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, 2016
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-12934
(Commission file number)
ImmuCell Corporation
(Exact name of Registrant as specified in its charter)
| Delaware | 01-0382980 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| 56 Evergreen Drive, Portland, Maine | 04103 | |
| (Address of principal executive offices) | (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 ☒
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 ☒
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 ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2016 was approximately $22,866,000 based on the closing sales price on June 30, 2016 of $6.90 per share.
The number of shares of the Registrant’s common stock outstanding at March 20, 2017 was 4,848,390.
Documents incorporated by reference: Portions of the Registrant’s definitive Proxy Statement to be filed in connection with the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
ImmuCell Corporation
TABLE OF CONTENTS
December 31, 2016
ImmuCell Corporation
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: projections of future financial performance; 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; future market share of and revenue generated by current products and products still in development; future sources of financial support for our product development, manufacturing and marketing efforts; 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 amount and timing of future investments in facility modifications and production equipment; the future adequacy of our working capital and the availability and cost of third party financing; timing and future costs of a facility to produce the Drug Substance (active pharmaceutical ingredient) for Mast Out®; the timing and outcome of pending or anticipated applications for regulatory approvals; future regulatory requirements relating to our products; future expense ratios and margins; future compliance with bank debt covenants; future realization of deferred tax assets; costs associated with sustaining compliance with cGMP regulations in our current operations and attaining such compliance for the facility to produce the Drug Substance for Mast Out®; factors that may affect the dairy and beef industries and future demand for our products; the cost-effectiveness of additional sales and marketing expenditures and resources; the accuracy of our understanding of our distributors’ ordering patterns; anticipated changes in our manufacturing capabilities and efficiencies; anticipated competitive and 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” 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, competition within our anticipated product markets, customer acceptance of our new and existing products, alignment between our manufacturing resources and product demand, the uncertainties associated with product development and Drug Substance manufacturing, actual as compared to expected or estimated costs of expanding our manufacturing facilities, our potential reliance upon third parties for financial support, products and services, changes in laws and regulations, decision making by regulatory authorities, possible dilutive impacts on existing stockholders from any equity financing transactions in which we may engage, currency fluctuations and other risks detailed from time to time in filings we make with the Securities and Exchange Commission, 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 are based on our current expectations, but actual results may differ materially due to various factors, including the risk factors summarized under Item 1A below and uncertainties otherwise referred to in this Annual Report.
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 developing human product applications of the underlying milk protein purification technology. Beginning in 1999, we re-focused our business strategy on First Defense® and other products that improve animal health and productivity in the dairy and beef industries. We aim to capitalize on the growth in sales of First Defense® (a product that provides significant immediate immunity to newborn dairy and beef livestock) and to revolutionize the mastitis treatment paradigm (with a product we are developing to treat this most significant cause of economic loss to the dairy industry).
During 2000, we began the development of Mast Out®, our Nisin-based 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). 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 the manufacturing objectives required for FDA approval.
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ImmuCell Corporation
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. As we make process improvements, we continue to invest in personnel, equipment and facility modifications to increase the efficiency and quality of our operations.
We had approximately 2,429,000 shares of common stock outstanding as of December 31, 1998 (at the time we focused our strategy on products for the dairy and beef industries) in comparison to approximately 4,847,000 shares outstanding as of December 31, 2016. There were approximately 480,000 and 251,000 shares of common stock reserved for issuance under stock options that were outstanding as of December 31, 1998 and 2016, respectively. During 2016, we issued an aggregate of 1,783,690 shares of common stock, raising gross proceeds of approximately $9,364,000 in two separate transactions. In order to minimize the dilutive effects of such 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. We also raised up to approximately $6.5 million in new debt availability (during the first quarter of 2016 and amended during the first quarter of 2017). We intend to use this new capital to complete the development of Mast Out® without relying on funding from a partner, thereby retaining control over all product rights and potential revenues.
Our operations are generally profitable, except when we elect to make unusually large investments in product development expenses. During these eighteen years in which we have focused on products for the dairy and beef industries, we have funded our operations and improved our net financial position, as demonstrated in the following table (in thousands, except for percentages):
As
of December 31, | Net $ Increase Over Eighteen- Year Period | As of December 31, 2016 | Net % Increase Over Eighteen- Year Period | ||||||||||||||||||
| Cash, cash equivalents, short-term investments and long-term investments | $ | 1,539 |
+ | $ | 9,085 | = | $ | 10,624 | 590 | % | |||||||||||
| Net working capital | $ | 1,866 | + | $ | 10,423 | = | $ | 12,289 | 559 | % | |||||||||||
| Total assets | $ | 3,145 | + | $ | 21,552 | = | $ | 24,697 | 685 | % | |||||||||||
| Stockholders’ equity | $ | 2,248 | + | $ | 17,474 | = | $ | 19,722 | 777 | % | |||||||||||
Animal Health Products
Our lead product, First Defense®, is manufactured from hyperimmune cows’ colostrum (the milk that a cow produces immediately after giving birth) utilizing our proprietary vaccine and milk protein purification technologies. The target disease, bovine enteritis (calf scours), causes diarrhea and dehydration in newborn calves and often leads to serious sickness and even death. First Defense® is the only USDA-licensed, orally delivered scours preventive product on the market for calves with claims against E. coli K99 and coronavirus (two leading causes of scours). We are working to add a third claim (rotavirus) to our product line during 2017. First Defense® provides bovine antibodies that newborn calves need but are unable to produce on their own immediately after birth. 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 First Defense® 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. A single dose of First Defense® provides a guaranteed level of protection proven to reduce mortality and morbidity from two major causes of calf scours. First Defense® is convenient to use. A calf needs to receive only one bolus of First Defense® within the first twelve hours after birth (the earlier the better). The product is stored at room temperature and no mixing is required before it is given to the calf. We are a leader in the scours prevention market with this product. The third quarter of 2016 marked the 25th anniversary of the original USDA approval of this product in 1991. During the third quarter of 2016, we sold the 18,000,000th dose of First Defense®. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product. In 2011, we began selling nutritional and feed supplement product applications (that are not delivered in the capsule format) of our First Defense Technology®, which is a unique whey protein concentrate that is purified utilizing our proprietary milk protein processing methods that does not carry the claims of our USDA-licensed product. We are working to add USDA claims to these product formats. We utilize one liquid processing production line and two filling and formulating production lines and one quality system for all of our milk-based products.
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ImmuCell Corporation
During 1999, we acquired Wipe Out® Dairy Wipes, which has been our second leading source of product sales. Wipe Out® Dairy Wipes consist of towelettes that are pre-moistened with a Nisin-based formulation to prepare the teat area of a cow in advance of milking. Wipe Out® Dairy Wipes were manufactured in compliance with cGMP regulations, as required by federal law. As a product line extension, we developed a pet application of the Nisin technology underlying Wipe Out® Dairy Wipes, since many skin infections in pets are caused by Nisin-susceptible bacteria. During the first quarter of 2017 based on an extensive review of this product line, we discontinued the production and sale of the topical wipes product line due to its limited sales growth potential and minimal contribution to profits.
During 2001, we began to offer our own, internally developed California Mastitis Test (CMT). CMT can be used for bulk tank as well as individual cow sample monitoring and can be used 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 certain products that we now produce and sell under private label relationships with Ridley, USA Inc. of Mankato, MN and Genex Cooperative Inc. of Shawano, WI.
Sales and Markets
Our sales and marketing team currently consists of one vice president, five regional managers and one inside sales and marketing employee. The manner in which we sell and distribute our products depends, in large measure, upon the nature of the particular product, its intended users and the country in which it is sold. First Defense® and CMT are sold primarily through major animal health distributors who, in turn, sell directly to veterinary clinics, fleet stores and direct to farms. We have experienced minimal bad debt with respect to these products. Promotional merchandise is given to certain customers at times because we believe it enhances brand recognition. Additionally, advertising, training meetings, incentive programs, direct mail initiatives and face-to-face solution selling are tactics we use to create brand loyalty. Sales of First Defense® are normally seasonal, with higher sales expected during the first quarter. Sales of this product into the beef industry are highly seasonal because most beef calves are born between January and April each year. Harsh winter weather and severe temperature fluctuations cause stress to calves, and calves under stress are more susceptible to scours. We sold Wipe Out® Dairy Wipes to distributors, bovine veterinarians and directly to producers.
International product sales represented approximately 13% and 16% of our total product sales for the years ended December 31, 2016 and 2015, respectively. The majority of these international sales were to Canada. We currently 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. The value of the Canadian dollar has declined recently, but this has not correlated with a decrease in our sales into Canada. Generally, our international sales are generated through relationships with in-country distributors that have knowledge of the local regulatory and marketing requirements. We continue our efforts to grow sales of First Defense® in North America, where there are approximately 40,200,000 dairy and beef cows in the United States and 4,795,000 dairy and beef cows in Canada. We believe that even greater market opportunities exist in other international territories. There are estimated to be approximately 67,000,000 dairy and beef cows in China, 35,850,000 in the European Union, 20,306,000 in Australia and New Zealand, 10,175,000 in Mexico, 1,344,000 in South Korea and 1,340,000 in Japan. 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.
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ImmuCell Corporation
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. We entered into a distribution agreement with Beijing Starbiopharm Inc. of Beijing, China covering China during 2014. 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 and covering Iran with Senikco, LLC of Laguna Niguel, CA during the fourth quarter of 2016.
With Mast Out®, we are working to expand our product offerings to include an intramammary treatment for subclinical mastitis for the mother cow during lactation. Mastitis (inflammation of the mammary gland) is the most costly and common disease affecting the dairy industry. It is estimated to cost the U.S. dairy industry approximately $2 billion in economic harm per year. 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, including reduced or foregone milk quality premiums, lower milk production, 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. Our active ingredient, Nisin, is an antibacterial peptide that has been demonstrated in clinical studies to be an effective aid in the reduction of mastitis-causing organisms in dairy cows. We believe that Mast Out® could revolutionize the way that mastitis is treated by making earlier treatment of subclinically infected cows 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. 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 $15.00 per 100 pounds, a cow produces approximately $9 to $12 worth of milk per day. These estimated figures would result in milk discard costs ranging from approximately $32 (for 3.5 days of milk at 60 pounds per day) to $132 (for 11 days of milk at 80 pounds per day) per treated animal, which is a significant barrier to the routine treatment of subclinical mastitis with traditional antibiotics. We have estimated that the approximate cost to the U.S. dairy industry of this discarded milk may be around $300 million per year. Subclinical mastitis is associated with reduced milk production (some have estimated approximately 1,500 pounds of lost milk, or about $240 at $16.00 per hundredweight, per infected cow), reduced milk premiums, reproduction inefficiencies and an increased incidence of clinical mastitis. 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 Mast Out® would not have to be moved, allowing this costly drop in production to be avoided. Mast Out® 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. We believe that the product’s value proposition demonstrates a return on investment to the producer that will justify this premium.
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.
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ImmuCell Corporation
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 are 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 Mast Out® because Nisin is not used for human health. This current environment could be favorable to the introduction of a new product such as Mast Out® 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 product development efforts. Additionally, we believe that the use of First Defense® is consistent with this trend of reducing the use of antibiotics because the prevention of calf scours early in life with our purified milk 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 Mast Out® claim spectrum. 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 have estimated that first year domestic sales of our product could be approximately $5.8 million and that annual sales could grow to approximately $36.1 million by the fifth year after market launch. Actual sales results could be higher or lower. Key assumptions underlying these estimates include there being 7.65 million cows in lactation in the United States and the treatment of 1.15 quarters per cow on average with three doses per treatment at approximately $9.99 per dose. We assumed that 2.2% of all cows in lactation would be treated during the first year after market launch and that 13.7% would be treated during the fifth year after market launch. We believe that similar market opportunities also exist outside of the United States and for the treatment of dry (non-lactating) cows. The manufacturing facility that we are constructing could have enough capacity to meet approximately $13 million of the sales projected for the second or third year after product launch. Our construction plans allow for additional equipment to be installed in this facility in future years, which (when considered with anticipated yield improvements) could more than double the initial production capacity. This incremental investment would only be made after market acceptance of the product is demonstrated.
Product Development
The majority of our product development spending is focused on the development of Mast Out®. During the seventeen-year period that began on January 1, 2000 (the year we began the development of Mast Out®) and ended on December 31, 2016, we invested the aggregate of approximately $12,409,000 in the development of Mast Out®. This estimated allocation to Mast Out® reflects only direct expenditures and includes no allocation of product development or administrative overhead expenses. Approximately $2,891,000 of this investment was offset by product licensing revenues and grant income related to Mast Out®, most of which was earned from 2001 to 2007.
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 Mast Out®. In 2004, we paid Nutrition 21 approximately $965,000 to buy out this royalty and milestone-based license to Nisin, thereby acquiring control of the animal health applications of Nisin. Nisin, is an antibacterial peptide known to be effective against most Gram-positive and some Gram-negative bacteria. We have more than fifteen years of experience manufacturing Nisin for our now discontinued topical wipes product line. In our pivotal effectiveness study, statistically significant Mast Out® cure rates were associated with a statistically significant reduction in milk somatic cell count, which is an important measure of milk quality. Nisin is a well characterized substance, having been used in food preservation applications for over 50 years. Food-grade Nisin, however, cannot be used in pharmaceutical applications because of its low purity. Our Nisin technology includes processing and purification methods to achieve pharmaceutical-grade purity.
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ImmuCell Corporation
In 2004, we entered into a product development and marketing agreement with Pfizer Animal Health (now known as Zoetis) covering Mast Out®. Zoetis 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 cows treated with Mast Out® 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 Mast Out® 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 Mast Out® is used in accordance with the product label. We do not believe that a premium-priced product such as Mast Out® will be used as part of a whole herd (“blitz”) treatment protocol, which reduces the risk of cheese interference. We do not see this as a significant problem as modern “precision dairying” practices support reducing the indiscriminate use of drug treatments.
Commercial introduction of Mast Out® in the United States is subject to approval of our New Animal Drug Application (NADA) by the Food and Drug Administration (FDA), which approval cannot be assured. Foreign regulatory approvals would be required for sales in key markets outside of the United States, which would involve some similar and some different requirements. The NADA is comprised of five principal Technical Sections and one administrative submission that are subject to the FDA’s phased review. By statute, each Technical Section submission is generally subject to a six-month review cycle by the FDA. Each Technical Section can be reviewed and approved separately. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows:
1) Environmental Impact: During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter from the FDA.
2) Target Animal Safety: During the second quarter of 2012, we received the Target Animal Safety Technical Section Complete Letter from the FDA.
3) Effectiveness: During the third quarter of 2012, we received the Effectiveness Technical Section Complete Letter from the FDA. The draft product label carries claims for the treatment of subclinical mastitis associated with Streptococcus agalactiae, Streptococcus dysgalactiae, Streptococcus uberis, and coagulase-negative staphylococci in lactating dairy cattle.
4) Human Food Safety (HFS): The HFS Technical Section submission was made during the fourth quarter of 2010. This Technical Section includes several subsections such as: a) toxicology, b) total metabolism, c) effects of drug residues in food on human intestinal microbiology, d) effects on bacteria of human health concern (antimicrobial resistance) and e) pivotal residue chemistry. During the second quarter of 2011, we announced that the FDA had accepted the subsections described above and granted Mast Out®a zero milk discard period and a zero meat withhold period during and after treatment. Before we can obtain this Technical Section Complete Letter, we must transfer our analytical method that measures Nisin residues in milk to a government laboratory. Completion of the HFS Technical Section is currently anticipated during the second half of 2017.
5) Chemistry, Manufacturing and Controls (CMC): Obtaining FDA approval of the CMC Technical Section defines the critical path to FDA approval and to initial commercial sales. During the third quarter of 2014, we completed an investment in facility modifications and processing equipment necessary to produce the Drug Substance (the Active Pharmaceutical Ingredient, which is our pharmaceutical-grade Nisin) at small-scale. This small-scale facility has been used to i) expand our process knowledge and controls, ii) establish operating ranges for critical process parameters, iii) optimize process yields and iv) verify the cost of production. We believe these efforts will reduce risk as we invest in the commercial-scale production facility.
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Implementing Nisin production at commercial scale is the most critical action in front of us on our path to regulatory approval. Our initial plan was to have Nisin produced for us under a Development and Manufacturing Agreement with Lonza Sales, Ltd. of Basel, Switzerland, in order to avoid the investment in a manufacturing facility. By the end of 2011, we determined that the required minimum volumes were too large to permit efficient, continuous production and that the cost of goods under this contract would not be commercially feasible. This contract was terminated during the fourth quarter of 2014 by mutual consent. We presented this product development opportunity to a variety of large and small animal health companies. During the second quarter of 2013, we received a non-refundable $250,000 exclusive license option fee from a prospective partner that considered manufacturing our Nisin in a plant of their own. During the third quarter of 2013, this prospective partner decided not to execute a development and marketing license because it had determined that, in its opinion, it could not cost-effectively commercialize the product. While such a corporate partnership could have allowed us to avoid the large investment in a commercial-scale production facility, the partner would have taken a large share of the gross margin from all future Mast Out® sales. We are encouraged by the regulatory and marketing feedback from prospective partners, following their due diligence, that our novel mastitis treatment can achieve FDA approval and have a significant, positive impact on the dairy industry. During the fourth quarter of 2015, we acquired land nearby to our existing Portland facility for the construction of our own facility for the commercial-scale production of Nisin. During the third quarter of 2016, we broke ground for this facility, and construction is now well underway and progressing on schedule and within budget. We plan to complete construction by the third quarter of 2017 and installation and qualification of equipment by the first quarter of 2018. To gain regulatory approval of this product, validation batches must be produced at commercial scale, and a detailed CMC Technical Section prepared and submitted to the FDA. We expect that two, six-month reviews of the CMC Technical Section by the FDA will be required. Additionally, successful FDA site inspections must be achieved.
After preparing materials responsive to other administrative requirements, the administrative NADA submission will be assembled for review by the FDA. This final administrative submission is subject to a statutory sixty-day review period. Adherence to this timeline sets us up for anticipated regulatory approval in 2019.
We are party to a long-term, exclusive supply agreement with Nordson Corporation (formerly Plas-Pak Inc.) of Norwich, Connecticut covering the proprietary syringe that was developed specifically for treating cows with Mast Out®. These syringes were used for all pivotal studies of Mast Out®. During the fourth quarter of 2015, this contract was extended through December 31, 2020. A further extension past December 31, 2020 would be required, unless an alternative supplier is identified.
Since 2010, we have been party to a long-term, exclusive Contract Manufacture Agreement with Norbrook Laboratories Limited of Newry, Northern Ireland, an FDA-approved Drug Product (sterile-filled and packaged syringes) manufacturer, covering the formulation and sterile-filling of the Drug Substance into Drug Product for Mast Out®. Norbrook provided these services for clinical material used in all pivotal studies of Mast Out®. During the fourth quarter of 2015, we entered into a revised agreement with Norbrook covering the final development and commercial-scale launch of Mast Out® after FDA approval.
In addition to our work on Mast Out®, we are actively developing further improvements, extensions or additions to our current First Defense® product line. For example, we currently are developing treatments that could prevent calf scours caused by enteric pathogens in addition to E. coli K99 and bovine coronavirus (the current disease claims for First Defense®). In connection with that effort, during the second quarter of 2009 we entered into an exclusive license with the Baylor College of Medicine covering the underlying rotavirus vaccine technology used to generate the specific antibodies. This perpetual license (if not terminated for cause) is subject to milestone and royalty payments. If approved, this would be the first 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. Results from pilot studies completed during the first quarter of 2009 justified continued product development. We initiated a second pivotal effectiveness study at Cornell University College of Veterinary Medicine during the second quarter of 2014 and announced positive effectiveness results from this pivotal study during the first quarter of 2015. During the third quarter of 2015, we obtained concurrence from the USDA that we have been granted disease claims against bovine rotavirus for our product. We are now working to complete the other laboratory and manufacturing objectives required for product license approval. This could position us to achieve product licensure and market launch of this product, First Defense® Tri-Shield™, with the expanded claims during the second half of 2017. We intend to continue selling the bivalent formats of First Defense® as options for customers after the launch of First Defense® Tri-Shield™. We are currently working to establish USDA claims for our bivalent gel tube (expected during the second half of 2017) and bulk powder (expected during 2018) formulations 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 a three-year exclusive option agreement to license new bacteriocin technology from the University of Massachusetts Amherst. This technology focuses on bacteriocins having activity against Gram-negative infections for use in combating mastitis in dairy cattle. Subject to the availability of needed financial and other resources, we intend to begin new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring, on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.
| 7 |
ImmuCell Corporation
Competition
Our competition in the animal health market includes other biotechnology companies and major animal health companies. Many 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 Zoetis (formerly Pfizer Animal Health, a division of Pfizer, Inc.), Merck Animal Health and Boehringer Ingelheim, to be among the potential competitors for Mast Out®. We expect the FDA to grant a period of five years of market exclusivity for Mast Out® (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.
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 First Defense® offers two significant competitive advantages. First, First Defense® is the only product that provides protection against both E. coli and coronavirus, the two leading causes of calf scours. Second, First Defense®, being derived from colostrum, offers Immediate Immunity™ through antibodies that function both at the gut level and are absorbed into the blood stream for future protection. To complement this, First Defense® is easier to use, requires no mixing or refrigeration, and can be administered without delaying maternal colostrum.
Zoetis sells a product that competes directly with First Defense® in preventing scours via oral delivery to newborn calves. Their product (Calf-Guard®) is a modified-live virus vaccine, but we know that newborn calves respond poorly to vaccines and that the immune system must be given time to develop a response to vaccines. Like First Defense®, Calf-Guard® carries a claim against coronavirus infections, but this product does not carry a claim against E. coli infections like First Defense® does. Calf-Guard® carries a claim against rotavirus that First Defense® does not currently carry. First Defense® is priced at a premium to Calf-Guard®. 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 the vaccine product. There is no nutritional benefit to withholding milk from calves. In contrast, we encourage the feeding of four quarts of high quality colostrum immediately after birth when dosing a calf with First Defense®, which is standard practice for good calf health. Because the antibodies in First Defense® would likely work to inactivate a modified-live 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. We believe that this precaution should be required on the Calf-Guard® label to prevent inactivation of that product by First Defense® or colostrum.
