 
   2019   2018 
Interest expense  $431,788   $427,782 
Interest income   (118,283)   (14,301)
Other expenses, net  $313,505   $413,481 
v3.20.1
Summary of Significant Accounting Policies (Details 2)
Dec. 31, 2019
Dec. 31, 2018
Company B [Member]    
Revenue, Major Customer [Line Items]    
Accounts receivable due from significant customers 48.00% 36.00%
Company A [Member]    
Revenue, Major Customer [Line Items]    
Accounts receivable due from significant customers 28.00% 35.00%
Company C [Member]    
Revenue, Major Customer [Line Items]    
Accounts receivable due from significant customers [1] 15.00%
[1] Amount is less than 10%.
v3.20.1
Trade Accounts Receivable, Net (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Schedule of accounts receivable    
Trade accounts receivable, net $ 1,637,165 $ 932,298
v3.20.1
Stockholders' Equity (Details 1) - Stock option plans [Member]
12 Months Ended
Dec. 31, 2019
$ / shares
shares
Number of Shares, Non-vested stock options as of January 1, 2019 | shares 334,000
Non-vested stock options as of December 31, 2019 | shares 321,000
Number of Shares, Stock options granted during the year ended December 31, 2019 | shares 51,000
Number of Shares, Stock options that vested during the year ended December 31, 2019 | shares 36,000
Number of Shares, Stock options that were forfeited during the year ended December 31, 2019 | shares 29,000
Weighted Average Fair Value at Grant Date, Non-vested stock options as of January 1, 2019 $ 3.63
Weighted Average Fair Value at Grant Date, Non-vested stock options as of December 31, 2019 3.49
Weighted Average Fair Value at Grant Date, Stock options granted during the year ended December 31, 2019 2.93
Weighted Average Fair Value at Grant Date, Stock options that vested during the year ended December 31, 2019 4.10
Weighted Average Fair Value at Grant Date, Stock options that were forfeited during the year ended December 31, 2019 3.39
Weighted Average Exercise Price, Non-vested stock options as of January 1, 2019 6.64
Weighted Average Exercise Price, Non-vested stock options as of December 31, 2019 6.55
Weighted Average Exercise Price, Stock options granted during the year ended December 31, 2019 5.90
Weighted Average Exercise Price, Stock options that vested during the year ended December 31, 2019 6.87
Weighted Average Exercise Price, Stock options that were forfeited during the year ended December 31, 2019 $ 6.05
v3.20.1
Statements of Cash Flows - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (1,295,587) $ (2,321,671)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:    
Depreciation 2,248,317 1,501,607
Amortization 19,104 19,104
Amortization of debt issuance costs 16,976 16,829
Deferred income taxes 24,684 462,315
Stock-based compensation 313,144 344,016
Gain on sale of assets (700,000)
Loss on disposal of fixed assets 2,469 1,733
Changes in:    
Trade accounts receivable, gross (704,867) 411,724
Accrued interest income (27,753)
Inventory (186,585) (281,939)
Prepaid expenses and other current assets (73,749) 128,849
Other assets (13,931) (12,033)
Accounts payable and accrued expenses (88,711) 80,162
Deferred revenue (24,100)
Net cash provided by (used for) operating activities 233,511 (373,404)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchase of property, plant and equipment (1,391,446) (2,029,895)
Maturities of investment 7,670,000
Purchases of investments (10,123,000)
Payment of contingent royalties related to 2016 acquisition (8,914) (14,077)
Proceeds from sale of assets 450,000 250,000
Net cash used for investing activities (3,403,360) (1,793,972)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from public offering, net 8,303,436
Proceeds from debt issuance 693,640
Proceeds from line of credit 500,000