Elanco Animal Health (a division of Eli Lilly and Company) and Boehringer Ingelheim also sell directly competitive products. The Elanco product (Bovine Ecolizer® + C20) was acquired through Elanco’s January 2015 acquisition of Novartis Animal Health and carries claims to prevent scours in newborn calves caused by E. Coli and Clostridium perfringens. We also compete for market share against a Boehringer Ingelheim product (Bar-Guard-99™). This product carries claims to prevent scours in newborn calves caused by E. coli. These latter two products are both derived from equine serum in contrast to the bovine colostrum used for First Defense®. Equine antibodies are less efficiently absorbed into the bloodstream, so fewer antibodies are re-secreted for additional protection.
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.
| 8 |
ImmuCell Corporation
Market research that we have access to suggests that we captured approximately 37% of the market comprised of the four leading scours preventatives given orally to newborn calves during 2016. This estimate is down from 39% during 2015 and up from 33% during 2014. This market share estimate has increased from 22% during 2012 and 26% during 2013 as the total market size has steadily increased. We will begin tracking the market share of the new Merck product during 2017.
First Defense® also competes against scours vaccines sold by Zoetis and Merck that are given to the dam (mother cow) to increase her production of antibodies that can then be transferred through her colostrum to the calf. 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 guaranteed dose of antibodies in First Defense® provides more consistent protection than such vaccine products.
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, managerial and sales personnel, to develop proprietary technologies and products, to obtain USDA or FDA approval 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.
Patents, Proprietary Information and Trademarks
In 2004, we were issued U.S. Patent No. 6,794,181 entitled “Method of Purifying Lantibiotics” covering a manufacturing process for Drug Substance (pharmaceutical-grade Nisin). 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. Instead, we have sought (and may seek in the future) to maintain the confidentiality of any relevant proprietary technology through operational measures and contractual agreements.
We have registered certain trademarks with the U.S. Patent and Trademark Office in connection with the sale of our products. We own federal trademark registrations of the following trademarks: ImmuCell; First Defense®, our calf scours preventive product, Mast Out®, our mastitis treatment product under development, Your Calf Crew®, a term used to describe our sales team and First Defense Technology®, the product name we use for line extensions of First Defense® without disease claims. We utilize the trademark Immediate Immunity™ in connection with the marketing of our products, and we intend to apply to register this mark and related design during 2017. The FDA has determined that the name Mast Out® is overly promotional. Rather than continuing an appeal of this decision, we have decided to select a new product name before market launch. During the first quarter of 2017, we sold our registered trademarks related to Wipe Out® Dairy Wipes when we discontinued that product line.
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 (Center for Veterinary Biologics). We have received USDA and Canadian Food Inspection Agency approval for First Defense®. Mast Out® is regulated by the FDA, Center for Veterinary Medicine, which regulates veterinary drugs. Regulations in the European Union will likely require that Mast Out® 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. The manufacture of Wipe Out® Dairy Wipes also was regulated by the FDA. 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.
| 9 |
ImmuCell Corporation
Employees
We currently employ 45 employees (including 6 part-time employees). Approximately 26.5 full-time equivalent employees are engaged in manufacturing operations, 7.5 full-time equivalent employees in sales and marketing, 3.5 full-time equivalent employees in product development activities and 4.5 full-time equivalent employees in finance and administration. At times, manufacturing personnel are also utilized, as needed, in the production of clinical material for use in product development. All of our employees are required to execute non-disclosure, non-compete and invention assignment 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.
Projection of net income: 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 First Defense® or extended shortfalls in production relative to the growing product sales demand could lead to less profits or an operating loss. Large investments in product development (or cost overruns) can result in a net loss. We have been profitable since the second half of 2014 and expect this trend to continue.
Reliance on sales of First Defense®: We are heavily reliant on the market acceptance of First Defense® to generate product sales and fund our operations (including part of the construction and equipment costs of our Nisin production plant to support the commercialization of Mast Out®). Our business would not have been profitable during the nine consecutive years in the period ended December 31, 2007, or during the years ended December 31, 2012, 2013, 2015 and 2016 without the gross margin that we earned on sales of First Defense®, which accounted for 93% of our product sales during the years ended December 31, 2016 and 2015.
Product risks generally: The sale of our products is subject to financial, efficacy, regulatory, competitive and other market risks. Elevated standards to achieve and maintain regulatory compliance required to sell our products continue to evolve. 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.
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 principally 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 First Defense®: 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. 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 First Defense® 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. We expect to be subject to similar regulatory risks for our anticipated rotavirus claim, and similar regulatory oversight risks exist in territories outside of the United States where we sell our products.
| 10 |
ImmuCell Corporation
Regulatory requirements for Wipe Out®Dairy Wipes: While the FDA regulates the manufacture and sale of Wipe Out®Dairy Wipes, this type of product is permitted to be sold without NADA approval, in accordance with the FDA’s Compliance Policy Guide 7125.30 (“Teat Dips and Udder Washes for Dairy Cows and Goats”). The manufacture of Wipe Out®Dairy Wipes is subject to Part 211 of the cGMP regulations. As a result, our operations are subject to inspection by the FDA. During the second quarter of 2007, the FDA inspected our facilities and operations and issued a Warning Letter to us, citing deficiencies in specific areas of the cGMP regulations. We filed an initial response to the FDA during the second quarter of 2007, and we responded to a request for additional information during the second quarter of 2008. During the first quarter of 2013, the FDA again inspected our facilities and operations. The report from this inspection was favorable, and we responded to the few, minor observations that were noted. During the third quarter of 2016, the FDA inspected our facilities and operations again. The report from this inspection noted five observations. We submitted our responses to the observations that were noted, and subsequently were informed that the FDA had closed its inspection. During the first quarter of 2017, we discontinued the manufacture and sale of this product, which reduces our exposure to an adverse action by the FDA in this respect to a minimal level.
Regulatory requirements for Mast Out®: The commercial introduction of Mast Out® in the United States will require us to obtain FDA approval for this product. Completing the development of Mast Out® through to the submission of the administrative NADA to the FDA involves risk. While three Technical Sections have been approved and the Human Food Safety Technical Section is near completion, the development process timeline has been extensive (17 years) and has involved multiple commercial production strategies. As such, the Chemistry, Manufacturing and Controls Technical Section has not yet been submitted for the Nisin Drug Substance or the Drug Product. To reduce the risk associated with this process, we have met with the FDA on multiple occasions to align on filing strategy and requirements. We have disclosed a timeline of events that could lead to approval during 2019. We are exposed to additional regulatory compliance risks through the subcontractors that we choose to work with to produce Mast Out®, 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, such as Canada. European regulatory authorities are not expected to approve a product with a zero milk discard claim, which would remove a significant competitive advantage of Mast Out® in that territory. However, the assigned milk discard period may be shorter for Mast Out® than it is for other products on the market in Europe.
Concentration of sales: Approximately 99% and 97% of our product sales were made to customers in the dairy and beef industries throughout the world during the years ended December 31, 2016 and 2015, respectively. Approximately 85% and 83% of our product sales were made to customers in the U.S. dairy and beef industries during the years ended December 31, 2016 and 2015, respectively. A large portion of our product sales (60% and 62% during the years ended December 31, 2016 and 2015, respectively) was made to two large distributors. A large portion of our trade accounts receivable (64% and 52% as of December 31, 2016 and 2015, 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.
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 to 89,100,000 as of January 1, 2015 and to 91,900,000 as of January 1, 2016. The U.S. cattle inventory as of January 1, 2017 totaled 93,600,000, which is 1.8% higher than January 1, 2016 |
| ● | From 1998 through 2016, the size (annual average) of the U.S. dairy herd ranged from approximately the low of 9,011,000 (2004) to the high of 9,332,000 (2016). The 2016 level exceeded the previous high during this nineteen-year period of 9,317,000 in 2015. |
| 11 |
ImmuCell Corporation
| ● | While the number of cows in the U.S. herd and the production of milk per cow directly influence the supply of milk, demand for milk is also influenced by very volatile international demand for milk products. 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) for 2014 of $22.34 (peaking at $24.60 in September 2014) was the highest level since these prices were first reported in 1980. This strong price level declined to the average of $15.80 during 2015 and further declined to $14.87 during 2016. However, the average during the three-month period ended January 31, 2017 was $16.98. 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, |
Increase (Decrease) | ||||||||||
| 2012 | 2013 | ||||||||||
| $ | 17.44 | $ | 17.99 | 3 | % | ||||||
| 2013 | 2014 | ||||||||||
| $ | 17.99 | $ | 22.34 | 24 | % | ||||||
| 2014 | 2015 | ||||||||||
| $ | 22.34 | $ | 15.80 | (29 | %) | ||||||
| 2015 | 2016 | ||||||||||
| $ | 15.80 | $ | 14.87 | (6 | %) | ||||||
| ● | 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. The annual average for this ratio of 1.52 in 2012 was the lowest recorded since this ratio was first reported in 1985. The highest annual average this ratio has reached since 1985 was 3.64 in 1987. 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 dropped to an annual average of 2.12 during 2015 and increased to 2.24 during 2016. 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, |
Increase (Decrease) | ||||||||||
| 2012 | 2013 | ||||||||||
| 1.52 | 1.75 | 15 | % | ||||||||
| 2013 | 2014 | ||||||||||
| 1.75 | 2.54 | 45 | % | ||||||||
| 2014 | 2015 | ||||||||||
| 2.54 | 2.12 | (16 | %) | ||||||||
| 2015 | 2016 | ||||||||||
| 2.12 | 2.24 | 6 | % | ||||||||
| ● | An increase in feed costs also has a negative impact on the beef industry. Widespread severe drought conditions in key U.S. agricultural regions during 2012 drove feed costs higher and the inventory of all cattle and calves lower. The positive trend in these market indices during 2013 and 2014 resulted in an increase in the value of milk cows. The 2014 annual average price for a milk cow increased by 32% to $1,835 in comparison to 2013. Previously, this annual average price since 1970 was only higher when it reached $1,840 in 2007 and $1,953 in 2008. This annual average price for 2015 increased by 9% to $1,993 in comparison to 2014, but this average price has declined by 11% to $1,768 during 2016. The industry data referred to above is compiled from USDA databases. 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 Mast Out®) into the dairy market. |
| 12 |
ImmuCell Corporation
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 Mast Out®, which requires (and will continue to require) a substantial investment. Our efforts will be subject to inspection and approval by the FDA. There is no assurance whether or when we will obtain all of the data necessary to support regulatory approval for this product.
Risks associated with Mast Out® funding strategy: The construction of and the financing for the commercial-scale Nisin production plant is the most critical action in front of us on our path to U.S. regulatory approval for Mast Out®. We believe our current cash and investments, together with the available debt facility of up to approximately $6.5 million and cash to be generated from operations, will be adequate financing to complete the project. However, due to the risks described herein, we could fail to generate sufficient cash to fully fund that project, and we could experience cost overruns or delays. We will not know whether we will receive the necessary regulatory approvals to manufacture and sell Mast Out®, or whether the product will achieve market acceptance and profitability, until after we have completed construction of the production facility described elsewhere in this report, at the presently estimated cost of $20 million. Absent sufficient sales of this new product at a profitable gross margin, we would be required to fund all debt service costs from sales of First Defense® which would reduce our expected profitability going forward.
Uncertainty of market size and product sales estimates: Estimating the size of the market for Mast Out® is subject to numerous uncertainties. Some of the uncertainties surrounding our product 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, cost of manufacture and integration of milk from treated cows with susceptible cheese starter cultures.
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 capabilities than we do, including greater ability to withstand adverse economic or market conditions and declining revenues and/or profitability. Zoetis, Elanco, Boehringer Ingelheim and Merck, among other companies, sell products that compete directly with First Defense® in preventing scours in newborn calves. The product sold by Elanco (which has a similar selling price to our product) experienced a lack of supply in the market during late 2014 and into the middle of 2015 but returned to the market in the latter part of 2015 and has regained a significant portion of the market share it had lost during this period. The product sold by Zoetis does carry a rotavirus claim (which we do not yet have), but it does not have an E. coli claim (which we do have), and it sells for approximately half the price of our product. The market for the treatment of mastitis in dairy cows is highly competitive, and presently is dominated by large companies such as Zoetis, Merck and Boehringer Ingelheim. There is no assurance that Mast Out®will compete successfully in this market. 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: Our policy 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. The loss of farms from which we buy raw material for First Defense® could make it difficult for us to produce enough inventory. We are dependent on our manufacturing facility and operations in Portland, Maine for the production of First Defense® and will be dependent on the facility we are constructing in Portland for the production of Mast Out® when that product begins commercial sales. The specific antibodies that we purify from colostrum for First Defense® are not readily available from other sources. We are dependent on Nordson Corporation (formerly Plas-Pak Inc.) for the supply of the syringes used for our gel tube format of First Defense Technology® and expect to be dependent on this company for the supply of the syringes for Mast Out®. The supply contract covering the Mast Out® syringes would need to be extended past December 31, 2020 unless an alternative supplier is identified. We expect to be dependent on Norbrook for the sterile-filling and final packaging of our Drug Substance into Drug Product. We are evaluating alternative sources for these services for potential use post-approval. Given the requirement that such a facility be inspected and approved by the FDA, it could be costly and time-consuming to find and qualify an adequate alternative source for these services. Any significant damage to or other disruption in the services at any of these third party or company-owned facilities (including due to regulatory non-compliance) could adversely affect the production of inventory and result in significant added expenses and loss of future sales.
| 13 |
ImmuCell Corporation
Small size; dependence on key personnel: We are a small company with 45 employees (including 6 part-time employees). As such, we rely on certain key employees to support different 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. 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. 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.
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. 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.
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.
Cost burdens of our reporting obligations as a public company: Operating a public company involves substantial costs 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 global economic crisis: The U.S. economy has come out of a recession, which was caused principally by the housing, credit and financial crises that began around 2008. However, such recent positive indications could prove temporary and further downturn could occur. The credit markets continue to be very turbulent and uncertain. 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. Interest rates are trending higher, and a significant portion of our bank debt currently bears interest at variable rates. This extraordinary period of instability in the U.S. economy and the financial markets has been troubling for nearly all Americans. The European economy remains sluggish and precarious. Certain emerging markets also show signs of slower growth or, in some areas, downturns in economic performance. While we do price our products in U.S. dollars for all export markets, the strength of the dollar against weakening foreign currencies could reduce product demand in international markets. 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 international markets.
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. First Defense® is considered a veterinary medicine rather than a feed ingredient, and it 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 First Defense®, although presently we do not anticipate that this will be the case.
| 14 |
ImmuCell Corporation
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.
Stock market valuation: Our common stock trades on The Nasdaq Stock Market (NasdaqCM: ICCC). Our average daily trading volume (although it has increased recently) is lower than the volume for most other companies and the bid/ask stock price spread can be larger, which could result in investors facing difficulty selling their stock for proceeds that they may expect or desire. There are companies in the animal health sector with market capitalization values that greatly exceed our current market capitalization of approximately $27,000,000 as of March 20, 2017. Some of these companies have little or no product sales. We currently have annual product sales of almost $10,000,000. 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.
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 facility and production equipment and to reduce debt. Stockholders must be prepared to rely on 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.
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 nearby to our facility at 56 Evergreen Drive for a total purchase price of $278,000 on which we initiated construction of our Nisin production plant for Mast Out® during the third quarter of 2016.
During the first quarter of 2016, we paid $20,500 for an option to purchase additional land nearby to the Nisin production plant. We allowed this option to expire as of December 31, 2016 and applied the option amount to the purchase of a 4,114 square foot facility adjacent to the Nisin production plant, during the first quarter of 2017, for $445,000, net of the option payment. We intend to use the warehouse space primarily for storage of inventory, materials and equipment.
We rented approximately 640 square feet of office and warehouse space in New York to support our farm operations. During the first quarter of 2017, we exited this property and entered into a renewable, two-year lease for approximately 1,350 square feet of office, warehouse and garage space nearby.
During 2016, we rented approximately 3,266 square feet in Minnesota on a short-term basis, where we formulated our gel tube delivery format of First Defense Technology® and certain private label products. This lease expired during the first quarter of 2017, and we no longer utilize this space. The manufacturing of this product line was successfully transferred to the Portland facility during the first quarter of 2017.
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, through contractual relationships with commercial dairy farms.
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
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ImmuCell Corporation
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 20, 2017, we had 10,000,000 common shares authorized and 4,848,390 common shares outstanding, and there were approximately 850 shareholders of record. The last sales price of our common stock on March 20, 2017 was $5.52 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, 2015 through December 31, 2016:
| 2015 | 2016 | |||||||||||||||||||||||||||||||
| 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 | $ | 7.22 | $ | 8.69 | $ | 11.40 | $ | 7.80 | $ | 8.29 | $ | 7.38 | $ | 8.24 | $ | 7.99 | ||||||||||||||||
| Low | $ | 4.99 | $ | 5.50 | $ | 5.95 | $ | 6.03 | $ | 5.60 | $ | 5.62 | $ | 6.46 | $ | 4.76 | ||||||||||||||||
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, 2016 or that could be granted in the future:
Number
of shares to be issued upon exercise of outstanding | Weighted-average exercise price of outstanding options | Number of shares | ||||||||||
| Equity compensation plans approved by stockholders | 251,000 | $ | 3.89 | 155,500 | ||||||||
| Equity compensation plans not approved by stockholders | - | - | - | |||||||||
| Total | 251,000 | $ | 3.89 | 155,500 | ||||||||
ITEM 6 – SELECTED FINANCIAL DATA
You should read the following consolidated financial data in connection 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 statements of operations and statements of cash flows data for the years ended December 31, 2016 and 2015, and the balance sheet data as of December 31, 2016 and 2015 from our audited financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K. We derived the statements of operations and statements of cash flows data for the years ended December 31, 2014, 2013, and 2012, and the balance sheet data as of December 31, 2014, 2013, and 2012, 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.
| During the Years Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Product sales | $ | 9,544 | $ | 10,229 | $ | 7,597 | $ | 6,007 | $ | 5,390 | ||||||||||
| Gross margin | 5,421 | 6,251 | 4,449 | 3,061 | 3,054 | |||||||||||||||
| Product development expenses | 1,244 | 1,235 | 2,179 | 1,154 | 918 | |||||||||||||||
| Selling and administrative expenses | 3,286 | 2,893 | 2,476 | 1,926 | 1,892 | |||||||||||||||
| Net operating income (loss) | 890 | 2,122 | (206 | ) | (20 | ) | 245 | |||||||||||||
| Income (loss) before income taxes | 758 | 2,064 | (255 | ) | 205 | 192 | ||||||||||||||
| Interest expense | 162 | 84 | 58 | 67 | 75 | |||||||||||||||
| Depreciation and amortization expenses | 811 | 529 | 449 | 417 | 403 | |||||||||||||||
| Net income (loss) | $ | 508 | $ | 1,213 | $ | (167 | ) | $ | 117 | $ | 90 | |||||||||
| 16 |
ImmuCell Corporation
| During the Years Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Per Common Share: | ||||||||||||||||||||
| Basic net income (loss) | $ | 0.12 | $ | 0.40 | $ | (0.06 | ) | $ | 0.04 | $ | 0.03 | |||||||||
| Diluted net income (loss) | $ | 0.12 | $ | 0.38 | $ | (0.06 | ) | $ | 0.04 | $ | 0.03 | |||||||||
| Cash dividend | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Statement of Cash Flows Data: | ||||||||||||||||||||
| Net cash provided by (used for) operating activities | $ | (324 | ) | $ | 2,900 | $ | 302 | $ | 1,099 | $ | 344 | |||||||||
| As of December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash, cash equivalents, short-term investments and long-term investments | $ | 10,624 | $ | 6,534 | $ | 3,835 | $ | 5,255 | $ | 4,914 | ||||||||||
| Total assets | 24,697 | 14,540 | 11,052 | 10,961 | 11,030 | |||||||||||||||
| Net working capital | 12,289 | 7,087 | 4,460 | 6,632 | 6,697 | |||||||||||||||
| Stockholders’ equity | $ | 19,722 | $ | 10,614 | $ | 9,258 | $ | 9,396 | $ | 9,195 | ||||||||||
| Per Outstanding Common Share: | ||||||||||||||||||||
| Cash, cash equivalents, short-term investments and long-term investments | $ | 2.19 | $ | 2.14 | $ | 1.27 | $ | 1.74 | $ | 1.63 | ||||||||||
| Stockholders’ equity | $ | 4.07 | $ | 3.47 | $ | 3.06 | $ | 3.11 | $ | 3.05 | ||||||||||
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations 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. You should review Part I, Item 1A“Risk Factors” of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Liquidity and Capital Resources
We have funded most of our product development expenses principally from our gross margin on product sales. As anticipated, we incurred a net loss during the year ended December 31, 2014 due to an unusually large investment in a pilot plant for Mast Out®. After completing this investment, we did return to profitability, as planned, during the six-month period ended December 31, 2014 and continued this profitability during 2015 and 2016. The table below summarizes the changes in selected, key accounts (in thousands, except for percentages):
| As of December 31, | As of December 31, | Increase | ||||||||||||||
| 2016 | 2015 | Amount | % | |||||||||||||
| Cash, cash equivalents, short-term investments and long-term investments | $ | 10,624 | (1) | $ | 6,534 | $ | 4,091 | 63 | % | |||||||
| Net working capital | $ | 12,289 | $ | 7,087 | $ | 5,202 | 73 | % | ||||||||
| Total assets | $ | 24,697 | $ | 14,540 | $ | 10,157 | 70 | % | ||||||||
| Stockholders’ equity | $ | 19,722 | $ | 10,614 | $ | 9,108 | 86 | % | ||||||||
| Common shares outstanding | 4,847 | 3,055 | 1,792 | 59 | % | |||||||||||
| (1) | This cash balance does not include approximately $343,000 being held temporarily in escrow against certain construction performance requirements related to our production facility for Mast Out®. |
Net cash (used for) operating activities amounted to ($324,000) during the year ended December 31, 2016 in comparison to net cash provided by operating activities of $2.9 million during the year ended December 31, 2015. Capital investments totaled $3.6 million during the year ended December 31, 2016 compared to capital investments of $2.7 million during the year ended December 31, 2015. As we progress our investment in the Nisin production facility, described below, we expect these investments of cash to increase. Together with gross margin earned from ongoing product sales, we believe that we have sufficient capital resources to meet our working capital requirements and to finance our ongoing business operations during at least the next twelve months.
| 17 |
ImmuCell Corporation
During the third quarters of 2010 and 2015, we agreed to terms of certain credit facilities with TD Bank, N.A., which are secured by substantially all of our assets including our building, which was independently appraised at $4.2 million in connection with the 2015 financing. As of December 31, 2016, our outstanding bank debt balance was approximately $3 million. We have a $500,000 line of credit that is available as needed through August 29, 2017 and subject to extension by the bank after that date. There was no balance outstanding under this line of credit as of December 31, 2016. These credit facilities are subject to certain financial covenants. We are in compliance with all applicable covenants as of December 31, 2016.