Debt principal repayments (861,347) (398,308)
Line of credit repayment (500,000)
Payments of debt issue costs (1,971)
Proceeds from exercise of stock options 3 96,254
Net cash provided by financing activities 6,942,092 889,615
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,772,243 (1,277,761)
BEGINNING CASH AND CASH EQUIVALENTS 2,521,050 3,798,811
ENDING CASH AND CASH EQUIVALENTS 6,293,293 2,521,050
CASH PAID FOR:    
Income taxes 3,566 4,222
Interest expense 420,956 403,535
NON-CASH ACTIVITIES:    
Change in capital expenditures included in accounts payable and accrued expenses 97,530 (568,695)
Net change in fair value of interest rate swaps, net of taxes 74,052 (30,795)
Fixed asset disposals, gross $ 62,055 $ 22,681
v3.20.1
Bank Debt (Details 2)
Dec. 31, 2019
USD ($)
Debt Instrument [Line Items]  
Year ending 12/31/2020 $ 1,291,133
Year ending 12/31/2021 802,483
Year ending 12/31/2022 807,557
Year ending 12/31/2023 812,806
Year ending 12/31/2024 818,240
After 12/31/2024 3,986,859
Subtotal 8,519,078
Debt Issuance Costs (97,612)
Total 8,421,466
Loan #1 [Member]  
Debt Instrument [Line Items]  
Year ending 12/31/2020 493,696
Year ending 12/31/2021
Year ending 12/31/2022
Year ending 12/31/2023
Year ending 12/31/2024
After 12/31/2024
Subtotal 493,696
Loan #2 [Member]  
Debt Instrument [Line Items]  
Year ending 12/31/2020 94,005
Year ending 12/31/2021 98,538
Year ending 12/31/2022 103,077
Year ending 12/31/2023 107,769
Year ending 12/31/2024 112,623
After 12/31/2024 1,627,759
Subtotal 2,143,771
Loan #3 [Member]  
Debt Instrument [Line Items]  
Year ending 12/31/2020 562,857 [1]
Year ending 12/31/2021 562,857 [1]
Year ending 12/31/2022 562,857 [1]
Year ending 12/31/2023 562,857 [1]
Year ending 12/31/2024 562,857 [1]
After 12/31/2024 422,144 [1]
Subtotal 3,236,429 [1]
Loan #4 [Member]  
Debt Instrument [Line Items]  
Year ending 12/31/2020 128,000 [1]
Year ending 12/31/2021 128,000 [1]
Year ending 12/31/2022 128,000 [1]
Year ending 12/31/2023 128,000 [1]
Year ending 12/31/2024 128,000 [1]
After 12/31/2024 1,696,000 [1]
Subtotal 2,336,000 [1]
Loan #5 [Member]  
Debt Instrument [Line Items]  
Year ending 12/31/2020 12,575 [2]
Year ending 12/31/2021 13,088 [2]
Year ending 12/31/2022 13,623 [2]
Year ending 12/31/2023 14,180 [2]
Year ending 12/31/2024 14,760 [2]
After 12/31/2024 240,956 [2]
Subtotal $ 309,182 [2]
[1] These notes bear interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 3.96%. The actual interest rate and principal payments will be different.
[2] This note bears interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25%. Figures in this table are estimated using an interest rate of approximately 4.01%. The actual interest rate and principal payments will be different.
v3.20.1
Statements of Operations - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Income Statement [Abstract]    
Product sales $ 13,722,872 $ 10,986,297
Costs of goods sold 6,983,152 5,792,392
Gross margin 6,739,720 5,193,905
OPERATING EXPENSES (INCOME):    
Product development expenses 3,687,609 3,516,619
Sales and marketing expenses 2,318,112 2,084,903
Administrative expenses 1,687,907 1,738,953
Gain on sale of assets (700,000)
Operating activities, net 7,693,628 6,640,475
NET OPERATING LOSS (953,908) (1,446,570)
Other expenses, net 313,505 413,481
LOSS BEFORE INCOME TAXES (1,267,413) (1,860,051)
Income tax expense 28,174 461,620
NET LOSS $ (1,295,587) $ (2,321,671)
Basic weighted average common shares outstanding 6,818,960 5,486,154
Basic net loss per share $ (0.19) $ (0.42)
Diluted weighted average common shares outstanding 6,818,960 5,486,154
Diluted net loss per share $ (0.19) $ (0.42)
v3.20.1
Employee Benefits
12 Months Ended
Dec. 31, 2019
Retirement Benefits [Abstract]  
EMPLOYEE BENEFITS