During the first quarter of 2016, we entered into two bank debt agreements covering certain additional credit facilities with TD Bank N.A. aggregating up to approximately $4.5 million. During the first quarter of 2017, we amended these agreements to increase the total amount of debt available up to approximately $6.5 million and to make certain other modifications. As of March 20, 2017, we had not drawn proceeds under either of these credit facilities. These credit facilities are subject to certain financial covenants and are secured by substantially all of our assets. We are in compliance with all applicable convenants as of December 31, 2016. At this point, we anticipate that we may draw funds under these loans beginning during the second quarter of 2017.
During the first and fourth quarters of 2016, we issued an aggregate of approximately 1.8 million shares of common stock, raising net proceeds of approximately $8.5 million in two separate transactions.
During the third quarter of 2016, we initiated construction of our Nisin production facility for Mast Out®. The estimated total cost of the Nisin facility is approximately $20 million. Expenditures on this project are heavily weighted to the nine-month period ending September 30, 2017. We expect to fund remaining costs in excess of our current cash and investments with cash to be generated from operations during 2017 to 2018 and borrowings under the credit facilities described above. These costs are being capitalized on our balance sheet as construction in progress. Depreciation of these costs is expected to begin when the facility is placed into service, which could be before FDA approval of the product is achieved. The following table details the amount and timing of the expected investment:
| Period | Amount | |||
| Year ended December 31, 2016 | $ | 3,280,000 | (1) | |
| Estimated investment required to complete | 16,720,000 | (2) | ||
| Estimated total investment | $ | 20,000,000 | (3) | |
| (1) | Approximately $1,200,000 of this amount was capitalized as of December 31, 2016 but not paid until 2017. |
| (2) | We expect most of this investment to be disbursed during the nine-month period ending September 30, 2017. Approximately $12,320,000 of this amount was committed to vendors as of December 31, 2016. |
| (3) | This budget estimate does not include approximately $278,000 that was invested in land for the facility, which was acquired during the fourth quarter of 2015. |
During the third quarter of 2016, the City of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces our real estate taxes on the Nisin production facility for Mast Out® that we are constructing by 65% over the eleven-year period ending June 30, 2028 and by 30% during the year ending June 30, 2029, at which time the rebate expires. The TIF is still subject to standard approvals by the State’s Department of Economic and Community Development. The aggregate financial benefit was originally estimated to be approximately $400,000 based on the then current $3 million building cost estimate calculated during 2015 before the detailed design work and construction bidding was complete. Significant process-directed requirements to the building have since increased the estimated construction costs to approximately $11 million. We believe the cost per square foot as currently estimated for a facility of this purpose is competitive and that the increase is largely the result of the preliminary engineering estimate from 2015 for a building shell being for much less of a structure that would not have satisfied our regulatory and Nisin production capacity needs. The value of the tax savings would increase in proportion to the increase in the cost of the building as assessed for city real estate tax purposes. The actual savings will be based on the assessed value of the building after construction is complete, which is likely to be less than its cost of construction.
| 18 |
ImmuCell Corporation
During the early part of 2015, we invested $644,000 to complete a 7,100 square foot addition to our Portland facility, providing cold storage, production and warehouse space required to increase our manufacturing capacity. Construction of the facility addition was initiated at the end of the third quarter of 2014. The total cost of this project was $1,914,000. We completed an investment to increase our liquid processing capacity by 50% during the fourth quarter of 2015 and an investment to increase our freeze-drying capacity by 100% at the end of the first quarter of 2016. During 2015, we invested $1,379,000 in these production capacity increases and $430,000 in other capital expenditures. During 2016, we invested $1,161,000 to complete these production capacity increases and $345,000 in other capital expenditures.
Our capital expenditure investments from 2014 to 2016 were larger than our historical norm. As of January 1, 2017, we had additional authorization from our Board of Directors to spend up to approximately $150,000 for new manufacturing equipment and other routine and necessary capital expenditures, which does not include the $20 million budget for the Nisin production plant described above.
Results of Operations
2016 Compared to 2015
Product Sales
Product sales for the year ended December 31, 2016 decreased by 7%, or $685,000, to $9,544,000 from $10,229,000 during 2015. During the year ended December 31, 2016, domestic product sales decreased by 4%, or $311,000, and international sales decreased by 23%, or $374,000, in comparison to 2015. Financial results for 2016 were impacted by the return to the market of a competitive product that was largely off the market from late 2014 to the middle of 2015. We believe that our increased investment in sales and marketing personnel and efforts is helping us introduce First Defense® to new customers, despite significant market volatility affecting both milk prices and feed costs. Product sales during 2015 and into the early part of 2016 benefited from relatively strong prices of milk, cows and calves as well as a stable to moderately lower cost of feed. Market conditions in the dairy and beef industries, including milk pricing and prices for bull calves, weakened during 2016 in comparison to 2015. This new level sales demand for First Defense® exceeded our production capacity and available inventory. As of December 31, 2015, we had a backlog of orders that aggregated approximately $381,000 in comparison to no backlog as of December 31, 2016 or 2014. We completed the investments necessary to increase our liquid processing capacity by 50% during the fourth quarter of 2015 and our freeze drying capacity by 100% during the first quarter of 2016 to meet the growing sales demand for First Defense®, enabling us to build back target inventory levels during the fourth quarter of 2016. The prolonged period of order backlog (which began early in 2015 and extended through the middle of 2016) disrupted normal shipping patterns. The manufacturing issues that impacted our performance during 2015 and 2016 are behind us. Despite lower sales during 2016, revenue since 2012 has grown at a 15.4% compounded annual rate.
Our lead product, First Defense®, continues to benefit from wide acceptance by dairy and beef producers as an effective tool to prevent bovine enteritis (scours) in newborn calves. Sales of the First Defense® product line aggregated 92.9% and 92.8% of our total product sales during the years ended December 31, 2016 and 2015, respectively. Sales of the First Defense® product line decreased by 7% during the year ended December 31, 2016 in comparison to 2015. Domestic sales of the First Defense® product line decreased by 6%, and international sales decreased by 9%, during the year ended December 31, 2016 in comparison to 2015. We have realized positive sales growth of First Defense® and related product line extensions for twenty-one of the last twenty-five quarters, in comparison to the same quarters of the prior year.
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. Our sales and marketing team currently consists of one vice president, five regional managers and one inside sales and marketing employee. We launched a new communications campaign at the end of 2010 that continues to emphasize how the unique ability of First Defense® to provide Immediate Immunity™ generates a dependable and competitive return on investment for dairy and beef producers. Preventing newborn calves from becoming sick helps them to reach their genetic potential.
| 19 |
ImmuCell Corporation
Competition for resources that dairy producers allocate to their calf enterprises has been increased by the many new products that have been introduced to the calf market. Our sales are normally seasonal, with higher sales expected during the first quarter. Warm and dry weather reduces the producer’s perception of the need for a disease preventative product like First Defense®, but heat stress on calves caused by extremely hot summer weather can increase the incidence of scours. Harsher winter weather benefits our sales. The animal health distribution segment has been aggressively consolidating over the last few years. Larger distributors have been acquiring smaller distributors.
We are selling new product applications of First Defense® under the description First Defense Technology®, which is a unique whey protein concentrate that is processed utilizing our proprietary colostrum (first milk) protein purification methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed product. Through our First Defense Technology®, we are selling concentrated whey proteins in different formats. During the first quarter of 2011, we initiated sales of First Defense Technology® in a bulk powder format (no capsule), which is delivered with a scoop and mixed with colostrum for feeding to calves. We are working to achieve USDA claims for this product format during 2018. During the fourth quarter of 2011, Milk Products, LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra Start® 150 Plus and certain similar private label products, which are colostrum replacers with First Defense Technology® Inside. During the first quarter of 2012, we initiated a limited launch of a tube delivery format of our First Defense Technology® in a gel solution. We are working to achieve USDA claims for this product format during the second half of 2017.
We generally held our product selling prices without increase during the seven-year period ended December 31, 2007. During the first quarter of 2008, we implemented a modest increase to the selling price of First Defense®. We did not implement another price increase until the third quarter of 2014. During 2015, we implemented an increase of approximately 10% to the selling price of the gel tube format of First Defense Technology®. During 2016, we implemented a price increase of approximately 5% for First Defense®. This strategy recognizes that while selling a premium-priced product, we must be very efficient with our manufacturing costs to maintain a healthy gross margin.
Sales of products other than First Defense® aggregated 7% of our total product sales during the years ended December 31, 2016 and 2015. Since 1999, we have been selling Wipe Out® Dairy Wipes (our second leading source of product sales prior to 2017) for use in preparing the teat area of a cow for milking. We believe that sales growth potential for Wipe Out® Dairy Wipes is limited. During the first quarter of 2013, we initiated sales of Nisin-based wipes for pets in a 120-count canister (Preva™ wipes) to Bayer HealthCare Animal Health of St. Joseph, Missouri for commercial sales to pet owners. Sales of our Nisin-based topical wipes aggregated approximately $350,000 during the year ended December 31, 2016, a 2% increase over 2015. The topical wipes product line contributed very little to our profits. During the first quarter of 2017, we discontinued the production and sale of this product line. In connection therewith, we wrote off $38,000 worth of fixed assets and recognized $45,000 from the sale of certain other fixed assets and product rights, resulting in a net gain of $7,000. Sales of several other private label products that we acquired in connection with our January 2016 acquisition of certain gel formulation technology (our third leading source of animal health product sales) aggregated 2% of our total product sales during the year ended December 31, 2016. During the fourth quarter of 2016, we shut down the manufacturing site in Minnesota that had been used to produce these products and moved these operations to our Portland, Maine facility. We expect to realize reduced labor and overhead expenses and benefit from certain other operating efficiencies as a result of this consolidation. In connection therewith, we wrote off $34,000 worth of fixed assets and recognized $7,000 from the sale of certain other fixed assets, resulting in a net loss of $27,000. Sales of our California Mastitis Test (CMT) (our fourth leading source of animal health product sales) decreased by 20% during the year ended December 31, 2016 in comparison to the same period during 2015. We make and sell bulk reagents for Isolate™ (formerly known as Crypto-Scan®), which is a drinking water test that is sold by our distributor in Europe. No sales of these bulk reagents were recorded during 2016. Sales of these bulk reagents aggregated slightly more than 2% of total product sales during the year ended December 31, 2015.
| 20 |
ImmuCell Corporation
Gross Margin
Changes in the gross margin on product sales are summarized in the following table for the respective periods (in thousands, except for percentages):
| For the Years Ended December 31, | (Decrease) | |||||||||||||||
| 2016 | 2015 | Amount | % | |||||||||||||
| Gross margin | $ | 5,421 | $ | 6,251 | $ | (830 | ) | (13 | %) | |||||||
| Percent of product sales | 57 | % | 61 | % | (4 | %) | (7 | %) | ||||||||
The gross margin as a percentage of product sales was 57% and 61% during the years ended December 31, 2016 and 2015, respectively. This compares to gross margin percentages of 59% and 51% during the years ended December 31, 2014 and 2013, respectively. Our objective for the foreseeable future is to maintain the gross margin percentage over 55%, and we have achieved this annual objective since 2014. Largely due to the significant increase in product sales experienced especially during the second half of 2014, our inventory balance was reduced to $946,000 as of December 31, 2014. As sales continued to increase during 2015, our inventory balance was further reduced to $870,000 as of December 31, 2015. During the first quarter of 2016, we completed an investment to increase our production capacity to build inventory levels and catch up with growing sales. This allowed us to increase our inventory balance to $2,127,000 as of December 31, 2016. A number of factors account for the variability in our costs, resulting in some fluctuations in gross margin percentages from quarter to quarter. The gross margin on First Defense® is affected by biological yields from our raw material, which do vary over time. Like most U.S. manufacturers, we have been experiencing increases in the cost of raw materials that we purchase. The costs for production of First Defense® and Wipe Out® Dairy Wipes have increased due to increased labor costs and other expenses associated with our efforts to sustain compliance with cGMP regulations in our production processes. We have been able to minimize the impact of these cost increases by implementing yield improvements. Product mix also affects gross margin in that we earn a higher gross margin on First Defense® and a much lower gross margin on Wipe Out® Dairy Wipes.
Product Development Expenses
During the eighteen-year period that began January 1, 1999 (the year we first re-focused our business strategy on First Defense® and other products for the dairy and beef industries) and ended on December 31, 2016, we invested the aggregate of approximately $23,229,000 in product development expenses, averaging approximately $1,290,000 per year during this period. Approximately $4,130,000 of this investment was offset by product licensing revenues, technology sales and grant income. During the seventeen-year period that began on January 1, 2000 (the year we began the development of Mast Out®) and ended on December 31, 2016, we invested the aggregate of approximately $12,409,000 in the development of Mast Out®. This estimated allocation to Mast Out® reflects only direct expenditures and includes no allocation of product development or administrative overhead expenses. Approximately $2,891,000 of this investment was offset by product licensing revenues and grant income related to Mast Out®. Product development expenses increased by less than 1%, or $9,000, to $1,244,000 during the year ended December 31, 2016, as compared to $1,235,000 during 2015. Product development expenses aggregated 13% and 12% of product sales during 2016 and 2015, respectively. The balance of our efforts have been primarily focused on other improvements, extensions or additions to our First Defense® product line, including the potential to prevent scours in calves caused by pathogens other than those within the current First Defense® disease claims (E. coli K99 and coronavirus) such as rotavirus. We also remain interested in acquiring other new products and technologies that fit with our sales focus on the dairy and beef industries.
Sales and Marketing Expenses
Sales and marketing expenses increased by approximately 14%, or $224,000, to $1,831,000 during the year ended December 31, 2016, as compared to $1,607,000 during 2015, increasing to 19% of product sales in 2016 from 16% in 2015. 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 First Defense® sales. Our current budgetary objective in 2017 is to invest up to 18% of product sales in sales and marketing expenses on an annual basis.
| 21 |
ImmuCell Corporation
Administrative Expenses
Administrative expenses increased by approximately 13%, or $168,000, to $1,455,000 during the year ended December 31, 2016 as compared to $1,286,000 during 2015. We strive to be efficient with these expenses while funding costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more actively managed investor relations program. Additionally, 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. Additional information about us is available in our annual Proxy Statement. All of these reports are filed with the SEC and are available on-line or upon request to the Company.
Net Operating Income (Loss)
Our net operating income during the year ended December 31, 2016 of $890,000 was $1,232,000 less than the net operating income of $2,122,000 during 2015. We have now recorded positive net operating income for ten consecutive quarters. We recorded a net operating (loss) of ($206,000) during the year ended December 31, 2014.
Other expenses, net
Interest income increased by approximately 185%, or $35,000, to $55,000 during the year ended December 31, 2016, in comparison to $19,000 during 2015. Interest expense (including amortization of debt issuance costs of approximately $9,000 and $3,000 during the years ended December 31, 2016 and 2015, respectively) increased by approximately 93%, or $78,000, to $162,000 during the year ended December 31, 2016, in comparison to $84,000 during 2015. The 2016 results include a net loss of $27,000 related to our decision to shut down a production site in Minnesota. As a result, other expenses, net, aggregated $132,000 and $59,000 during the years ended December 31, 2016 and 2015, respectively.
Income Before Income Taxes and Net Income
Our income before income taxes of $758,000 during the year ended December 31, 2016 compares to income before income taxes of $2,064,000 during 2015. This decrease is largely attributable to the $830,000 decrease in gross margin and the $402,000 increase in operating expenses. We recorded income tax expense of 33% and 41% of the income before income taxes during the years ended December 31, 2016 and 2015, respectively. The decrease in our tax rate was largely the result of an increase in tax credits. Our net income of $508,000, or $0.12 per diluted share, during the year ended December 31, 2016 compares to net income of $1,213,000, or $0.38 per diluted share, during the year ended December 31, 2015.
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, 2016 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.
| 22 |
ImmuCell Corporation
We sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met. These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii) the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We offer a 50% account credit to domestic distributors on expired First Defense® product that is returned to us past its expiration date, which is generally two years past its date of manufacture. At the time of sale, we estimate returns and record a corresponding liability. We generally have experienced an immaterial amount of product returns.
Inventory includes raw materials, work-in-process and finished goods and are recorded at the lower of standard cost which approximates cost on the first-in, first-out method or market (net realizable value). 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 $1,000,000 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 $2,500,000 mortgage with an interest rate swap agreement that effectively converted a floating interest rate to the fixed rate of 4.38%.
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:
| 23 |
ImmuCell Corporation
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 2, 2016, Baker Newman & Noyes, LLC (BNN) informed us of its decision not to submit a proposal for the Company’s audit services for the year ending December 31, 2016. BNN believes that, in light of our future growth plans, we would be better served by a larger firm which provides these services to companies in our industry that are subject to the periodic reporting requirements of the Securities Exchange Act of 1934. BNN completed its work in auditing the Company’s financial statements as of and for the year ended December 31, 2015 and performed its customary more limited role with respect to a review of the Company’s financial statements as of and for the quarter ended March 31, 2016.
There were no disagreements between the Company and BNN 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 BNN, would have caused BNN to make reference to the subject matter of the disagreements in any of BNN’s reports on the Company’s financial statements, nor were there any “reportable events” as such term is described in Item 304(a)(1)(v) of Regulation S-K. None of such reports contained any adverse opinion or disclaimer of opinion or were qualified or modified as to uncertainty, audit scope or accounting principles.
On May 20, 2016, we engaged RSM US LLP as our Independent Registered Public Accounting Firm for the year ending December 31, 2016. This decision was authorized by the Audit Committee of our Board of Directors and ratified by our Board of Directors. The Audit Committee and the Board of Directors determined that engaging a large, national firm is in the best interest of the Company at this stage in our development.
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, 2016. 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 (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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.
Management 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 assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. Based on management’s assessment and those criteria, management believes that the internal control over financial reporting as of December 31, 2016 was effective.
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. There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None
| 24 |
ImmuCell Corporation
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers of the Company
Our executive officers as of March 20, 2017 were as follows:
MICHAEL F. BRIGHAM (Age: 56, 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 has been a member of the Board of Directors of the United Way of York County since 2012, serving as its Treasurer until June 2016 and is presently Vice Chair of the Board of Directors and Chair of the Governance 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.
BOBBI JO BROCKMANN (Age: 40, Officer since February 2015, Director since March 2017) 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: 62, Officer since 1996, Director since 2001) served as Chair of the Board of Directors from June 2009 to February 2013. He was appointed a Director of the Company in March 2001, having previously served in that capacity during the period from March 1999 until February 2000. Before that, he 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. 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: 61, Officer since April 2016) joined the Company during the second quarter of 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 2017 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, 2016. 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.
| 25 |
ImmuCell Corporation
ITEM 11 – EXECUTIVE COMPENSATION
Information regarding cash compensation paid to our executive officers is incorporated herein by reference to the section of our 2017 Proxy Statement titled “Executive Officer Compensation”, which we intend to file with the Securities and Exchange Commission within 120 days after December 31, 2016.
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 2017 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, 2016.
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 2017 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, 2016.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding our principal accounting fees and services is incorporated by reference to the section of our 2017 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, 2016.
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 | 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). |
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ImmuCell Corporation
| 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 Current Report on Form 8-K filed on April 15, 2015). |
| 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). |
| 10.8 | Commercial Promissory Note for $1,000,000 between the Company and TD Bank, N.A. dated August 13, 2010 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2010). |
| 10.9 | Line of Credit Agreement and Promissory Note for up to $500,000 between the Company and TD Bank, N.A. dated August 13, 2010 (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2010). |
| 10.10(1) | Loan Agreement between the Company and TD Bank, N.A. dated August 13, 2010 (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2010). |
| 10.11 | Mortgage Loan Note for $2,500,000 between the Company and TD Bank, N.A. dated September 21, 2015 (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on September 24, 2015). |
| 10.12 | Amended and Restated Loan Agreement between the Company and TD Bank, N.A. dated September 21, 2015 (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on September 24, 2015). |
| 10.13 | Construction Loan Note for $2,000,000 by the Company in favor of TD Bank N.A. dated March 28, 2016 (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on March 31, 2016). |
| 10.14 | Term Loan Note for $2,500,000 by the Company in favor of TD Bank N.A. dated March 28, 2016 (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on March 31, 2016). |
| 10.15 | Second Amended and Restated Loan Agreement between the Company and TD Bank N.A. dated March 28, 2016 (incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filed on March 31, 2016). |
| 10.16 | Amended and Restated Promissory Note ($2,560,000) given by the Company in favor of TD Bank N.A. dated March 1, 2017. |
| 10.17 | Amended and Restated Promissory Note ($3,940,000) given by the Company in favor of TD Bank N.A. dated March 1, 2017. |
| 10.18 | Amendment to Construction Loan Agreement between the Company and TD Bank N.A. dated March 1, 2017. |
| 27 |
ImmuCell Corporation
| 10.19(1) | Contract Manufacture Agreement between the Company and Norbrook Laboratories Limited dated as of December 17, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 22, 2015). |
| 10.20 | Supply Agreement between the Company and Plas-Pak Industries, Inc. dated as of October 14, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the three-month period ended September 30, 2015). |
| 10.21+ | Incentive Compensation Agreement dated March 6, 2017 between the Company and Bobbi Jo Brockmann (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed on March 8, 2017). |
| 10.22+ | Incentive Compensation Agreement dated March 6, 2017 between the Company and Elizabeth L. Williams (incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filed on March 8, 2017). |
| 10.23 | Standard Form of Agreement between the Company and Consigli Construction Co. dated September 27, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the three-month period ended September 30, 2016). |
| 10.24 | Mortgage Loan Note for $340,000 given by the Company in favor of TD Bank N.A. dated March 16, 2017. |
| 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). |
| 16.1 | Letter from Baker Newman & Noyes, LLC to the Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K filed on March 7, 2016). |
| 23 | Consent of Baker Newman & Noyes, LLC. |
| 23.1 | 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.
| (1) | Confidential treatment as to certain portions has been requested, which portions have been omitted and filed separately with the Securities and Exchange Commission |
| 28 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ImmuCell Corporation
We have audited the accompanying balance sheet of ImmuCell Corporation (the Company) as of December 31, 2016, and the related statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended (collectively, the financial statements). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ImmuCell Corporation as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
| /s/ RSM US |
Boston, Massachusetts
March 30, 2017
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ImmuCell Corporation
We have audited the accompanying balance sheet of ImmuCell Corporation (the Company) as of December 31, 2015, and the related statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ImmuCell Corporation as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
| Portland, Maine | /s/ Baker Newman & Noyes |
| March 25, 2016 | Limited Liability Company |
| F-2 |
ImmuCell Corporation
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 5,150,344 | $ | 1,573,328 | ||||
| Short-term investments | 5,474,013 | 4,470,574 | ||||||
| Inventory | 2,126,899 | 870,207 | ||||||
| Accounts receivable, net | 992,390 | 718,103 | ||||||
| Prepaid expenses and other current assets | 604,482 | 247,476 | ||||||
| Total current assets | 14,348,128 | 7,879,688 | ||||||
| PROPERTY, PLANT AND EQUIPMENT, net | 9,846,293 | 5,718,814 | ||||||
| LONG-TERM INVESTMENTS, net of current portion | - | 489,648 | ||||||
| DEFERRED TAX ASSETS | 201,003 | 452,117 | ||||||
| INTANGIBLE ASSETS, net | 171,936 | - | ||||||
| GOODWILL | 95,557 | - | ||||||
| OTHER ASSETS, net | 34,264 | - | ||||||
| TOTAL ASSETS | $ | 24,697,181 | $ | 14,540,267 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | 1,891,763 | $ | 662,165 | ||||
| Current portion of bank debt | 133,269 | 130,780 | ||||||
| Deferred revenue | 33,856 | - | ||||||
| Total current liabilities | 2,058,888 | 792,945 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Bank debt, net of current portion | 2,878,805 | 3,054,977 | ||||||
| Interest rate swaps | 37,346 | 78,525 | ||||||
| Total long-term liabilities | 2,916,151 | 3,133,502 | ||||||
TOTAL LIABILITIES | 4,975,039 | 3,926,447 | ||||||
| CONTINGENT LIABILITIES AND COMMITMENTS ( See Note 15) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Common stock, $0.10 par value per share, 10,000,000 and 8,000,000 shares authorized, 5,044,838 and 3,261,148 shares issued and 4,847,390 and 3,055,034 shares outstanding, as of December 31, 2016 and 2015, respectively | 504,484 | 326,115 | ||||||
| Additional paid-in capital | 18,526,383 | 10,150,190 | ||||||
| Retained earnings | 1,147,120 | 638,672 | ||||||
| Treasury stock, at cost, 197,448 and 206,114 shares as of December 31, 2016 and 2015, respectively | (431,943 | ) | (450,901 | ) | ||||
| Accumulated other comprehensive (loss) | (23,902 | ) | (50,256 | ) | ||||
| Total stockholders’ equity | 19,722,142 | 10,613,820 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 24,697,181 | $ | 14,540,267 | ||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
ImmuCell Corporation
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Product sales | $ | 9,543,961 | $ | 10,228,689 | ||||
| Cost of goods sold | 4,123,266 | 3,977,787 | ||||||
| Gross margin | 5,420,695 | 6,250,902 | ||||||
| Sales and marketing expenses | 1,831,317 | 1,606,898 | ||||||
| Administrative expenses | 1,454,839 | 1,286,373 | ||||||
| Product development expenses | 1,244,335 | 1,235,309 | ||||||
| Operating expenses | 4,530,491 | 4,128,580 | ||||||
| NET OPERATING INCOME | 890,204 | 2,122,322 | ||||||
| Other expenses, net | 131,882 | 58,774 | ||||||
| INCOME BEFORE INCOME TAXES | 758,322 | 2,063,548 | ||||||
| Income tax expense | 249,874 | 850,309 | ||||||
| NET INCOME | $ | 508,448 | $ | 1,213,239 | ||||
| Weighted average common shares outstanding: | ||||||||
| Basic | 4,225,789 | 3,042,376 | ||||||
| Diluted | 4,336,229 | 3,165,735 | ||||||
| NET INCOME PER SHARE: | ||||||||
Basic | $ | 0.12 | $ | 0.40 | ||||
| Diluted | $ | 0.12 | $ | 0.38 | ||||
| F-4 |
ImmuCell Corporation
STATEMENTS OF COMPREHENSIVE INCOME
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net income | $ | 508,448 | $ | 1,213,239 | ||||
| Other comprehensive income (loss): | ||||||||
| Interest rate swaps, before taxes | 41,179 | (39,708 | ) | |||||
| Income tax applicable to interest rate swaps | (14,825 | ) | 12,783 | |||||
| Other comprehensive income (loss), net of taxes | 26,354 | (26,925 | ) | |||||
| Total comprehensive income | $ | 534,802 | $ | 1,186,314 | ||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
ImmuCell Corporation
STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Accumulated | |||||||||||||||||||||||||||||||
| Additional | Retained | Other | Total | |||||||||||||||||||||||||||||
| paid-in | Earnings | Treasury Stock | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||
| Shares | Amount | capital | (Deficit) | Shares | Amount | (Loss) | Equity | |||||||||||||||||||||||||
| BALANCE, December 31, 2014 | 3,261,148 | $ | 326,115 | $ | 10,042,305 | $ | (574,567 | ) | 234,114 | $ | (512,154 | ) | $ | (23,331 | ) | $ | 9,258,368 | |||||||||||||||
| Net income | - | - | - | 1,213,239 | - | - | - | 1,213,239 | ||||||||||||||||||||||||
| Other comprehensive (loss), net of taxes | - | - | - | - | - | - | (26,925 | ) | (26,925 | ) | ||||||||||||||||||||||
| Exercise of stock options | - | - | 58,957 | - | (28,000 | ) | 61,253 | - | 120,210 | |||||||||||||||||||||||
| Tax benefits related to stock options | - | - | 25,706 | - | - | - | - | 25,706 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 23,222 | - | - | - | - | 23,222 | ||||||||||||||||||||||||
| BALANCE, December 31, 2015 | 3,261,148 | 326,115 | 10,150,190 | 638,672 | 206,114 | (450,901 | ) | (50,256 | ) | 10,613,820 | ||||||||||||||||||||||
| Net income | - | - | - | 508,448 | - | - | - | 508,448 | ||||||||||||||||||||||||
| Other comprehensive income, net of taxes | - | - | - | - | - | - | 26,354 | 26,354 | ||||||||||||||||||||||||
| Public offering of common stock, net of $586,779 of offering costs | 1,123,810 | 112,381 | 5,200,842 | - | - | - | - | 5,313,223 | ||||||||||||||||||||||||
| Private placement of common stock, net of $303,450 of placement costs | 659,880 | 65,988 | 3,094,935 | - | - | - | - | 3,160,923 | ||||||||||||||||||||||||
| Exercise of stock options | - | - | 13,017 | - | (8,666 | ) | 18,958 | - | 31,975 | |||||||||||||||||||||||
| Stock-based compensation | - | - | 67,399 | - | - | - | - | 67,399 | ||||||||||||||||||||||||
BALANCE, December 31, 2016 | 5,044,838 | $ | 504,484 | $ | 18,526,383 | $ | 1,147,120 | 197,448 | $ | (431,943 | ) | $ | (23,902 | ) | $ | 19,722,142 | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
| F-6 |
ImmuCell Corporation
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 508,448 | $ | 1,213,239 | ||||
| Adjustments to reconcile net income to net cash (used for) provided by operating activities: | ||||||||
| Depreciation | 783,275 | 525,918 | ||||||
| Amortization | 19,104 | - | ||||||
| Non-cash interest expense | 8,891 | 3,343 | ||||||
| Deferred income taxes | 236,289 | 821,469 | ||||||
| Stock-based compensation | 67,399 | 23,222 | ||||||
| Loss (gain) on disposal of fixed assets | 25,385 | (3,984 | ) | |||||
| Provision for uncollectible accounts, net | 3,234 | 1,898 | ||||||
| Changes in: | ||||||||
| Accounts receivable, gross | (277,521 | ) | 249,290 | |||||
| Accrued interest income | (14,791 | ) | (3,706 | ) | ||||
| Inventory | (1,143,693 | ) | 75,548 | |||||
| Prepaid expenses and other current assets | (391,270 | ) | (59,672 | ) | ||||
| Accounts payable and accrued expenses | (182,508 | ) | 60,361 | |||||
| Deferred revenue | 33,856 | (6,690 | ) | |||||
| Net cash (used for) provided by operating activities | (323,902 | ) | 2,900,236 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property, plant and equipment | (3,586,349 | ) | (2,719,189 | ) | ||||
| Acquisition of certain business assets | (368,219 | ) | - | |||||
| Maturities of investments | 4,464,000 | 2,489,000 | ||||||
| Purchases of investments | (4,963,000 | ) | (4,455,000 | ) | ||||
| Proceeds from sale of fixed assets | 30,939 | 66,215 | ||||||
| Net cash used for investing activities | (4,422,629 | ) | (4,618,974 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITES: | ||||||||
| Proceeds from public offering, net | 5,313,223 | - | ||||||
| Proceeds from private placement, net | 3,160,923 | - | ||||||
| Proceeds from debt issuance | - | 2,500,000 | ||||||
| Debt principal repayments | (135,840 | ) | (169,753 | ) | ||||
| Debt issuance costs | (46,734 | ) | (34,125 | ) | ||||
| Proceeds from exercise of stock options | 31,975 | 120,210 | ||||||
| Tax benefits related to stock options | - | 25,706 | ||||||
| Net cash provided by financing activities | 8,323,547 | 2,442,038 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 3,577,016 | 723,300 | ||||||
| BEGINNING CASH AND CASH EQUIVALENTS | 1,573,328 | 850,028 | ||||||
ENDING CASH AND CASH EQUIVALENTS | $ | 5,150,344 | $ | 1,573,328 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| CASH PAID FOR: | ||||||||
| Income taxes | $ | 123,584 | $ | 3,133 | ||||
| Interest expense | $ | 153,093 | $ | 77,159 | ||||
| NON-CASH ACTIVITIES: | ||||||||
Change in capital expenditures included in accounts payable and accrued expenses | $ | 1,248,352 | $ | (249,873 | ) | |||
| Net change in fair value of interest rate swaps | $ | (26,354 | ) | $ | 26,925 | |||
| Fixed asset disposals, gross | $ | 140,901 | $ | 283,594 | ||||
See Note 8 for non-cash activities related to a 2016 business acquisition
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”) is an animal health company whose purpose is to create scientifically-proven and practical products that improve animal health and productivity in the dairy and beef industries. The Company was originally incorporated in Maine in 1982 and reincorporated in Delaware in 1987, in conjunction with its initial public offering of common stock. We market products that provide immediate immunity to newborn dairy and beef cattle. We are developing product line extensions of our existing products and are in the late stages of developing a novel product that addresses mastitis, the most significant cause of economic loss to the dairy industry. These products help reduce the need to use traditional antibiotics in food producing animals. The Company is subject to certain risks associated with its stage of development including dependence on key individuals, competition from other larger companies, the successful sale of existing products and the development and acquisition of additional commercially viable products with appropriate regulatory approvals, where applicable. The $20,000,000 investment we are making in a Nisin production plant for Mast Out® is being funded from available cash and bank debt, together with cash flows from ongoing operations.
| 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). Certain prior year accounts have been reclassified to conform with the 2016 financial statement presentation.
| (b) | Cash, Cash Equivalents, Short-Term Investments and Long-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 $4,650,044 and $1,073,028 as of December 31, 2016 and 2015, respectively. We account for investments in marketable securities in accordance with Codification Topic 320, Investments – Debt and Equity Securities. Short-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Long-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than twelve months from the balance sheet date. Short-term and long-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. See Note 3.
| (c) | 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. See Note 4.
| F-8 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| (d) | Accounts Receivable |
Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection and product returns. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as income when received. Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is charged on past due accounts receivable. See Note 5.
| (e) | Property, Plant and Equipment |
We depreciate property, plant and equipment on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. The facility we are constructing to produce the active ingredient, Nisin, for Mast Out® will be depreciated over its useful life beginning when that facility is placed into service, which could be before the Food and Drug Administration (FDA) approval of the product is achieved. This facility is not yet placed in service. We are evaluating the estimated useful lives of the assets associated with this facility. Repairs to fixed assets that benefit more than a current period are capitalized and depreciated over their useful lives. See Note 7.
| (f) | Intangible Assets and Goodwill |
We amortize intangible assets on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. We have recorded intangible assets related to customer relationships, non-compete agreements, and developed technology, each with defined useful lives. We have classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) acquired in purchase transactions.
We assess the impairment of intangible assets and goodwill that have indefinite lives 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 assess goodwill for impairment annually, at the reporting unit level whenever events or circumstances indicate impairment may exist. In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would then perform step one of the two-step impairment test; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the two-step impairment test. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. Factors that could indicate that an impairment may exist include significant under-performance relative to plan or long-term projections, significant changes in business strategy and significant negative industry or economic trends. Although we believe intangible assets and goodwill are appropriately stated in the accompanying financial statements, changes in strategy or market conditions could significantly impact these judgements and require an adjustment to the recorded balance. No goodwill impairments were recorded during the year ended December 31, 2016. See Notes 2(h), 8 and 9 for additional disclosures.
| F-9 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| (g) | Fair Value Measurements |
In determining fair value measurements, we follow the provisions of Codification Topic 820, Fair Value Measurements and Disclosures. Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. At December 31, 2016 and 2015, the carrying amounts of cash and cash equivalents, accounts receivable, inventory, other assets, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value. The three-level hierarchy is as follows:
| Level 1 - | Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date. |
| Level 2 - | Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. |
| Level 3 - | Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors specific to the investment.
Our held to maturity securities are comprised of investments in bank certificates of deposit. The value of these securities is disclosed in Note 3. We also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments is based on their closing published net asset value.
We assess the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with our accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. During the years ended December 31, 2016 and 2015, there were no transfers between levels. As of December 31, 2016 and 2015, 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, 2016 and 2015, our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2016 and 2015, 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, 2016 or 2015.
As of December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and money market accounts | $ | 5,150,344 | - | - | $ | 5,150,344 | ||||||||||
| Bank certificates of deposit | - | $ | 5,474,013 | - | 5,474,013 | |||||||||||
| Interest rate swaps | - | (37,346 | ) | - | (37,346 | ) | ||||||||||
| Total | $ | 5,150,344 | $ | 5,436,667 | - | $ | 10,587,011 | |||||||||
As of December 31, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash and money market accounts | $ | 1,573,328 | - | - | $ | 1,573,328 | ||||||||||
| Bank certificates of deposit | - | $ | 4,960,222 | - | 4,960,222 | |||||||||||
| Interest rate swaps | - | (78,525 | ) | - | (78,525 | ) | ||||||||||
| Total | $ | 1,573,328 | $ | 4,881,697 | - | $ | 6,455,025 | |||||||||
| 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 and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows. No impairment was recognized during the years ended December 31, 2016 or 2015.
| (i) | Concentration of Risk |
Concentration of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:
Year
Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Patterson Companies, Inc.(1) | 39 | % | 42 | % | ||||
| AmerisourceBergen Corporation(2) | 21 | % | 20 | % | ||||
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, | As
of December 31, | |||||||
| AmerisourceBergen Corporation(2) | 33 | % | 27 | % | ||||
| Patterson Companies, Inc.(1) | 31 | % | 26 | % | ||||
| ANIMART LLC(3) | * | 11 | % | |||||
| (1) | During June 2015, Patterson Companies, Inc. (NASDAQ: PDCO) acquired Animal Health International, Inc. |
| (2) | During March 2015, AmerisourceBergen Corporation (NYSE: ABC) acquired MWI Animal Health. |
| (3) | Assumes that the acquisition of Animal Medic by ANIMART LLC (which closed during the third quarter of 2016) had occurred as of the beginning of the periods being reported. |
*Amount is less than 10%.
We believe that supplies and raw materials for the production of our products are available from more than one vendor or farm. Our policy is to maintain more than one source of supply for the components used in our products. However, there is a risk that we could have difficulty in efficiently acquiring essential supplies.
| F-11 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| (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 |
We sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met. These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii) the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We offer a 50% account credit to domestic distributors on expired First Defense® product that is returned to us past its expiration date, which is generally two years past its date of manufacture. At the time of sale, we estimate returns and record a corresponding liability. We generally have experienced an immaterial amount of product returns.
| (l) | Expense Recognition |
Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $114,860 and $94,607 during the years ended December 31, 2016 and 2015, 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.
| (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. We believe it is more likely than not that the deferred tax assets will be realized through future taxable income and future tax effects of temporary differences between book income and taxable income. Accordingly, we have not established a valuation allowance for the deferred tax assets. Codification Topic 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must meet before being recognized in the financial statements. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other taxing authorities. Our tax returns for the years 2013 through 2016 are subject to audit. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as of December 31, 2016. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 14.
| 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 $67,399 and $23,222 during the years ended December 31, 2016 and 2015, respectively, which resulted in a decrease to income before income taxes of less than $0.01 per share during each of the periods reported.
| (o) | Net Income Per Common Share |
Net income per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding during the period. The diluted net income per share has been computed by dividing net income by the weighted average number of shares outstanding during the period plus all outstanding stock options with an exercise price that is less than the average market price of the common stock during the period less the number of shares that could have been repurchased at this average market price with the proceeds from the hypothetical stock option exercises. The weighted average and diluted number of shares outstanding consisted of the following:
Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Weighted average number of shares outstanding | 4,225,789 | 3,042,376 | ||||||
| Effect of dilutive stock options | 110,440 | 123,359 | ||||||
| Diluted number of shares outstanding | 4,336,229 | 3,165,735 | ||||||
| Outstanding stock options not included in the calculation because the effect would be anti-dilutive | 34,250 | 6,000 | ||||||
| (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, goodwill, accrued expenses and costs of goods sold accounts as well as amortization of our intangible assets.
| (q) | New Accounting Pronouncements |
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 was initially to become effective for the Company on January 1, 2017. Early application was not permitted. In July 2015, the FASB approved a one-year deferral in the effective date to January 1, 2018, with the option of applying the standard on the original effective date. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We intend to utilize the modified retrospective method and have made a preliminary evaluation of the effect that ASU 2014-09 would have on our financial statements and related disclosures and do not expect ASU 2014-09 to have a material impact on our financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern”, which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We implemented this guidance during 2016. The adoption of this guidance did not have a material impact on our financial statements.
| F-13 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update is effective for the annual reporting periods beginning after December 15, 2015. During the first quarter of 2016, we adopted ASU 2015-03 and reclassified $40,792 of debt issuance costs (net) from other assets to a reduction in our bank debt liability as of December 31, 2015. In August 2015, the FASB confirmed that ASU No. 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. For line-of-credit arrangements, borrowers have the option of presenting debt issuance costs as an asset which is subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any related outstanding borrowings. ASU No. 2015-03 did not have a material impact on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory, which simplifies the existing guidance which requires entities to subsequently measure inventory at the lower of cost or market value. Under ASU No. 2015-11, an entity should measure inventory valued using a first-in, first-out or average cost method at the lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2015-11 during the third quarter of 2016, and it did not have a material impact on our financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which simplifies the existing guidance which requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Under ASU No. 2015-17, an entity should classify all deferred tax liabilities and assets as one noncurrent deferred tax liability or asset (net) within the statement of financial position. The amendments apply to all entities that present a classified statement of financial position and are effective for the public business entities for annual periods beginning after December 15, 2016, including interim periods therein. Earlier application was permitted. During the first quarter of 2016, we adopted ASU No. 2015-17 early and reclassified $19,588 of current deferred tax liabilities to long-term, which amount was netted against our long-term deferred tax asset, as of December 31, 2015. ASU No. 2015-17 did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. Based on our current lease agreements, we are not subject to material lease obligations, and we do not expect ASU 2016-02 to have a material impact on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows. The most significant change resulting from these amendments is recording all the tax effects related to share-based payments at settlement through the income statement. Under existing guidance, tax benefits in excess of compensation costs (“windfalls”) are recorded in equity. Similarly, tax deficiencies below compensation costs (“shortfalls”) are recorded in equity to the extent of previous windfalls, while shortfalls in excess of this are recorded to the income statement. Furthermore, the new guidance is expected to increase the dilutive effect of share-based payment awards as a result of no longer assuming that tax benefits are used to purchase our common stock under the treasury method. The amendments also provide an alternative to estimating stock award forfeitures and instead recording at the time of forfeiture. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2016-09 during 2016, and it did not have a material impact on our financial statements.