20. 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 $126,638 and $104,843 into the plan for the years ended December 31, 2019 and 2018, respectively.

v3.20.1
Other Expenses, Net
12 Months Ended
Dec. 31, 2019
Other Income and Expenses [Abstract]  
OTHER EXPENSES, NET

16. OTHER EXPENSES, NET

 

Other expenses, net, consisted of the following:

 

   During the Years Ended
December 31,
 
   2019   2018 
Interest expense  $431,788   $427,782 
Interest income   (118,283)   (14,301)
Other expenses, net  $313,505   $413,481 
v3.20.1
Contingent Liabilities and Commitments
12 Months Ended
Dec. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
CONTINGENT LIABILITIES AND COMMITMENTS

12. 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 December 31, 2019. 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 December 31, 2019.

 

We are committed to purchasing certain key parts (syringes) and services (final 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 two contractors. We are investing in the necessary equipment to perform the final formulation, aseptic filling and final packaging 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 were accrued as of December 31, 2017 and paid in January 2018. Royalties of $10,396 were accrued as of December 31, 2018 and paid in January 2019. Royalties of $76,876 were accrued as of December 31, 2019 and paid in January 2020.

 

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. The lease term is ten years with a right to renew for a second ten-year term and a right of first offer to purchase. The total lease liability over the initial ten-year term (including inflationary adjustments) aggregates approximately $1.3 million before real estate and personal property taxes, utilities, insurance, maintenance and related building and operating expenses.

 

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 $2,318,000 to increase our production capacity for the First Defense® product line, $1,245,000 to construct and equip our own formulation and aseptic filling facility for Re-Tain, $547,000 to the purchase of inventory and $145,000 to other obligations as of December 31, 2019.

v3.20.1
Business Acquisition
12 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
BUSINESS ACQUISITION

8. BUSINESS ACQUISITION

 

On January 4, 2016, we acquired certain business assets and processes from DAY 1™ Technology, LLC of Minnesota. The acquired rights and know-how are primarily related to formulating our bovine antibodies into a gel solution (or paste) for an oral delivery option to newborn calves via a syringe (or tube). This product format offers customers an alternative delivery option to the bolus (the standard delivery format of the bivalent First Defense® product since first approval by the U.S. Department of Agriculture (USDA) and product launch in 1991). This gel formulation had been sold as a feed product without disease claims since 2012. During the fourth quarter of 2018, we achieved USDA approval of an improved bivalent gel formulation and began marketing this product as Dual-Force First Defense®. We achieved Canadian approval of this product during the first quarter of 2019. We were also interested in a gel formulation in anticipation of the launch of Tri-Shield First Defense® (which was approved by the USDA during the fourth quarter of 2017) because the additional rotavirus antibodies in this new product would not fit in a bolus full of E. coli and coronavirus antibodies. This purchase also included certain other related private-label products. The total purchase price was approximately $532,000 (comprised of a $368,000 up front payment, a $97,000 technology transfer payment and estimated royalty of $67,000). Actual royalties paid based on sales from January 1, 2016 through December 31, 2018 were $36,000, and no further royalties are payable under this agreement. The estimated fair values of the assets purchased in this transaction included inventory of approximately $113,000, machinery and equipment of approximately $132,000, a developed technology intangible of approximately $191,000 (which includes an immaterial amount of value associated with customer relationships and a non-compete agreement, and was valued using the relief from royalty method) and goodwill of approximately $96,000. The goodwill arising from the acquisition consists largely of the estimated value of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction was closed as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies.

v3.20.1
Trade Accounts Receivable, Net
12 Months Ended
Dec. 31, 2019
Receivables [Abstract]  
TRADE ACCOUNTS RECEIVABLE, net

4. TRADE ACCOUNTS RECEIVABLE, net

 

Trade accounts receivable amounted to $1,637,165 and $932,298 as of December 31, 2019 and 2018, respectively. No allowance for bad debt and product returns was recorded as of December 31, 2019 or 2018.

v3.20.1
Summary of Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Schedule of financial assets measured at fair value on nonrecurring basis

    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  

 

    As of December 31, 2018  
    Level 1     Level 2     Level 3     Total  
Assets:                        
Cash and money market accounts   $ 2,521,050     $     $     $ 2,521,050  
Interest rate swaps           40,209             40,209  
Total   $ 2,521,050     $ 40,209     $     $ 2,561,259  

Schedule of sales to significant customers
   During the Years Ended
December 31,
 
   2019   2018 
Company A   42%   43%
Company B   27%   23%
Schedule of accounts receivable due from significant customers

    As of
December 31,
2019
    As of
December 31,
2018
 
Company B     48 %     36 %
Company A     28 %     35 %
Company C     *       15 %