| F-14 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| 3. | CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS |
Cash, cash equivalents, short-term investments and long-term investments (at amortized cost plus accrued interest) consisted of the following:
| As of December 31, | Increase | |||||||||||
| 2016 | 2015 | (Decrease) | ||||||||||
| Cash and cash equivalents | $ | 5,150,344 | $ | 1,573,328 | $ | 3,577,016 | ||||||
| Short-term investments | 5,474,013 | 4,470,574 | 1,003,439 | |||||||||
| Subtotal | 10,624,357 | 6,043,902 | 4,580,455 | |||||||||
| Long-term investments | - | 489,648 | (489,648 | ) | ||||||||
| Total | $ | 10,624,357 | $ | 6,533,550 | $ | 4,090,807 | ||||||
Held to maturity securities (certificates of deposit) are carried at amortized cost. The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income. As of December 31, 2016 and 2015, the fair value of held to maturity securities consisted of the following:
As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Amortized cost | $ | 5,450,000 | $ | 4,951,000 | ||||
| Accrued interest | 24,013 | 9,222 | ||||||
| Gross unrealized gains | 2,073 | 25 | ||||||
| Gross unrealized losses | (59 | ) | (6,277 | ) | ||||
| Estimated fair value | $ | 5,476,027 | $ | 4,953,970 | ||||
| 4. | INVENTORY |
Inventory consisted of the following:
| As of December 31, | ||||||||||||
| 2016 | 2015 | Increase | ||||||||||
| Raw materials | $ | 318,443 | $ | 284,331 | $ | 34,112 | ||||||
| Work-in-process | 968,810 | 452,024 | 516,786 | |||||||||
| Finished goods | 839,646 | 133,852 | 705,794 | |||||||||
| Total | $ | 2,126,899 | $ | 870,207 | $ | 1,256,692 | ||||||
| 5. | ACCOUNTS RECEIVABLE |
Accounts receivable consisted of the following:
| As of December 31, | Increase | |||||||||||
| 2016 | 2015 | (Decrease) | ||||||||||
| Trade accounts receivable, gross | $ | 1,013,716 | $ | 736,195 | $ | 277,521 | ||||||
| Allowance for bad debt and product returns | (21,326 | ) | (18,092 | ) | (3,234 | ) | ||||||
| Trade accounts receivable, net | $ | 992,390 | $ | 718,103 | $ | 274,287 | ||||||
| F-15 |
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, | (Decrease) | |||||||||||
| 2016 | 2015 | Increase | ||||||||||
| Prepaid expenses | $ | 126,523 | $ | 183,217 | $ | (56,694 | ) | |||||
| Other receivables | 144,848 | 26,958 | 117,890 | |||||||||
| Security deposits(1) | 333,111 | 37,301 | 295,810 | |||||||||
| Total | $ | 604,482 | $ | 247,476 | $ | 357,006 | ||||||
| (1) | This balance as of December 31, 2016 included an option payment of $20,500 towards land (which we did not exercise) that was subsequently applied to the purchase of a warehouse facility during the first quarter of 2017. |
| 7. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
Estimated Useful Lives (in years) | As of December 31, | Increase | ||||||||||||
| 2016 | 2015 | (Decrease) | ||||||||||||
| Laboratory and manufacturing equipment | 5-10 | $ | 5,562,938 | $ | 3,766,556 | $ | 1,796,382 | |||||||
| Building and improvements | 10-33 | 5,037,512 | 4,716,204 | 321,308 | ||||||||||
| Office furniture and equipment | 5-10 | 653,462 | 568,188 | 85,274 | ||||||||||
| Construction in progress(1) | 3,694,509 | 1,084,924 | 2,609,585 | |||||||||||
| Land | 347,114 | 333,486 | 13,628 | |||||||||||
| Property, plant and equipment, gross | 15,295,535 | 10,469,358 | 4,826,177 | |||||||||||
| Accumulated depreciation | (5,449,242 | ) | (4,750,544 | ) | (698,698 | ) | ||||||||
| Property, plant and equipment, net | $ | 9,846,293 | $ | 5,718,814 | $ | 4,127,479 | ||||||||
| (1) | As of December 31, 2016, construction in progress consisted principally of initial costs incurred in connection with the building and equipping of our Nisin production plant for Mast Out®. As of December 31, 2015, construction in progress consisted principally of partial payments towards new manufacturing equipment related to expanding our production capacity for First Defense®. |
| 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 for an oral delivery option to newborn calves via a syringe (or tube). This product format offers customers an alternative delivery option to the bolus (the standard delivery format of the bivalent First Defense® product since first approval by the U.S. Department of Agriculture (USDA) and product launch in 1991) and could allow more market penetration. The formulation was developed for us and has been sold as a feed product without disease claims since 2012. This purchase also includes certain other related private-label products. The total purchase price was approximately $532,000. Approximately $368,000 of this amount was paid as of the closing date. A technology transfer payment of $97,000 was made during the third quarter of 2016. There are also royalty payments owed based on a percentage of sales made through December 31, 2018. There is no limit to the royalty amount. As of January 4, 2016, we estimated the aggregate royalties to be paid would be approximately $67,000, which was recorded in accounts payable and accrued expenses on the accompanying balance sheet. As of December 31, 2016, this amount was estimated to be approximately $30,000. We made payments of $8,200 for the year ended December 31, 2016. The estimated fair values of the assets purchased in this transaction included inventory of $113,000, machinery and equipment of $132,000, a developed technology intangible of $191,000 (which includes an immaterial amount of value associated with customer relationships and a non-compete agreement, and was valued using the relief from royalty method) and goodwill of $96,000. The intangible assets and goodwill are deductible for tax return purposes. The goodwill arising from the acquisition consists largely of the estimated value of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction was closed as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies. The impact of the acquisition on our pro forma prior year operations is not material. As of December 31, 2016, we vacated the rented facility in Minnesota that had been used to produce the gel solution format of our product and certain other related private-label products. This resulted in the termination of employment of four employees, as these production functions were consolidated into our Portland facility, which enables us to better utilize existing infrastructure and larger scale equipment to improve operating efficiencies.
| F-16 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| 9. | INTANGIBLE ASSETS |
The intangible assets described in Note 8 are being amortized to cost of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization expense was $19,104 during the year ended December 31, 2016. The net value of these intangibles was $171,936 as of December 31, 2016. A summary of intangible amortization expense estimated for the five years beginning January 1, 2017 and thereafter is as follows:
| Period | Amount | |||
| Year ending December 31, 2017 | $ | 19,104 | ||
| Year ending December 31, 2018 | $ | 19,104 | ||
| Year ending December 31, 2019 | $ | 19,104 | ||
| Year ending December 31, 2020 | $ | 19,104 | ||
| Year ending December 31, 2021 | $ | 19,104 | ||
| After December 31, 2021 | $ | 76,416 | ||
| Total | $ | 171,936 | ||
Intangible assets as of December 31, 2016 consisted of the following:
| As of December 31, 2016 | ||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | ||||||||||
| Developed technology | $ | 184,100 | $ | (18,410 | ) | $ | 165,690 | |||||
| Customer relationships | 1,300 | (130 | ) | 1,170 | ||||||||
| Non-compete agreements | 5,640 | (564 | ) | 5,076 | ||||||||
| Total | $ | 191,040 | $ | (19,104 | ) | $ | 171,936 | |||||
| 10. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consisted of the following:
| As of December 31, | Increase | |||||||||||
| 2016 | 2015 | (Decrease) | ||||||||||
| Accounts payable – capital | $ | 1,249,862 | $ | 1,510 | $ | 1,248,352 | ||||||
| Accounts payable – trade | 257,397 | 199,105 | 58,292 | |||||||||
| Accrued payroll | 200,477 | 242,690 | (42,213 | ) | ||||||||
| Accrued clinical studies | - | 68,428 | (68,428 | ) | ||||||||
| Accrued professional fees | 82,500 | 56,450 | 26,050 | |||||||||
| Accrued other | 101,527 | 93,982 | 7,545 | |||||||||
| Total | $ | 1,891,763 | $ | 662,165 | $ | 1,229,598 | ||||||
| F-17 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| 11 |
BANK DEBT |
During the first quarter of 2016, we entered into bank debt agreements covering certain additional credit facilities with TD Bank N.A. aggregating up to approximately $4.5 million. As a result of loan amendments entered into with TD Bank N.A. on March 1, 2017, these credit facilities now aggregate up to approximately $6.5 million, subject to certain restrictions as defined in the agreements. The first instrument is comprised of a construction loan of up to $2.5 million and not to exceed 80% of the cost of equipment installed in the to-be-constructed commercial-scale Nisin production facility for Mast Out®. Effective March 1, 2017, this loan amount was increased by $1.44 million to $3.94 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through July 2018, at which time the loan converts to a seven-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a seven-year amortization schedule. The second instrument is comprised of a construction loan of up to $2.0 million and not to exceed 80% (75% prior to the March 1, 2017 amendment) of the appraised value of the to-be-constructed commercial-scale Nisin production facility in Portland, Maine. Effective March 1, 2017, this loan amount was increased by $560,000 to $2.56 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through January 2018, at which time the loan converts to a nine-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a twenty-year amortization schedule with a balloon principal payment of approximately $1.654 million due in January 2027. These credit facilities are secured by substantially all of our assets and are subject to certain financial covenants. There were no amounts outstanding under these facilities as of December 31, 2016.
Additionally, we have in place certain credit facilities with TD Bank N.A. not to exceed 80% of the appraised value of our corporate headquarters and production and research facility in Portland, which are secured by substantially all of our assets and are subject to certain financial covenants. Proceeds from the $1.0 million mortgage note were received during the third quarter of 2010. Based on a 15-year amortization schedule, a balloon principal payment of $451,885 will be due during the third quarter of 2020. Proceeds from the $2.5 million mortgage note were received during the third quarter of 2015. Based on a 20-year amortization schedule, a balloon principal payment of approximately $1.55 million will be due during the third quarter of 2025. Principal payments (net of debt issuance costs) due under debt outstanding as of December 31, 2016 (which does not include the debt proceeds not yet drawn under the credit facilities entered into during the first quarter of 2016 and subsequently amended during the first quarter of 2017, as discussed above) are reflected in the following table by the year that payments are due:
| Period | $1,000,000 Mortgage Note | $2,500,000 Mortgage Note | Debt Issuance Costs | Total | ||||||||||||
| Year ending December 31, 2017 | $ | 61,056 | $ | 82,308 | $ | (10,095 | ) | $ | 133,269 | |||||||
| Year ending December 31, 2018 | 64,876 | 86,097 | (10,095 | ) | 140,878 | |||||||||||
| Year ending December 31, 2019 | 68,908 | 89,997 | (10,095 | ) | 148,810 | |||||||||||
| Year ending December 31, 2020 | 493,696 | 94,005 | (9,462 | ) | 578,239 | |||||||||||
| Year ending December 31, 2021 | - | 98,538 | (8,448 | ) | 90,090 | |||||||||||
| After December 31, 2021 | - | 1,951,228 | (30,440 | ) | 1,920,788 | |||||||||||
| Total | $ | 688,536 | $ | 2,402,173 | $ | (78,635 | ) | $ | 3,012,074 | |||||||
We hedged our interest rate exposure on these mortgage notes with interest rate swap agreements that effectively converted floating interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to the fixed rates of 6.04% and 4.38%, respectively. As of December 31, 2016, the variable rates on these two mortgage notes were 3.93% and 2.99%, respectively. All derivatives are recognized on the balance sheet at their fair value. At the time of the closings and thereafter, the agreements were determined to be highly effective in hedging the variability of the identified cash flows and have been designated as cash flow hedges of the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreements are recorded in other comprehensive income (loss), net of taxes. The original notional amounts of the interest rate swap agreements of $1,000,000 and $2,500,000 amortize in accordance with the amortization of the mortgage notes. The notional amount of the interest rate swaps was $3,090,709 as of December 31, 2016. 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.
| F-18 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
|
Year
Ended | |||||||
| 2016 | 2015 | |||||||
| Payments required by interest rate swaps | $ | 58,346 | $ | 32,515 | ||||
| Other comprehensive income (loss) net of taxes | $ | 26,354 | $ | (26,925 | ) | |||
In connection with the credit facilities entered into during the third quarters of 2010 and 2015 and the first quarter of 2016, we incurred debt issue costs of $26,489, $34,125 and $46,734, respectively, which costs are being recorded as a component of other expenses over the terms of the credit facilities.
Proceeds from a $600,000 note bearing interest at 4.25% were received during the first quarter of 2011. This note was repaid during the third quarter of 2015.
The $500,000 line of credit with TD Bank N.A. was first entered into during the third quarter of 2010 and has been renewed approximately annually since then and is available as needed and has been extended through August 29, 2017. The line of credit, which is subject to certain financial covenants, was unused as of December 31, 2016 and 2015. Interest on any borrowings against the line of credit would be variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum.
| 12. | STOCKHOLDERS’ EQUITY |
On October 28, 2015, we filed a registration statement on Form S-3 with the SEC for the potential issuance of up to $10,000,000 in equity (subject to certain limitations). This registration statement became effective on November 10, 2015. Under this form of registration statement, we were limited to raising gross proceeds of no more than one-third of the market capitalization of our common stock (as determined by the high price within the preceding 60 days leading up to a sale of securities) held by non-affiliates (non-insiders) of the Company within a twelve-month period. This limit was approximately $5,958,000, based on the closing price of $8.08 per share as of January 6, 2016. On February 3, 2016, we sold 1,123,810 shares of common stock at a price to the public of $5.25 per share in an underwritten public offering, raising gross proceeds of approximately $5,900,000, resulting in net proceeds to the Company of approximately $5,313,000 after deducting underwriting discounts and offering expenses incurred in connection with the equity financing. On October 21, 2016, we closed on a private placement of 659,880 shares of common stock to nineteen institutional and accredited investors at $5.25 per share, raising gross proceeds of approximately $3,464,000 resulting in net proceeds to the Company of approximately $3,161,000 after deducting placement agent fees and other estimated expenses incurred in connection with the equity financing.
At the June 15, 2016 Annual Meeting of Stockholders, our stockholders voted to approve an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock authorized for issuance from 8,000,000 to 10,000,000.
In June 2000, our stockholders approved the 2000 Stock Option and Incentive Plan (the “2000 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. Originally, 250,000 shares of common stock were reserved for issuance under the 2000 Plan. The stockholders of the Company approved an increase in this number to 500,000 shares in June 2001. All options granted under the 2000 Plan expire no later than ten years from the date of grant. The 2000 Plan expired in February 2010, after which date no further options could be granted under the 2000 Plan. However, outstanding options under the 2000 Plan may be exercised in accordance with their terms.
| F-19 |
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 i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. At that time, 300,000 shares of common stock were reserved for issuance under the 2010 Plan and subsequently no additional shares have been reserved for the 2010 Plan. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. All options granted under the 2010 Plan expire no later than ten years from the date of grant.
Activity under the stock option plans described above was as follows:
| 2000 Plan | 2010 Plan | Weighted Average Exercise Price | Aggregate Intrinsic Value(1) | |||||||||||||
| Outstanding at December 31, 2014 | 157,500 | 95,500 | $ | 3.42 | $ | 364,000 | ||||||||||
| Grants | - | 16,000 | $ | 7.40 | ||||||||||||
| Terminations | - | (3,000 | ) | $ | 4.95 | |||||||||||
| Exercises | (26,000 | ) | (2,000 | ) | $ | 4.29 | ||||||||||
| Outstanding at December 31, 2015 | 131,500 | 106,500 | $ | 3.57 | $ | 945,000 | ||||||||||
| Grants | - | 46,000 | $ | 6.98 | ||||||||||||
| Terminations | (5,000 | ) | (12,000 | ) | $ | 6.16 | ||||||||||
| Exercises | - | (16,000 | ) | $ | 5.59 | |||||||||||
| Outstanding at December 31, 2016 | 126,500 | 124,500 | $ | 3.89 | $ | 517,000 | ||||||||||
| Exercisable at December 31, 2016 | 126,500 | 26,500 | $ | 2.52 | $ | 524,000 | ||||||||||
| Reserved for future grants | - | 155,500 | ||||||||||||||
| (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. |
| Number of Shares | Weighted Average Fair Value at Grant Date | |||||||
| Non-vested stock options as of January 1, 2016 | 65,000 | $ | 5.35 | |||||
| Non-vested stock options as of December 31, 2016 | 98,000 | $ | 6.03 | |||||
| Stock options granted during the year ended December 31, 2016 | 46,000 | $ | 6.98 | |||||
| Stock options that vested during the year ended December 31, 2016 | 1,000 | $ | 4.15 | |||||
| Stock options that were forfeited during the year ended December 31, 2016 | 17,000 | $ | 6.16 | |||||
During the year ended December 31, 2016, one employee and one director exercised stock options covering the aggregate of 16,000 shares of which 6,000 were exercised for cash, resulting in total proceeds of $31,900, and 10,000 of these options were exercised by the surrender of 7,334 shares of common stock with a fair market value of $57,425 at the time of exercise and $75 in cash. During the year ended December 31, 2015, eleven employees exercised stock options covering the aggregate of 28,000 shares. These options were exercised for cash, resulting in total proceeds of $120,210. At December 31, 2016, 251,000 shares of common stock were reserved for future issuance under all outstanding stock options described above, and an additional 155,500 shares of common stock were reserved for the potential issuance of stock option grants in the future under the 2010 Plan.
| F-20 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
The weighted average remaining life of the options outstanding under the 2000 Plan and the 2010 Plan as of December 31, 2016 was approximately 4 years and 4 months. The weighted average remaining life of the options exercisable under these plans as of December 31, 2016 was approximately 2 years and 4 months. The exercise prices of the options outstanding as of December 31, 2016 ranged from $1.70 to $8.21 per share. The 46,000 stock options granted during 2016 had exercise prices between $6.27 and $8.21 per share. The 16,000 stock options granted during 2015 had exercise prices between $6.05 and $7.54 per share. The aggregate intrinsic value of options exercised during 2016 and 2015 approximated $32,000 and $110,000, respectively. The weighted-average grant date fair values of options granted during 2016 and 2015 were $4.16 and $3.46 per share, respectively. As of December 31, 2016, total unrecognized stock-based compensation related to non-vested stock options aggregated $204,360, which will be recognized over a weighted average period of two years and eleven months. The fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model, for the purpose discussed in Note 2(n), with the following weighted-average assumptions for the years ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Risk-free interest rate | 1.2 | % | 2.0 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected volatility | 63 | % | 47 | % | ||||
| Expected life | 6.5 years | 6 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.
| F-21 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
On June 8, 2005, our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2008. As of June 30, 2005, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension. On June 6, 2008 our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2011 and to increase the ownership threshold for determining “Acquiring Person” status from 15% to 18%. As of June 30, 2008, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On August 5, 2011, our Board of Directors voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date by an additional three years to September 19, 2014 and to increase the ownership threshold for determining “Acquiring Person” status from 18% to 20%. As of August 9, 2011, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On June 10, 2014, our Board of Directors voted to authorize an amendment to the Rights Agreement to extend the final expiration date by an additional three years to September 19, 2017. As of June 16, 2014, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension. No other changes have been made to the terms of the Rights or the Rights Agreement.
During the second quarter of 2015, we amended our Common Stock Rights Plan by removing a provision that prevented a new group of directors elected following the emergence of an Acquiring Person (an owner of more than 20% of our stock) from controlling the Rights Plan by maintaining exclusive authority over the Rights Plan with pre-existing directors. We did this because such provisions have come to be viewed with disfavor by Delaware courts.
| 13. | OTHER EXPENSES, NET |
Other expenses, net, consisted of the following:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Interest expense | $ | 161,697 | $ | 83,578 | ||||
| Interest income | (54,662 | ) | (19,169 | ) | ||||
| Other losses (gains) | 24,847 | (5,635 | ) | |||||
| Other expenses, net | $ | 131,882 | $ | 58,774 | ||||
| 14. | INCOME TAXES |
Our income tax expense aggregated $249,874 and $850,309 during the years ended December 31, 2016 and 2015, respectively. In 2015, we utilized $1,625,653 of net operating loss carryforwards to offset otherwise taxable income. As of December 31, 2015, we had federal net operating loss carryforwards of $125,797 (that expire in 2031, (if not utilized before then) of which approximately $98,000 is expected to be utilized against taxable income during 2016. As of December 31, 2016, we have federal general business tax credit carryforwards of approximately $292,000 that expire in 2027 through 2034 (if not utilized before then) and state tax credit carryforwards of approximately $152,000 that expire in 2023 through 2036 (if not utilized before then). The $965,000 licensing payment that we made during the fourth quarter of 2004 was treated as an intangible asset and is being amortized over 15 years, for tax return purposes only. Approximately $1,112,000 of our investment in a small-scale facility to produce the Drug Substance (our Active Pharmaceutical Ingredient, Nisin) for Mast Out® was expensed as incurred for our books. Included in this amount is approximately $820,000 that was capitalized and is being depreciated over statutory periods for tax return purposes only.
| F-22 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the period such determination was made.
Net operating loss carryforwards, credits, and other tax attributes are subject to review and possible adjustment by the Internal Revenue Service. Section 382 of the Internal Revenue Code contains provisions that could place annual limitations on the future utilization of net operating loss carryforwards and credits in the event of a change in ownership of the Company, as defined.
The Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2013. We currently have no tax examinations in progress. We also have not paid additional taxes, interest or penalties as a result of tax examinations nor do we have any unrecognized tax benefits for any of the periods in the accompanying financial statements.
The income tax provision consisted of the following:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Federal | - | - | ||||||
| State | $ | 13,585 | $ | 3,150 | ||||
| Current | $ | 13,585 | $ | 3,150 | ||||
| Federal | 252,659 | 641,733 | ||||||
| State | (16,370 | ) | 205,426 | |||||
| Deferred | 236,289 | 847,159 | ||||||
| Total | $ | 249,874 | $ | 850,309 | ||||
The actual income tax expense differs from the expected tax computed by applying the U.S. federal corporate tax rate of 34% to income before income tax as follows:
| Year Ended December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Computed expected tax expense/rate | $ | 257,829 | 34.00 | % | $ | 701,607 | 34.00 | % | ||||||||
| State income taxes, net of federal expense | 38,855 | 5.12 | 44,754 | 2.17 | ||||||||||||
| Share-based compensation | 13,362 | 1.76 | (7,524 | ) | (0.36 | ) | ||||||||||
| Tax credits | (70,967 | ) | (9.36 | ) | (54,719 | ) | (2.65 | ) | ||||||||
| State income tax rate change, net of federal(1) | - | - | 109,112 | 5.29 | ||||||||||||
| Other | 10,795 | 1.43 | 57,079 | 2.76 | ||||||||||||
| Total income tax expense/rate | $ | 249,874 | 32.95 | % | $ | 850,309 | 41.21 | % | ||||||||
| (1) | This impact is due to the actual state tax rate in 2015 being lower than the expected state tax rate used in computing prior deferred taxes. |
| F-23 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
The significant components of our deferred tax asset consisted of the following:
| As of December 31, | |||||||
| 2016 | 2015 | |||||||
| Product rights | $ | 68,197 | $ | 91,344 | ||||
| Property, plant and equipment | (307,976 | ) | (26,717 | ) | ||||
| Federal and state tax credits | 292,516 | 339,585 | ||||||
| Federal net operating loss carryforward | 8,856 | 39,241 | ||||||
| State tax credits carryover | 100,528 | - | ||||||
| Interest rate swap | 13,437 | 28,253 | ||||||
| Prepaid expenses and other | (6,240 | ) | (19,589 | ) | ||||
| UNICAP | 31,685 | - | ||||||
| Deferred tax asset | $ | 201,003 | $ | 452,117 | ||||
| 15. | CONTINGENT LIABILITIES AND COMMITMENTS |
Our bylaws, as amended, in effect provide that the Company will indemnify its officers and directors to the maximum extent permitted by Delaware law. In addition, we make similar indemnity undertakings to each director through a separate indemnification agreement with that director. The maximum payment that we may be required to make under such provisions is theoretically unlimited and is impossible to determine. We maintain directors’ and officers’ liability insurance, which may provide reimbursement to the Company for payments made to, or on behalf of, officers and directors pursuant to the indemnification provisions. Our indemnification obligations were grandfathered under the provisions of Codification Topic 460, Guarantees. Accordingly, we have recorded no liability for such obligations as of December 31, 2016. 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, 2016.
We are committed to purchasing certain key parts (syringes) and services (formulation, filling and packaging of Drug Product) pertaining to Mast Out® exclusively from two contractors. If we do not commercialize the product by the end of 2019, we would be liable for a $100,000 termination fee under one of such agreements.
During the second quarter of 2009, we entered into an exclusive license with the Baylor College of Medicine covering the underlying rotavirus vaccine technology used to generate the specific antibodies for our product line extension that is under development. This perpetual license (if not terminated for cause) is subject to a milestone payment of $150,000 upon regulatory approval and a royalty equal to 4% of sales above current sales of our bivalent product plus a growth assumption.
| F-24 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
During the third quarter of 2016, we initiated construction of our Nisin production facility for Mast Out®. The estimated total cost of the Nisin facility is $20,000,000. As of December 31, 2016, we had incurred approximately $3,280,000 of capital expenditures related to this project, of which $2,080,000 had been paid as of year-end. The majority of this investment is expected to be paid during the nine-month period ending September 30, 2017. As of December 31, 2016, we had committed $12,320,000 of the remaining $17,920,000 expected to be paid on this project. Approximately $8,865,000 of these capital expenditures is committed under a guaranteed maximum price contract with our construction management firm, net of payments made. This contract includes provisions that could reduce the amount of the commitment generally by the amount not expended or committed by the construction manager at the time of an unexpected and unlikely early termination. We expect to fund the remaining costs in excess of our current cash and investments with cash to be generated from operations during 2017 and borrowings under the credit facilities described in Note 11. Additionally, as of December 31, 2016, we had committed $617,000 to the production of inventory and $100,000 to other obligations.
| 16. | 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 cows for the dairy and beef industries. Almost all of our internally funded product development expenses are in support of such products. The significant accounting policies of this segment are described in Note 2. Our single operating segment is defined as the component of our business for which financial information is available and evaluated regularly by our chief operating decision-maker in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our President and CEO.
Sales of the First Defense® product line aggregated 93% of our total product sales during the years ended December 31, 2016 and 2015. Our primary customers for the majority of our product sales (85% and 83% for the years ended December 31, 2016, and 2015 respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 13% and 14% of our total product sales for the years ended December 31, 2016 and 2015, respectively.
| 17. | RELATED PARTY TRANSACTIONS |
Dr. David S. Tomsche (Chair of our Board of Directors) is a controlling owner of Leedstone Inc. (formerly Stearns Veterinary Outlet, Inc.), a domestic distributor of ImmuCell products (First Defense®, Wipe Out® Dairy Wipes, and CMT) and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $551,020 and $573,165 of products from ImmuCell during the years ended December 31, 2016 and 2015, respectively, on terms consistent with those offered to other distributors of similar status. We made marketing-related payments of $5,286 and $3,222 to these affiliate companies during the years ended December 31, 2016 and 2015, respectively, that were expensed as incurred. Our accounts receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated $3,221 and $36,528 as of December 31, 2016 and 2015, respectively.
| 18. | 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. Since August 2012, we have matched 100% of the first 3% of each employee’s salary that is contributed to the Plan and 50% of the next 2% of each employee’s salary that is contributed to the Plan. Under this matching plan, we paid $74,507 and $73,514 into the plan for the years ended December 31, 2016 and 2015, respectively.
| F-25 |
ImmuCell Corporation
Notes to Audited Financial Statements (continued)
| 19. | UNAUDITED QUARTERLY FINANCIAL DATA |
The following tables present the quarterly information for the years ended December 31, 2016 and 2015, respectively:
| Three Months Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Fiscal 2016: | ||||||||||||||||
| Product sales | $ | 2,986,359 | $ | 2,375,662 | $ | 1,968,122 | $ | 2,213,818 | ||||||||
| Gross margin | 1,757,560 | 1,239,861 | 1,204,627 | 1,218,647 | ||||||||||||
| Product development expenses | 302,443 | 380,434 | 307,721 | 253,737 | ||||||||||||
| Net operating income | 698,964 | 21,465 | 50,467 | 119,309 | ||||||||||||
| Net income (loss) | 452,448 | (9,155 | ) | 34,870 | 30,285 | |||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.12 | $ | (0.00 | ) | $ | 0.01 | $ | 0.01 | |||||||
| Diluted | $ | 0.11 | $ | (0.00 | ) | $ | 0.01 | $ | 0.01 | |||||||
| Fiscal 2015: | ||||||||||||||||
| Product sales | $ | 3,101,491 | $ | 1,960,363 | $ | 2,472,428 | $ | 2,694,407 | ||||||||
| Gross margin | 1,850,925 | 1,130,574 | 1,611,902 | 1,657,502 | ||||||||||||
| Product development expenses | 330,665 | 271,759 | 301,746 | 331,139 | ||||||||||||
| Net operating income | 820,052 | 213,983 | 626,850 | 461,437 | ||||||||||||
| Net income | 479,082 | 94,058 | 351,292 | 288,807 | ||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic | $ | 0.16 | $ | 0.03 | $ | 0.12 | $ | 0.09 | ||||||||
| Diluted | $ | 0.15 | $ | 0.03 | $ | 0.11 | $ | 0.09 | ||||||||
| 20. | SUBSEQUENT EVENTS |
We have evaluated subsequent events through the time of filing on March 30, 2017, the date we have issued this Annual Report on Form 10-K. As of such date, except as described below, there were no material, reportable subsequent events.
During the first quarter of 2017, we acquired a 4,114 square foot building that is adjacent to our Nisin production plant for additional warehousing and storage space. The purchase price was $465,500, and we financed this purchase, in part, with a mortgage loan in the amount of $340,000 bearing interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25% with monthly principal and interest payments due for ten years based on a twenty-year amortization schedule.
During the first quarter of 2017, we amended two loan agreements, as described in Note 11, increasing the total available loan amount from up to approximately $4.5 million to up to approximately $6.5 million.
During the first quarter of 2017, we discontinued the production and sale of our topical wipes product line. In connection therewith, we wrote off approximately $38,000 worth of fixed assets and recognized $45,000 from the sale of certain other fixed assets and product rights, resulting in a net gain of approximately $7,000.
During the first quarter of 2017, our $500,000 line of credit was extended through August 29, 2017.
| F-26 |
ImmuCell Corporation
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 30, 2017 | 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 resubstitution, 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 30, 2017 | By: | /s/ Michael F. Brigham | |
Michael F. Brigham President, Chief Executive Officer, Principal Financial Officer and Director | ||||
| Date: | March 30, 2017 | By: | /s/ Bobbi Jo Brockmann | |
Bobbi Jo Brockmann, Director | ||||
| Date: | March 30, 2017 | By: | /s/ Joseph H. Crabb | |
Joseph H. Crabb, Ph.D., Director | ||||
| Date: | March 30, 2017 | By: | /s/ David S. Cunningham | |
David S. Cunningham, Director | ||||
| Date: | March 30, 2017 | By: | /s/ Linda Rhodes | |
Linda Rhodes, VMD, Ph.D., Director | ||||
| Date: | March 30, 2017 | By: | /s/ Jonathan E. Rothschild | |
Jonathan E. Rothschild, Director | ||||
| Date: | March 30, 2017 | By: | /s/ David S. Tomsche | |
David S. Tomsche, DVM, Director | ||||
| Date: | March 30, 2017 | By: | /s/ Paul R. Wainman | |
Paul R. Wainman, Director |
ImmuCell Corporation
EXHIBIT INDEX
| 10.16 | Amended and Restated Promissory Note ($2,560,000) given by the Company in favor of TD Bank N.A. dated March 1, 2017. | |
| 10.17 | Amended and Restated Promissory Note ($3,940,000) given by the Company in favor of TD Bank N.A. dated March 1, 2017. | |
| 10.18 | Amendment to Construction Loan Agreement between the Company and TD Bank N.A. dated March 1, 2017. | |
| 10.24 | Mortgage Loan Note for $340,000 given by the Company in favor of TD Bank N.A. dated March 16, 2017. | |
| 23 | Consent of Baker Newman & Noyes, LLC. | |
| 23.1 | 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. |
EXHIBIT 10.16
IMMUCELL CORPORATION
Amended and Restated Promissory Note ($2,560,000) given
by the Company in favor of TD Bank N.A. dated March 1, 2017.
LOAN #__________
AMENDED AND RESTATED CONSTRUCTION LOAN NOTE
(Amends
and Restates Construction Loan Note dated March 28, 2016 in the original
principal amount of $2,000,000.00)
Date of Note: |
March 1, 2017 |
| Principal Amount: | $2,560,000.00 |
| Maturity Date: | March 1, 2027 |
| Interest Rate: | An interest rate equal at all times to Two and One Quarter percent (2.25%) per annum in excess of the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) of the one (1) month LIBOR (as hereinafter defined). The Lender shall not be required to notify Borrower of adjustments in said interest rate.
“LIBOR” (i.e., the London Interbank Offered Rate) means the rate of interest in U.S. Dollars (rounded upwards, at the Lender's option, to the next 1/8th of one percent) equal to the Intercontinental Exchange Benchmark Administration Ltd. (“ICE, ”or the successor thereto if ICE is no longer making a London Interbank Offered Rate available) (“ICE LIBOR”) rate for the equivalent Interest Period as published by Bloomberg (or such other commercially available source providing quotations of ICE LIBOR as designated by Lender from time to time) at approximately 11:00 A.M. (London time) two (2) London Business Days prior to the Reset Date; provided however, if more than one ICE LIBOR is specified, the applicable rate shall be the arithmetic mean of all such rates. If, for any reason, such rate is not available, the term LIBOR Rate shall mean, for the LIBOR Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Lender to be the average rates per annum at which deposits in dollars are offered for such LIBOR Interest Period to major banks in the London Interbank market in London, England at approximately 11:00 A.M. (London time) two (2) Business Days prior to the Reset Date. The Interest Rate shall be computed on an actual/360 day basis (i.e., interest for each day during which the Principal Amount, or any part thereof, is outstanding shall be computed at the Interest Rate, divided by 360). |
|
Notwithstanding the foregoing, LIBOR Rate loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to Lender. The LIBOR Rate shall be adjusted automatically on and as of the effective date of any change in the LIBOR Reserve Percentage or the LIBOR Interest Period for each LIBOR Rate loan comprising part of the same borrowing (including conversions, extensions and renewals), to a per annum interest rate determined pursuant to the following formula:
Adjusted LIBOR Rate = LIBOR Rate 1 - LIBOR Reserve Percentage
For purposes of this calculation LIBOR Reserve Percentage is defined as, for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D, as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of LIBOR Rate loans is determined), whether or not Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. |
| 1 |
| LIBOR Interest Period: | Initially, the first (1st) LIBOR Interest Period hereunder shall be the period commencing on the date hereof and ending on (and including) March 31, 2017. Thereafter, each LIBOR Interest Period shall commence on the first (1st) day of the calendar month immediately following the previous LIBOR Interest Period (the “Reset Date”) and shall end on the last day of such month; provided however, (i) no LIBOR Interest Period shall extend beyond the Maturity Date of the Loan, and (ii) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such LIBOR Interest Period. |
| Construction Loan Agreement: | That certain agreement between Borrower and Lender dated on or about March 28, 2016, as modified and/or amended from time to time including, without limitation, by Amendment bearing even date herewith pursuant to which Lender has agreed to advance the Principal Amount to the Borrower subject to the terms and conditions of such agreement. |
| Business Day: | Any day on which domestic and international transactions are carried on in the London Interbank Market and commercial banks are open for business in London, England and are neither required nor authorized to close in the State. |
| State: | Shall mean the State of Maine. |
FOR VALUE RECEIVED, ImmuCell Corporation, a Delaware corporation (the “Borrower”), having an address as indicated below, HEREBY PROMISES TO PAY ON THE MATURITY DATE to the order of TD Bank, N.A., a national banking association, (hereinafter, together with its successors and assigns, referred to as the “Lender”) at One Portland Square, P.O. Box 9540, Portland, Maine, 04112, or at such other place as the holder hereof may from time to time designate in writing, in immediately available federal funds, the Principal Amount or so much thereof as shall be advanced by Lender to Borrower pursuant to the Construction Loan Agreement and then remaining unpaid, together with interest on the outstanding Principal Amount from time to time at the Interest Rate. Interest only shall be due and payable monthly, commencing April 1, 2017 and on the same day of each successive month until March 1, 2018 (the “Payment Change Date”).
Beginning with the payment next due after the Payment Change Date, principal payments shall be due and payable pursuant to a schedule of principal payments based on a twenty year even amortization to be later attached to this Note as Schedule A to be then provided by the Lender, plus accrued interest, in equal monthly installments, followed by a final installment of all unpaid principal and interest due and payable on the Maturity Date. Borrower may elect an interest rate swap for all or any portion of the loan.
For so long as the Interest Rate in effect is a variable rate of interest, the loan evidenced hereby may be prepaid in part or in full at any time without premium. However, upon Borrower’s execution of any ISDA interest rate swap or other hedging agreement in connection with this Construction Loan Note synthetically converting the Interest Rate to an indicative fixed rate, any prepayment shall be subject to the terms of such a swap or hedge agreement, including any provisions relating to termination fees.
Notwithstanding the foregoing, Borrower may elect to reduce the “interest only” time period set forth herein and begin amortizing the Loan before the Payment Change Date, provided, however, that the total Loan amount has been fully advanced to the Borrower.
| 2 |
Borrower hereby authorizes Lender to charge checking account number _____________ at TD Bank, N.A. (or such other account maintained by Borrower at TD Bank, N.A. as Borrower shall designate by written notice to Lender) (the “Deposit Account”) to satisfy the monthly payments of principal and/or interest due and payable to Lender hereunder on the first (1st) day of each month (each, a “Charge Date”) and Lender is hereby authorized to charge the Deposit Account on each Charge Date or, if any Charge Date shall fall on a Saturday, Sunday or legal holiday, then the Lender reserves the right to charge the Deposit Account on either the first (1st) Business Day immediately preceding or on the first (1st) Business day immediately following any such Charge Date until the Note shall be paid in full.
Borrower agrees to maintain sufficient funds in the Deposit Account to satisfy the payment due Lender under the Note on the next succeeding Charge Date during the term of this Note. If sufficient funds are not available in the Deposit Account on any Charge Date to pay the amounts then due and payable under this Note, Lender, in its sole discretion, is authorized to: (a) charge the Deposit Account for such lesser amount as shall then be available; and/or (b) charge the Deposit Account on such later date or dates after the applicable Charge Date that funds shall be available in the Deposit Account to satisfy the payment then due (or balance of such payment then due). Notwithstanding the foregoing, Borrower shall only be entitled to receive credit in respect of any payments of principal and interest due under the Note for funds actually received by Lender as a result of any such charges to the Deposit Account. Borrower shall be liable to Lender for any late fees or interest at the Default Rate on any payments not made on a timely basis by Borrower because of insufficient funds in the Deposit Account on any Charge Date. In the event the Deposit Account continues to contain insufficient funds to fully satisfy the payments due Lender under the Note, Borrower shall be responsible for making all such payments from another source and in no event shall the obligations of Borrower under the Note be affected or diminished as a result of any shortages in the Deposit Account, it being understood and agreed that Borrower shall at all times remain liable for payment in full of all indebtedness under the Note.
Lender may, at Lender’s sole discretion, discontinue charging the Deposit Account at any time on not less than ten (10) days’ written notice to the Borrower, in which event, Borrower shall thereafter be responsible for making all payments hereunder to Lender at the address set forth in Lender’s notice or if no such address is given, then to Lender at P.O. Box 5600, Lewiston, Maine 04243-5600.
The Borrower and each endorser and guarantor hereof grant to the Bank a continuing lien on and security interest in any and all deposits or other sums at any time credited by or due from Lender or any Affiliate (as defined in the Construction Loan Agreement) of Lender to the Borrower and/or each endorser or guarantor hereof and any cash, securities, instruments or other property of the Borrower and each endorser and guarantor hereof in the possession of the Lender or any Lender Affiliate, whether for safekeeping or otherwise, or in transit to or from the Lender or any Lender Affiliate (regardless of the reason the Lender or Lender Affiliate had received the same or whether the Lender or Lender Affiliate has conditionally released the same) as security for the full and punctual payment and performance of all of the liabilities and obligations of the Borrower and/or any endorser or guarantor hereof to the Lender or any Lender Affiliate and such deposits and other sums may be applied or set off against such liabilities and obligations of the Borrower or any endorser or guarantor hereof to the Lender or any Lender Affiliate at any time, whether or not such are then due, whether or not demand has been made and whether or not other collateral is then available to the Lender or any Lender Affiliate.
| 3 |
Borrower shall pay a late payment charge of six cents ($.06) for each dollar ($1.00) of each payment that is made more than fifteen (15) days after the due date thereof, which charge shall be due and payable with each such late payment.
DEFAULT / POST JUDGMENT INTEREST RATE. The Lender shall have the right to charge interest on the unpaid principal balance hereof at an interest rate of four percent (4.0%) per annum in excess of the Interest Rate otherwise payable as provided herein (the “Default Rate”) for any period during which the Borrower has failed to make a required payment hereunder within ten (10) days of the due date therefor, or shall be in default under any material provision hereof or there shall be a default under any other document guarantying, governing or securing this Note. The Default Rate shall apply following entry of any judgment hereon notwithstanding any otherwise applicable statutory rate.
Notwithstanding any other provision of this Note, if Lender shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, (i) by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining the Adjusted LIBOR Rate, or (ii) it is unlawful for Lender to make or maintain the loan evidenced by the Note as a LIBOR Rate based loan as contemplated by this Note, or to obtain in the interbank Eurodollar market the funds with which to make such LIBOR Rate based loans, Lender shall give prompt written notice thereof to Borrower and after the giving of such notice, until any such notice has been withdrawn by Lender, the Principal Amount shall bear interest at another rate then designated by the Lender, in its sole discretion, for general commercial loan reference purposes.
If the adoption of or any change in any applicable law or regulation or in the interpretation or application thereof or compliance by Lender with any request or directive (whether or not having the force of law) from any central bank or other governmental authority made subsequent to the date hereof, shall (a) subject Lender to any tax of any kind whatsoever with respect to any LIBOR Rate based loan made by it, or change the basis of taxation of payments to Lender in respect thereof (except for changes in the rate of tax on the overall net income of Lender); (b) impose, modify, or hold applicable, any reserve, special deposit, compulsory loan, or similar requirement against assets held by, deposits or other liabilities in, or for the account of, advances, loans, or other extension of credit (including participations therein) by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the Adjusted LIBOR Rate hereunder; or (c) shall impose on such Lender any other condition; and the result of any of the foregoing is to materially increase the cost to Lender of making or maintaining the loan evidenced by this Note as a LIBOR Rate based loan, or to reduce any amount receivable hereunder, then, in any such case, Borrower shall promptly pay Lender, upon its demand, any additional amounts necessary to compensate Lender for such additional costs or reduced amount receivable which Lender reasonably deems to be material as determined by Lender, with respect to this Note. A certificate as to any additional amounts payable pursuant to this paragraph submitted by Lender to Borrower shall be presumptive evidence of such amounts owing. Lender agrees to use reasonable efforts to avoid, or to minimize, any amounts which might otherwise be payable pursuant to this paragraph provided however, that such efforts shall not cause the imposition on Lender of any additional costs or legal regulatory burdens deemed by Lender in good faith to be material.
| 4 |
During the term hereof, Borrower will deliver to Lender such financial information and reports as may be required by that certain Second Amended and Restated Loan Agreement dated on or about March 28, 2016, as the same may be amended from time to time. Borrower’s failure to timely supply such information shall constitute an Event of Default hereunder.
This Note is secured by, and the parties hereto are entitled to the benefits and security of, that certain Mortgage and Security Agreement dated on or about March 28, 2016 recorded in the Cumberland County Registry of Deeds in Book 33003, Page 114, as the same may have been, or may be, modified or amended from time to time including, without limitation by Modification dated of or about even date herewith with respect to certain property owned by Borrower and improvements now or in the future existing thereon, located at or about 33 Caddie Lane a/k/a Unit 11, Second Tee Business Park Condominium, Riverside Street, Portland, Maine, as well as an existing Amended and Restated Mortgage and Security Agreement dated on or about September 21, 2015 with respect to certain property with improvements thereon owned by Borrower and located at or about 56 Evergreen Drive, Portland, Maine (together, the “Mortgages”), related collateral assignments of leases and rents and certain security agreements dated on or about September 21, 2015 and on or about March 28, 2016 (the “Security Agreements”) covering all business assets from Borrower to Lender, and a certain Assignment of Contracts, Leases and Permits dated on or about March 28, 2016, all of the covenants, conditions and agreements of the Mortgages and Security Agreements being made a part of this Note by this reference, and by any other mortgage or security instrument executed and delivered by Borrower to Lender from time to time that secures all obligations or indebtedness of Borrower to Lender.