* Amount is less than 10%.

v3.20.1
Property, Plant and Equipment, Net (Tables)
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment [Abstract]  
Schedule of property, plant and equipment
   Estimated
Useful Lives
(in years)
  As of
December 31, 2019
   As of
December 31, 2018
 
Laboratory and manufacturing equipment  3-10  $15,437,724   $15,092,252 
Building and improvements  10-39   17,078,829    17,018,316 
Office furniture and equipment  3-10   719,323    731,510 
Construction in progress  n/a   1,124,189    91,067 
Land  n/a   516,867    516,867 
Property, plant and equipment, gross      34,876,932    33,450,012 
Accumulated depreciation      (9,611,194)   (7,422,463)
Property, plant and equipment, net     $25,265,738   $26,027,549 
v3.20.1
Stockholders' Equity (Tables)
12 Months Ended
Dec. 31, 2019
Equity [Abstract]  
Schedule of activity under the stock option plans

   2000 Plan   2010 Plan   2017 Plan   Weighted
Average
Exercise
Price
  

Aggregate
Intrinsic
Value(1)

 
Outstanding at December 31, 2017   117,500    242,500       $4.58   $1,513,980 
Grants       48,500    122,500   $7.38      
Terminations       (19,000)   (11,000)  $6.63      
Exercises   (105,000)   (2,000)      $1.89      
Outstanding at December 31, 2018   12,500    270,000    111,500   $6.37   $266,020 
Grants       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)
Vested at December 31, 2019       67,500       $6.13   $(65,890)
Vested and expected to vest at                         
December 31, 2019       255,000    133,500   $6.48   $(516,475)
Reserved for future grants       1,000    167,500           

 

(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.
Schedule of additional information about the stock option plans
  Number of
Shares
   Weighted
Average
Fair Value at
Grant Date
   Weighted
Average
Exercise
Price
 
Non-vested stock options as of January 1, 2019   334,000   $3.63   $6.64 
Non-vested stock options as of December 31, 2019   321,000   $3.49   $6.55 
Stock options granted during the year ended December 31, 2019   51,000   $2.93   $5.90 
Stock options that vested during the year ended December 31, 2019   36,000   $4.10   $6.87 
Stock options that were forfeited during the year ended December 31, 2019   29,000   $3.39   $6.05 
Schedule of fair value stock option grant using black-scholes option valuation model with the weighted-average assumptions
   During the
Year Ended
December 31,
2019
   During the
Year Ended
December 31,
2018
 
Risk-free interest rate   1.9%   2.6%
Dividend yield   0%   0%
Expected volatility   51%   56%
Expected life   6 years    5.4 years 
v3.20.1
Intangible Assets (Details Textual) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Intangible Assets (Textual)    
Intangible amortization expense $ 19,104 $ 19,104
Intangible asset amortized, useful lives 10 years  
Net value $ 114,624 $ 133,728
v3.20.1
Property, Plant and Equipment, Net (Details Textual) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Property, Plant and Equipment (Textual)    
Property, plant and equipment, disposals $ 62,055 $ 22,681
Depreciation expense $ 2,248,317 $ 1,501,607
v3.20.1
Inventory (Details) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Schedule of inventory    
Raw materials $ 791,558 $ 338,991
Work-in-process 1,207,457 1,337,035
Finished goods 519,241 655,645
Total $ 2,518,256 $ 2,331,671
v3.20.1
Income Taxes (Details) - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Current    
Federal
State 3,490 (820)
Current subtotal 3,490 (820)
Deferred    
Federal (240,458) (274,495)
State (31,205) (504,072)
Deferred subtotal, gross (271,663) (778,567)
Valuation allowance 296,347 1,241,007
Deferred subtotal, net 24,684 462,440
Income tax expense $ 28,174 $ 461,620
v3.20.1
Segment Information (Details) - Segment
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Segment Information (Textual)    
Number of business segment 1  
Sales Revenue [Member]    
Segment Information (Textual)    
Concentration risk percentage 97.00% 97.00%
U.S. dairy and beef industries [Member] | Sales Revenue [Member]    
Segment Information (Textual)    
Concentration risk percentage 89.00% 87.00%
International Dairy and Beef [Member] | Sales Revenue [Member]    
Segment Information (Textual)    
Concentration risk percentage 10.00% 13.00%