Except as may be otherwise provided in the Construction Loan Agreement or the Mortgages securing Borrower’s obligations hereunder, all monthly payments received by Lender hereunder shall be applied first, to the payment of accrued interest on the Principal Amount, second, to the reduction of the Principal Amount of this Note, and finally, the balance, if any, to the payment of any fees, costs, expenses or charges then payable by Borrower to Lender hereunder, under the Mortgages or under any other document executed and delivered by Borrower in connection with the loan evidenced by this Note.
Borrower agrees that if it fails to make any payment due under this Note, or upon the happening of any “Event of Default” (as defined in the Construction Loan Agreement) under the Construction Loan Agreement or either of the Mortgages, the outstanding Principal Amount, together with accrued interest and all other expenses, including, without limitation, reasonable attorneys’ fees, shall immediately become due and payable at the option of the holder of this Note, notwithstanding the Maturity Date. For purposes hereof, attorneys’ fees shall include, without limitation, fees and disbursements for legal services incurred by the holder hereof in collecting or enforcing payment hereof whether or not suit is brought, and if suit is brought, then through all appellate actions. From and after any “Event of Default” under the Construction Loan Agreement, the interest rate of this Note shall be the “Default Rate” (as defined herein).
In no event shall the total of all charges payable under this Note, the Construction Loan Agreement and any other documents executed and delivered in connection herewith and therewith that are or could be held to be in the nature of interest exceed the maximum rate permitted to be charged by applicable law. Should the Lender receive any payment of interest that is or would be in excess of that permitted to be charged under any such applicable law, such payment shall have been, and shall be deemed to have been, made in error and shall thereupon be applied to reduce the principal balance outstanding on this Note.
Borrower waives demand, presentment for payment, notice of dishonor, protest and notice of protest of this Note.
Any notice, demand or request relating to any matter set forth in this Note shall be given in the manner provided for in the Construction Loan Agreement.
Time is of the essence as to all dates set forth herein; provided, however, that whenever any payment to be made under this Note shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computations of payment of interest.
This Note may not be waived, changed, modified, terminated or discharged orally, but only by an agreement in writing signed by the party against whom enforcement of any such waiver, change, modification, termination or discharge is sought.
BORROWER, AND BY ITS ACCEPTANCE HEREOF, LENDER, EACH HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS NOTE, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. BORROWER AND LENDER ARE EACH HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.
| 5 |
This Note and the rights and obligations of the parties hereunder shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State (without giving effect to the State’s principles of conflicts of law). Borrower hereby irrevocably submits to the nonexclusive jurisdiction of any state or federal court in the State sitting in the City of Portland, County of Cumberland, over any suit, action or proceeding arising out of or relating to this Note, and Borrower hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding in any state or federal court in the State sitting in the City of Portland, County of Cumberland, may be made by certified or registered mail, return receipt requested, directed to the Borrower at the address indicated below, and service so made shall be complete five (5) days after the same shall have been so mailed.
By signing below, Borrower agrees and acknowledges that, under Maine law, no promise, contract, or agreement to lend money, extend credit, forbear from collection of debt or make any other accommodation for the repayment of a debt for more than $250,000 may be enforced against Lender unless the promise, contract, or agreement (or some memorandum or note thereof) is in writing and signed by Lender.
[NO FURTHER TEXT ON THIS PAGE]
| 6 |
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note on the Date of Note as an instrument under seal.
| ATTESTING WITNESS | Borrower: | |
| ImmuCell Corporation | ||
| /s/ David S. Champoux | By: | /s/ Michael F. Brigham |
| Name: | Michael Brigham | |
| Title: | Its President and CEO | |
| Borrower’s Address: | ||
56
Evergreen Drive | ||
| 7 |
SCHEDULE A to CONSTRUCTION LOAN NOTE
TO BE LATER ATTACHED/PROVIDED BY LENDER
EXHIBIT 10.17
IMMUCELL CORPORATION
Amended and Restated Promissory Note
($3,940,000) given by the Company in favor of TD Bank N.A.
dated March 1, 2017.
LOAN #__________
AMENDED AND RESTATED TERM LOAN NOTE
(Amends
and Restates Term Loan Note dated March 28, 2016 in the original
principal amount of $2,500,000.00)
Date of Note: |
March 1, 2017 |
| Principal Amount: | $3,940,000.00 |
| Maturity Date: | September 1, 2025 |
| Interest Rate: | An interest rate equal at all times to Two and One Quarter percent (2.25%) per annum in excess of the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) of the one (1) month LIBOR (as hereinafter defined). The Lender shall not be required to notify Borrower of adjustments in said interest rate.
“LIBOR” (i.e., the London Interbank Offered Rate) means the rate of interest in U.S. Dollars (rounded upwards, at the Lender's option, to the next 1/8th of one percent) equal to the Intercontinental Exchange Benchmark Administration Ltd. (“ICE, ”or the successor thereto if ICE is no longer making a London Interbank Offered Rate available) (“ICE LIBOR”) rate for the equivalent Interest Period as published by Bloomberg (or such other commercially available source providing quotations of ICE LIBOR as designated by Lender from time to time) at approximately 11:00 A.M. (London time) two (2) London Business Days prior to the Reset Date; provided however, if more than one ICE LIBOR is specified, the applicable rate shall be the arithmetic mean of all such rates. If, for any reason, such rate is not available, the term LIBOR Rate shall mean, for the LIBOR Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Lender to be the average rates per annum at which deposits in dollars are offered for such LIBOR Interest Period to major banks in the London Interbank market in London, England at approximately 11:00 A.M. (London time) two (2) Business Days prior to the Reset Date. The Interest Rate shall be computed on an actual/360 day basis (i.e., interest for each day during which the Principal Amount, or any part thereof, is outstanding shall be computed at the Interest Rate, divided by 360).
Notwithstanding the foregoing, LIBOR Rate loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to Lender. The LIBOR Rate shall be adjusted automatically on and as of the effective date of any change in the LIBOR Reserve Percentage or the LIBOR Interest Period for each LIBOR Rate loan comprising part of the same borrowing (including conversions, extensions and renewals), to a per annum interest rate determined pursuant to the following formula:
Adjusted LIBOR Rate = LIBOR Rate___________ 1 - LIBOR Reserve Percentage
For purposes of this calculation LIBOR Reserve Percentage is defined as, for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D, as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of LIBOR Rate loans is determined), whether or not Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. |
| LIBOR Interest Period: | Initially, the first (1st) LIBOR Interest Period hereunder shall be the period commencing on the date hereof and ending on (and including) March 31, 2017. Thereafter, each LIBOR Interest Period shall commence on the first (1st) day of the calendar month immediately following the previous LIBOR Interest Period (the “Reset Date”) and shall end on the last day of such month; provided however, (i) no LIBOR Interest Period shall extend beyond the Maturity Date of the Loan, and (ii) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such LIBOR Interest Period. |
| Business Day: | Any day on which domestic and international transactions are carried on in the London Interbank Market and commercial banks are open for business in London, England and are neither required nor authorized to close in the State. |
| State: | Shall mean the State of Maine. |
| 1 |
FOR VALUE RECEIVED, ImmuCell Corporation, a Delaware corporation (the “Borrower”), having an address as indicated below, HEREBY PROMISES TO PAY ON THE MATURITY DATE to the order of TD Bank, N.A., a national banking association, (hereinafter, together with its successors and assigns, referred to as the “Lender”) at One Portland Square, P.O. Box 9540, Portland, Maine, 04112, or at such other place as the holder hereof may from time to time designate in writing, in immediately available federal funds, the Principal Amount or so much thereof as shall be advanced by Lender to Borrower pursuant to the terms hereof and then remaining unpaid, together with interest on the outstanding Principal Amount from time to time at the Interest Rate. Interest only shall be due and payable monthly, commencing April 1, 2017 and on the same day of each successive month until September 1, 2018 or the date on which the full Principal Amount hereof has been advanced by Lender to Borrower, whichever is earlier (the “Advance Termination Date”).
Beginning with the payment next due after the Advance Termination Date, principal payments shall be due and payable pursuant to a schedule of principal payments based on a seven year even amortization to be later attached to this Note as Schedule A to be then provided by the Lender, plus accrued interest, in equal monthly installments, followed by a final installment of all unpaid principal and interest due and payable on the Maturity Date. Borrower may elect an interest rate swap for all or any portion of the loan.
Borrower shall pay a late payment charge of six cents ($.06) for each dollar ($1.00) of each payment that is made more than fifteen (15) days after the due date thereof, which charge shall be due and payable with each such late payment.
For so long as the Interest Rate in effect is a variable rate of interest, the loan evidenced hereby may be prepaid in part or in full at any time without premium. However, upon Borrower’s execution of any ISDA interest rate swap or other hedging agreement in connection with this Term Loan Note synthetically converting the Interest Rate to an indicative fixed rate, any prepayment shall be subject to the terms of such a swap or hedge agreement, including any provisions relating to termination fees.
Borrower may request advances hereunder (each, an “Advance” and collectively, “Advances”) through, to and including the Advance Termination Date, which Advances shall be utilized by Borrower solely for purposes of purchasing machinery and equipment to be installed at the property owned by Borrower and located at or about 33 Caddie Lane a/k/a Unit 11, Second Tee Business Park Condominium, Riverside Street, Portland, Maine (the “Project”) and shall not exceed the invoiced cost of such machinery and equipment, exclusive of taxes, freight and installation charges so long as the total of all requested and outstanding Advances does not exceed eighty percent (80%) of the total invoiced cost of machinery and equipment (exclusive of taxes, freight and installation charges) purchased or ordered with respect to the Project at the time of such request. Advances shall be used for commercial purposes and not for any personal, family or household use or for the purpose of purchasing or carrying any “margin security” or “margin stock” as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 221 and 224.
| 2 |
The aggregate principal amount of all outstanding Advances shall not exceed the Principal Amount of this Note at any time. Lender shall not be obligated to make Advances hereunder until such time as Borrower has provided Lender with evidence satisfactory to Lender that Borrower has contributed equity in the form of machinery and equipment purchased with non-borrowed funds, to the Project in the amounts set forth on Schedule B hereto.
Lender shall not be obligated to make Advances after the Advance Termination Date. Lender shall have the right to request periodic reports from Borrower as to the status of the Project from time to time and Lender shall not be obligated to make Advances hereunder until such time as such reports are received and are satisfactory to Lender, in its sole discretion. Lender will have no obligation to make Advances hereunder if: (a) a Default (as hereinafter defined) has occurred and is continuing, (b) an event has occurred which with the passage of time or giving of notice, if left uncured, would constitute a Default hereunder, (c) there occurs a material adverse change in Borrower’s financial condition or business or (d) Borrower has applied funds advanced pursuant to this Note for purposes other than those authorized by Lender.
All Advances requested by Borrower hereunder are to be in writing pursuant to a written request (“Advance Request”) executed by an Authorized Officer in form and content satisfactory to Lender, and shall include invoices from third party vendors and other documentation satisfactory to Lender, in its sole discretion, establishing that the requested advance amount is equal to a maximum of the invoiced cost of the equipment to be purchased, less taxes, freight and installation charges and that the total of all requested and outstanding Advances at the time of such Advance Request does not exceed eighty percent (80%) of the total invoiced cost of machinery and equipment (exclusive of taxes, freight and installation charges) purchased or ordered for the Project at the time of such Advance Request. For purposes hereof, the term “Authorized Officer” shall mean any officer (or comparable equivalent) of Borrower authorized by specific resolution of Borrower to request Advances as set forth in an authorization certificate delivered to Lender in the form set forth as Schedule C hereto. Lender shall be entitled to rely on each such authorization certificate received until such time as Lender actually receives an amended authorization certificate amending the information set forth therein. Borrower agrees to be liable for all sums advanced in accordance with the instructions of an Authorized Person.
Upon receiving a request for an Advance in accordance with this paragraph, and subject to the conditions set forth herein, Lender shall make the requested Advance available to Borrower as soon as is reasonably practicable thereafter on the day the requested Advance is to be made. Advances which may be made by Lender from time to time hereunder shall be made available by crediting such proceeds to Borrower’s operating account with Lender.
| 3 |
Borrower hereby authorizes Lender to charge checking account number _______________ at TD Bank, N.A. (or such other account maintained by Borrower at TD Bank, N.A. as Borrower shall designate by written notice to Lender) (the “Deposit Account”) to satisfy the monthly payments of principal and/or interest due and payable to Lender hereunder on the first (1st) day of each month (each, a “Charge Date”) and Lender is hereby authorized to charge the Deposit Account on each Charge Date or, if any Charge Date shall fall on a Saturday, Sunday or legal holiday, then the Lender reserves the right to charge the Deposit Account on either the first (1st) Business Day immediately preceding or on the first (1st) Business day immediately following any such Charge Date until the Note shall be paid in full.
Borrower agrees to maintain sufficient funds in the Deposit Account to satisfy the payment due Lender under the Note on the next succeeding Charge Date during the term of this Note. If sufficient funds are not available in the Deposit Account on any Charge Date to pay the amounts then due and payable under this Note, Lender, in its sole discretion, is authorized to: (a) charge the Deposit Account for such lesser amount as shall then be available; and/or (b) charge the Deposit Account on such later date or dates after the applicable Charge Date that funds shall be available in the Deposit Account to satisfy the payment then due (or balance of such payment then due). Notwithstanding the foregoing, Borrower shall only be entitled to receive credit in respect of any payments of principal and interest due under the Note for funds actually received by Lender as a result of any such charges to the Deposit Account. Borrower shall be liable to Lender for any late fees or interest at the Default Rate on any payments not made on a timely basis by Borrower because of insufficient funds in the Deposit Account on any Charge Date. In the event the Deposit Account continues to contain insufficient funds to fully satisfy the payments due Lender under the Note, Borrower shall be responsible for making all such payments from another source and in no event shall the obligations of Borrower under the Note be affected or diminished as a result of any shortages in the Deposit Account, it being understood and agreed that Borrower shall at all times remain liable for payment in full of all indebtedness under the Note.
Lender may, at Lender’s sole discretion, discontinue charging the Deposit Account at any time on not less than ten (10) days’ written notice to the Borrower, in which event, Borrower shall thereafter be responsible for making all payments hereunder to Lender at the address set forth in Lender’s notice or if no such address is given, then to Lender at P.O. Box 5600, Lewiston, Maine 04243-5600.
The Borrower and each endorser and guarantor hereof grant to the Bank a continuing lien on and security interest in any and all deposits or other sums at any time credited by or due from Lender or any Affiliate (as defined in the Security Agreements) of Lender to the Borrower and/or each endorser or guarantor hereof and any cash, securities, instruments or other property of the Borrower and each endorser and guarantor hereof in the possession of the Lender or any Lender Affiliate, whether for safekeeping or otherwise, or in transit to or from the Lender or any Lender Affiliate (regardless of the reason the Lender or Lender Affiliate had received the same or whether the Lender or Lender Affiliate has conditionally released the same) as security for the full and punctual payment and performance of all of the liabilities and obligations of the Borrower and/or any endorser or guarantor hereof to the Lender or any Lender Affiliate and such deposits and other sums may be applied or set off against such liabilities and obligations of the Borrower or any endorser or guarantor hereof to the Lender or any Lender Affiliate at any time, whether or not such are then due, whether or not demand has been made and whether or not other collateral is then available to the Lender or any Lender Affiliate.
| 4 |
Notwithstanding any other provision of this Note, if Lender shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, (i) by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining the Adjusted LIBOR Rate, or (ii) it is unlawful for Lender to make or maintain the loan evidenced by the Note as a LIBOR Rate based loan as contemplated by this Note, or to obtain in the interbank Eurodollar market the funds with which to make such LIBOR Rate based loans, Lender shall give prompt written notice thereof to Borrower and after the giving of such notice, until any such notice has been withdrawn by Lender, the Principal Amount shall bear interest at another rate then designated by the Lender, in its sole discretion, for general commercial loan reference purposes.
If the adoption of or any change in any applicable law or regulation or in the interpretation or application thereof or compliance by Lender with any request or directive (whether or not having the force of law) from any central bank or other governmental authority made subsequent to the date hereof, shall (a) subject Lender to any tax of any kind whatsoever with respect to any LIBOR Rate based loan made by it, or change the basis of taxation of payments to Lender in respect thereof (except for changes in the rate of tax on the overall net income of Lender); (b) impose, modify, or hold applicable, any reserve, special deposit, compulsory loan, or similar requirement against assets held by, deposits or other liabilities in, or for the account of, advances, loans, or other extension of credit (including participations therein) by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the Adjusted LIBOR Rate hereunder; or (c) shall impose on such Lender any other condition; and the result of any of the foregoing is to materially increase the cost to Lender of making or maintaining the loan evidenced by this Note as a LIBOR Rate based loan, or to reduce any amount receivable hereunder, then, in any such case, Borrower shall promptly pay Lender, upon its demand, any additional amounts necessary to compensate Lender for such additional costs or reduced amount receivable which Lender reasonably deems to be material as determined by Lender, with respect to this Note. A certificate as to any additional amounts payable pursuant to this paragraph submitted by Lender to Borrower shall be presumptive evidence of such amounts owing. Lender agrees to use reasonable efforts to avoid, or to minimize, any amounts which might otherwise be payable pursuant to this paragraph provided however, that such efforts shall not cause the imposition on Lender of any additional costs or legal regulatory burdens deemed by Lender in good faith to be material.
During the term hereof, Borrower will deliver to Lender such financial information and reports as may be required by that certain Second Amended and Restated Loan Agreement dated of or about even date herewith, as the same may be amended from time to time. Borrower’s failure to timely supply such information shall constitute a Default hereunder.
| 5 |
This Note is secured by, and the parties hereto are entitled to the benefits and security of, that certain security agreement dated on or about March 28, 2016 (the “2016 Security Agreement”) from Borrower to Lender and a certain Amended and Restated Security Agreement dated on or about September 21, 2015 from Borrower to Lender (the “2015 Security Agreement or, together with the 2016 Security Agreement, the “Security Agreements”), each covering all business assets of Borrower, as well as a certain Mortgage and Security Agreement with respect to certain property owned by Borrower and improvements now or in the future existing thereon, located at or about 33 Caddie Lane a/k/a Unit 11, Second Tee Business Park Condominium, Riverside Street, Portland, Maine, an existing Amended and Restated Mortgage and Security Agreement dated on or about September 21, 2015 with respect to certain property with improvements thereon owned by Borrower and located at or about 56 Evergreen Drive, Portland, Maine (the two said Mortgage and Security Agreements, together, the “Mortgages”) and related collateral assignments of leases and rents, all of the covenants, conditions and agreements of the said collateral security documents being made a part of this Note by this reference, and by any other mortgage or security instrument executed and delivered by Borrower to Lender from time to time that secures all obligations or indebtedness of Borrower to Lender.
It is the intention of the parties that Lender shall have a first priority purchase money security interest in equipment purchased by Borrower for which an Advance is made hereunder.
Except as may be otherwise provided in the Security Agreements or the Mortgages securing Borrower’s obligations hereunder, all monthly payments received by Lender hereunder shall be applied first, to the payment of accrued interest on the Principal Amount, second, to the reduction of the Principal Amount of this Note, and finally, the balance, if any, to the payment of any fees, costs, expenses or charges then payable by Borrower to Lender hereunder, under the Mortgages or under any other document executed and delivered by Borrower in connection with the loan evidenced by this Note.
Borrower agrees that if it fails to make any payment due under this Note, or upon the happening of any “Default” (as defined in the 2016 Security Agreement) under the Security Agreements or an “Event of Default” under either of the Mortgages, Lender shall have no obligation to make any further Advances and the outstanding Principal Amount, together with accrued interest and all other expenses, including, without limitation, reasonable attorneys’ fees, shall immediately become due and payable at the option of the holder of this Note, notwithstanding the Maturity Date. For purposes hereof, attorneys’ fees shall include, without limitation, fees and disbursements for legal services incurred by the holder hereof in collecting or enforcing payment hereof whether or not suit is brought, and if suit is brought, then through all appellate actions.
DEFAULT / POST JUDGMENT INTEREST RATE. The Lender shall have the right to charge interest on the unpaid principal balance hereof at an interest rate of four percent (4.0%) per annum in excess of the Interest Rate otherwise payable as provided herein (the “Default Rate”) for any period during which the Borrower has failed to make a required payment hereunder within ten (10) days of the due date therefor, or shall be in default under any material provision hereof or there shall be a default under any other document guarantying, governing or securing this Note. The Default Rate shall apply following entry of any judgment hereon notwithstanding any otherwise applicable statutory rate.
| 6 |
In no event shall the total of all charges payable under this Note and any other documents executed and delivered in connection herewith and therewith that are or could be held to be in the nature of interest exceed the maximum rate permitted to be charged by applicable law. Should the Lender receive any payment of interest that is or would be in excess of that permitted to be charged under any such applicable law, such payment shall have been, and shall be deemed to have been, made in error and shall thereupon be applied to reduce the principal balance outstanding on this Note.
Borrower waives demand, presentment for payment, notice of dishonor, protest and notice of protest of this Note.
Any notice, demand or request relating to any matter set forth in this Note shall be in writing and shall be deemed to have been sufficiently given or served for all purposes when presented personally, three (3) days after mailing by registered or certified mail, postage prepaid, or one (1) day after delivery to a nationally recognized overnight courier service providing evidence of the date of delivery, if to Borrower at 56 Evergreen Drive, Portland, Maine 04103, to the attention of Michael Brigham, President and CEO, and if to Lender, at its address first above written, to the attention of Nicholas Weightman, or at such other address of which a party shall have notified the party giving such notice in writing in accordance with the foregoing requirements.
Time is of the essence as to all dates set forth herein; provided, however, that whenever any payment to be made under this Note shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computations of payment of interest.
This Note may not be waived, changed, modified, terminated or discharged orally, but only by an agreement in writing signed by the party against whom enforcement of any such waiver, change, modification, termination or discharge is sought.
BORROWER, AND BY ITS ACCEPTANCE HEREOF, LENDER, EACH HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS NOTE, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. BORROWER AND LENDER ARE EACH HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.
This Note and the rights and obligations of the parties hereunder shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State (without giving effect to the State’s principles of conflicts of law). Borrower hereby irrevocably submits to the nonexclusive jurisdiction of any state or federal court in the State sitting in the City of Portland, County of Cumberland, over any suit, action or proceeding arising out of or relating to this Note, and Borrower hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding in any state or federal court in the State sitting in the City of Portland, County of Cumberland, may be made by certified or registered mail, return receipt requested, directed to the Borrower at the address indicated below, and service so made shall be complete five (5) days after the same shall have been so mailed.
By signing below, Borrower agrees and acknowledges that, under Maine law, no promise, contract, or agreement to lend money, extend credit, forbear from collection of debt or make any other accommodation for the repayment of a debt for more than $250,000 may be enforced against Lender unless the promise, contract, or agreement (or some memorandum or note thereof) is in writing and signed by Lender.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
| 7 |
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note on the Date of Note as an instrument under seal.
| ATTESTING WITNESS | Borrower: | |
| ImmuCell Corporation | ||
| /s/ David S. Champoux | By: | /s/ Michael F. Brigham |
| Name: | Michael Brigham | |
| Title: | Its President and CEO | |
| Borrower’s Address: | ||
56
Evergreen Drive | ||
A&R Term Note
| 8 |
SCHEDULE A to TERM LOAN NOTE
TO BE LATER ATTACHED/PROVIDED BY LENDER
| 9 |
SCHEDULE B to TERM LOAN NOTE
EQUITY CONTRIBUTION AND ADVANCE SCHEDULE
| Borrower’s Minimum Required Equity | Amount of Loan Funds Available |
| (cumulative amount) | (subject to the terms hereof) |
| $2,500,000.00 | Up to $500,000 |
| $4,000,000.00 | Up to an additional $2,000,000.00 |
| $4,800,000.00 (see Note 1, below) | Remaining Balance of Principal Amount of Note |
Note 1: Borrower’s Minimum Required Equity to be contributed prior to Lender advancing any portion of the Remaining Balance of Principal Amount of Note, as described above, shall be equal to the total cost of all equipment purchased, or to be purchased, in connection with the Project, less (a) the amount of loan proceeds evidenced by this Note previously advanced by Lender, and (b) the then-Remaining Balance of Principal Amount of Note. The amount of Borrower’s Equity shall not be less than $4,800,000.00 unless Borrower provides Lender with evidence satisfactory to Lender, in its sole discretion, that the total cost for all equipment purchased, or to be purchased, for the Project has been reduced, in which case the amount of Borrower’s Minimum Required Equity to be contributed before Lender shall advance the Remaining Balance of Principal Amount of Note shall be reduced in an amount equal to such reduction in cost.
Borrower:___________ Lender: ____________________
| 10 |
SCHEDULE C TO TERM LOAN NOTE
FORM OF AUTHORIZATION CERTIFICATE
(Borrower Letterhead)
Date: _______________
TD Bank, N.A.
_______________
_______________
Attention:
Dear _____________:
The following individuals are authorized to request loan Advances under that certain Amended and Restated Term Loan Note dated on or about March 1, 2017 executed and delivered by ImmuCell Corporation (“Borrower”):
| Authorized Person | Title | Signature | |||
| 1. | |||||
| 2. | |||||
| 3. | |||||
| Acknowledged and approved: | ||
| By: | ||
| Name: | ||
| Title: | ||
EXHIBIT 10.18
IMMUCELL CORPORATION
Amendment to Construction Loan Agreement between the Company and TD Bank N.A. dated
March 1, 2017.
AMENDMENT TO CONSTRUCTION LOAN AGREEMENT
This Amendment to Construction Loan Agreement is entered into this 1st day of March, 2017, by and between ImmuCell Corporation, a Delaware corporation having an address of 56 Evergreen Drive, Portland, Maine 04103 (hereinafter referred to as "Borrower") and TD Bank, N.A., a national banking association having a place of business at One Portland Square, P.O. Box 9540, Portland, County of Cumberland, and State of Maine (hereinafter referred to as the "Lender"), for itself and as agent for any Affiliate Counterparty, and amends that certain Construction Loan Agreement dated as of March 28, 2016 by and between such parties.
W I T N E S S E T H
WHEREAS, on or about March 28, 2016, Borrower executed and delivered to Lender a certain $2,000,000.00 Construction Loan Note evidencing a construction loan from Lender to Borrower in that amount; and
WHEREAS, the proceeds of the $2,000,000.00 construction loan are to be utilized by Borrower in connection with the construction of improvements at or about 33 Caddie Lane, Unit 11, Second Tee Business Park Condominium, Riverside Street, Portland, Maine (the “Property”);
WHEREAS, the parties entered into a Construction Loan Agreement (the “Construction Loan Agreement”) and related Assignment of Contracts with respect to the construction loan dated on or about March 28, 2016 regarding the administration of the said construction loan; and
WHEREAS, Borrower has now commenced construction on the Property, but pursuant to the terms and conditions of the construction loan, the proceeds of such loan have not yet been advanced; and
WHEREAS, Borrower and Lender are entering into a modification of the construction loan of or about even date pursuant to which the maximum amount of the construction loan was increased to $2,560,000 and Borrower is executing and delivering an Amended and Restated Construction Loan Note in that amount (the “Construction Loan Note”) to Lender; and
WHEREAS, the parties wish to amend the Construction Loan Agreement as set forth herein.
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NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree that the Construction Loan Agreement is, and shall be, hereby amended as follows:
1. The term “Borrower’s Equity” shall be defined as that portion of the Project Cost Statement for Hard Costs and Soft Costs to be funded by Borrower in advance of the Initial Advance, which shall be equal to the total project cost for the project to be constructed on the Premises in accordance with the Plans and the General Contract, as the same may be modified or amended from time to time, minus the Loan Amount. The amount of Borrower’s Equity shall not be less than $8,970,204.00 unless Borrower provides Lender with evidence satisfactory to Lender, in its sole discretion, that the total project cost for the completed project to be constructed on the Premises in accordance with the Plans and the General Contract has been reduced, in which case the amount of Borrower’s Equity shall be reduced in an amount equal to such reduction in project cost.
2. The term “Commitment Letter” shall be defined as that certain letter dated March 11, 2016, as amended and replaced by a certain term sheet dated December 5, 2016, from Lender to Borrower pursuant to which Lender agreed to make the Construction Loan to Borrower.
3. The term “Completion Date” shall mean December 31, 2017.
4. The term “General Contractor” shall mean Consigli Construction or such other construction firm retained by Borrower to act as its general contractor in connection with the project to be constructed on the Premises.
5. The term “Loan Amount” shall be defined as $2,560,000.00.
6. The term “Maturity Date” shall be defined as March 1, 2027.
7. The term “Mortgage” shall mean that certain Mortgage and Security Agreement, dated on or about March 28, 2016, made by Borrower in favor of Lender, for itself and as agent for any Affiliate Counterparty, to secure the payment and performance of Borrower’s obligations hereunder, under the Note, any Hedging Contracts and otherwise in respect of the Construction Loan or Hedging Obligations, including any sums in addition to the Loan Amount advanced by Lender for completion of the Improvements, as the same may have been, or may be, modified or amended from time to time including, without limitation, by Modification dated of or about even date herewith
8. The term “Note” shall be defined as the Amended and Restated Construction Loan Note dated on or about even date herewith, for a principal sum equal to the Loan Amount made by Borrower to Lender to evidence the Construction Loan.
9. Section 2.08 of the Construction Loan Agreement is hereby amended by inserting the following additional (third) paragraph at the end of such Section:
Notwithstanding anything to the contrary contained herein, Borrower may request Advances hereunder by submitting Requisitions in accordance with the terms hereof through, to and including February 28, 2018. Lender shall be under no obligation to fund any Advances for Requisitions or reimbursement requests submitted by Borrower to Lender after that date.
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10. Section 3.01(d)(iv) of the Construction Loan Agreement is hereby deleted in its entirety and replaced with the following:
(iv) Appraisal. An independent M.A.I. appraisal of the Premises and Improvements complying in all respects with the standards for real estate appraisals established pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended from time to time showing a loan to value ratio with respect to the Premises of the Improvements (as built) of no greater than 80%;
11. Section 3.01(d)(viii) of the Construction Loan Agreement is hereby deleted in its entirety and replaced with the following:
(viii) Commercial Mortgage Loan Inspection Plan. Commercial Mortgage Loan Inspection Plan of Units 10&11, “Fifth Amended Condominium Plat of Second Tee Business Park Condominium” for ImmuCell Corporation prepared by Sebago Technics, showing the location of the foundation of the Improvements within the perimeter of the boundaries of the Premises, provided the same is deemed acceptable to the Title Insurer for purposes of deletion or modification of the survey exception to the title policy in a manner acceptable to Lender.
12. Section 3.03(c) of the Construction Loan Agreement is hereby deleted in its entirety and replaced with the following:
(c) Intentionally Omitted.
13. Section 5.16 of the Construction Loan Agreement is hereby deleted in its entirety and replaced with the following:
Section 5.16 Loan Amount. At all times during the term hereof, Borrower shall maintain a loan to value ratio of 80% which means that the outstanding principal balance due, together with all unpaid interest which shall have accrued thereon, shall not exceed 80%, of the fair market value of the Premises and Improvements. Fair market value shall be determined by Lender from time to time by reference to acceptable guides and indexes and/or appraisals or such other means as Lender, in its discretion, deems appropriate. For purposes hereof, in calculating the loan to value ratio at anytime prior to the completion of the Improvements by Borrower as contemplated hereunder, Lender shall use the estimated fair market value that the Premises and Improvements would have if the Improvements contemplated hereunder had already been substantially completed. In the event that Lender shall at any time determine that the loan to value ratio is greater than 80%, Borrower shall within ten (10) days of notice and demand by Lender, either reduce the loan amount or pledge such additional collateral as may be acceptable to Lender in order to maintain the required loan to value ratio. Borrower's failure to either reduce the loan balance as necessary or satisfy Lender's demand for additional collateral acceptable to it within ten (10) days of notice having been given by Lender as required by Section 6.11, shall be considered a default hereunder.
14. New Section 5.20 is added, as follows:
Section 5.20 As-Built Survey. Within ninety (90) days of the earlier of (a) Borrower’s completion of the construction of the Improvements, or (b) submission of the requisition for the Last Direct Costs Advance described in Section 3.03, Borrower shall provide Lender with a final “as built” survey of the Premises certified to Lender and the Title Insurer, showing the completed Improvements, including (a) the location of the perimeter of the Premises by courses and distances, (b) all easements, rights-of-way, and utility lines referred to in the title policy required by this Agreement or which actually service or cross the Premises, (c) the lines of the streets abutting the Premises and the width thereof, and any established building and setback lines, (d) encroachments and the extent thereof upon the Premises, (e) if the Premises are described on a filed map or plan, a legend relating the survey to said map or plan, and (f) any common elements or limited common elements of the condominium.
15. Exhibit A to the Construction Loan Agreement is amended and replaced with Exhibit A attached hereto.
16. Exhibit B to the Construction Loan Agreement is amended and replaced with Exhibit B attached hereto.
17. Exhibit H to the Construction Loan Agreement is amended and replaced with Exhibit H attached hereto.
18. Except to the limited extent amended hereby, the Construction Loan Agreement remains unmodified in any respect, which Construction Loan Agreement the Borrower hereby ratifies and affirms.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed this 1st day of March, 2017.
| Signed, Sealed and Delivered In the Presence of: | ImmuCell Corporation | |
| /s/ David S. Champoux | By: | /s/ Michael F. Brigham |
| Witness | Michael Brigham | |
| Its President and CEO | ||
TD Bank, N.A. | ||
/s/ Joshua R. Dow |
By: | /s/ Nicholas Weightman |
| Witness | Nicholas Weightman | |
Its Vice President, Commercial Lending | ||
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EXHIBIT 10.24
IMMUCELL CORPORATION
Mortgage Loan Note for $340,000 given by the Company in favor of TD Bank N.A. dated March 16, 2017.
LOAN #___________
MORTGAGE LOAN NOTE
(Floating Rate)
| Date of Note: | March 16, 2017 |
| Principal Amount: | $340,000.00 |
| Definitions | |
| Business Day: | Any day (other than Saturday, Sunday, federal holiday, or a day on which commercial banks in the State are required or permitted to close) on which Lender is open and conducting its customary banking transactions, or, for purposes of determining LIBOR (as defined below), any day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits) in London, England. |
| Default Rate | A rate of interest equal to the Interest Rate provided herein plus four (4%) percent per annum, but in no event to exceed the maximum rate allowed by law. |
| Interest Rate (LIBOR) | An interest rate equal at all times to Two and One Quarter (2.25%) percent per annum (the “Margin") in excess of the rate of interest per annum of the one (1) month LIBOR (as defined below) for any LIBOR Interest Period (as hereinafter defined). The Lender shall not be required to notify Borrower of adjustments in said interest rate.
Notwithstanding the foregoing, or any other provision of this Note, if Lender shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, (i) by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining LIBOR, or (ii) LIBOR does not adequately and fairly reflect the cost to Lender of funding the loan evidenced hereby, or (iii) it is unlawful for Lender to extend or maintain any loan evidenced hereby as a loan subject to LIBOR, Lender shall give prompt written notice thereof to Borrower and after the giving of such notice, until any such notice has been withdrawn by Lender, any loan evidenced hereby shall bear interest at another rate of interest then designated by Lender, in its sole reasonable discretion, for general commercial loan reference purposes. |
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| LIBOR | The London Interbank Offered Rate rate of interest in U.S. Dollars (rounded upwards, at the Lender's option, to the next 1/8th of one percent) equal to the rate established by the Intercontinental Exchange Benchmark Administration, Ltd. (“ICE” or the successor thereto if ICE is no longer making a London Interbank Offered Rate available) as published by Bloomberg (or such other commercially available source providing quotations of LIBOR), as determined by the Lender (as hereafter defined) and in effect two (2) Business Days before the date of this Note and before the commencement of each LIBOR Interest Period (as defined below), provided however, if more than one LIBOR is specified, the applicable rate shall be the arithmetic mean of all such rates. London Business Days means any day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits) in London, England. If, for any reason, such rate is not available, the term LIBOR shall mean, with respect to any LIBOR Interest Period, the rate of interest per annum determined by Bank to be the average rate per annum at which deposits in dollars are offered for such Interest Period by major banks in London, England at approximately 11:00 A.M. (London time) two (2) Business Days prior to the commencement of each LIBOR Interest Period. |
Interest shall be computed on an actual/360 day basis (i.e., interest for each day during which the Principal Amount, or any part thereof, is outstanding shall be computed at Interest Rate divided by 360).
Notwithstanding the foregoing, LIBOR rate loans shall be deemed to constitute "eurocurrency liabilities" and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to Lender. The LIBOR rate shall be adjusted automatically on and as of the effective date of any change in the LIBOR Reserve Percentage or the LIBOR Interest Period for each LIBOR rate loan comprising part of the same borrowing (including conversions, extensions and renewals), to a per annum interest rate determined pursuant to the following formula:
Adjusted LIBOR Rate = LIBOR Rate 1 - LIBOR Reserve Percentage
For purposes of this calculation LIBOR Reserve Percentage is defined as, for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D, as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of LIBOR rate loans is determined), whether or not Lender has any eurocurrency liabilities subject to such reserve requirement at that time. |
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| LIBOR Interest Period | Initially, the first (1st) LIBOR Interest Period hereunder shall be the period commencing on the date hereof and ending on (and including) April 15, 2017. Thereafter, each LIBOR Interest Period shall commence on the sixteenth (16th) day of the calendar month immediately following the previous LIBOR Interest Period (the “Reset Date”) and shall end on the same day of the next consecutive month; provided however, (i) no LIBOR Interest Period shall extend beyond the Maturity Date of the Loan, and (ii) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such LIBOR Interest Period. |
| Maturity Date | March 16, 2027 |
| State: | The State of Maine |
FOR VALUE RECEIVED, ImmuCell Corporation, a Delaware corporation (the “Borrower”), having an address as indicated below, HEREBY PROMISES TO PAY to the order of TD Bank, N.A., a national banking association, (hereinafter, together with its successors and assigns, referred to as the “Lender”) at P.O. Box 5600, Lewiston, Maine 04243-5600, or at such other place as the holder hereof may from time to time designate in writing, in immediately available federal funds, the Principal Amount, which Principal Amount shall be due and payable on the Maturity Date, together with interest on the outstanding Principal Amount from time to time at Interest Rate as follows until this Note is paid in full:
1. Beginning on April 16, 2017 and continuing on the 16th day of each successive month through, to and including February 16, 2027, Borrower shall make monthly payments of principal and interest to Lender in amounts deemed necessary by Lender to amortize the outstanding Principal Amount over a twenty (20) year term that commenced on the date hereof at the Interest Rate then in effect. The initial monthly payment amount shall be $1,924.24. Unless sooner accelerated, this Note shall mature on March 16, 2027 at which time the entire outstanding Principal Amount (including costs and fees), together with all interest thereon, shall be due and payable without further notice or demand.
2. Because the Interest Rate on the loan evidenced hereby is a variable rate, the Lender is entitled, but not obligated, to recalculate the monthly payment amount annually on each anniversary date of this Note to ensure that the monthly payments are sufficient, in Lender’s sole discretion, to amortize the then outstanding Principal Amount over the remainder of the twenty year term at the Interest Rate then in effect and as projected by Lender at the time of each such recalculation; provided, however, if in any month the interest accrued at the Interest Rate in effect for such month exceeds the scheduled monthly payment, Borrower shall pay as a minimum monthly payment for such month the total amount of accrued interest.
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If, after the date hereof, any (a) adoption of, or change in, United States federal, state or foreign laws, regulations or treaties, or any governmental or quasi- governmental rules, regulations, policies, guidelines, requests or directives (whether or not having the force of law), including the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines or directives issued in connection therewith regardless of the date enacted, adopted or issued, or (b) change in the interpretation, promulgation, implementation or administration of or under any United States federal, state or foreign laws, regulations or treaties, or any governmental or quasi-governmental rules, regulations, policies, guidelines, requests or directives (whether or not having the force of law), including the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines or directives issued in connection therewith regardless of the date enacted, adopted or issued, by any court, governmental, quasi-governmental, central bank or comparable agency or monetary authority that is charged with the interpretation or administration thereof, shall (1) subject Lender to any tax of any kind whatsoever with respect to any loans made by it, or change the basis of taxation of payments to Lender in respect thereof (except for changes in the rate of tax on the overall net income of Lender); (2) impose, modify, or hold applicable, any reserve, special deposit, compulsory loan, or similar requirement against assets held by, deposits or other liabilities in, or for the account of, advances, loans, or other extension of credit (including participations therein) by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of rate under the Note; or (3) impose on such Lender any other condition; and the result of any of the foregoing is to materially increase the cost to Lender of making or maintaining the loan evidenced by the Note, or to reduce any amount receivable under the Note, or any other Loan Document, then, in any such case, Borrower shall promptly pay Lender, upon its demand, any additional amounts necessary to compensate Lender for such additional costs or reduced amount receivable which Lender reasonably deems to be material as determined by Lender, with respect to the Loan. A certificate as to any additional amounts payable pursuant to this paragraph submitted by Lender to Borrower shall be presumptive evidence of such amounts owing. Lender agrees to use reasonable efforts to avoid, or to minimize, any amounts which might otherwise be payable pursuant to this paragraph provided however, that such efforts shall not cause the imposition on Lender of any additional costs or legal regulatory burdens deemed by Lender in good faith to be material.
Borrower hereby authorizes Lender to charge checking account number at TD Bank, N.A. (or such other account maintained by Borrower at TD Bank, N.A. as Borrower shall designate by written notice to Lender) (the “Deposit Account”) to satisfy the monthly payments of principal and/or interest due and payable to Lender hereunder on the sixteenth (16th) day of each month (each, a “Charge Date”) and Lender is hereby authorized to charge the Deposit Account on each Charge Date or, if any Charge Date shall fall on a Saturday, Sunday or legal holiday, then the Lender reserves the right to charge the Deposit Account on either the first (1st) Business Day (as herein defined) immediately preceding or on the first (1st) Business Day immediately following any such Charge Date until the Note shall be paid in full.
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Borrower agrees to maintain sufficient funds in the Deposit Account to satisfy the payment due Lender under the Note on the next succeeding Charge Date during the term of the Loan. If sufficient funds are not available in the Deposit Account on any Charge Date to pay the amounts then due and payable under this Note, Lender is, in its sole discretion authorized to: (a) charge the Deposit Account for such lesser amount as shall then be available; and/or (b) charge the Deposit Account on such later date or dates that funds shall be available in the Deposit Account to satisfy the payment then due (or balance of such payment then due). Notwithstanding the foregoing, Borrower shall only be entitled to receive credit in respect of any payments of principal and interest due under the Note for funds actually received by Lender as a result of any such charges to the Deposit Account. Borrower shall be liable to Lender for any late fees or interest at the Default Rate on any payments not made on a timely basis by Borrower because of insufficient funds in the Deposit Account on any Charge Date. In the event the Deposit Account continues to contain insufficient funds to fully satisfy the payments due Lender under the Note, Borrower shall be responsible for making all such payments from another source and in no event shall the obligations of Borrower under the Note be affected or diminished as a result of any shortages in the Deposit Account, it being understood and agreed that Borrower shall at all times remain liable for payment in full of all indebtedness under the Note.
Lender may, at Lender’s sole discretion, discontinue charging the Deposit Account at any time on not less than ten (10) days’ written notice to the Borrower, in which event, Borrower shall thereafter be responsible for making all payments hereunder to Lender at the address set forth in Lender’s notice or if no such address is given, then to Lender at P.O. Box 5600, Lewiston, Maine, 04243-5600.
The Borrower and each endorser and guarantor hereof grant to the Lender a continuing lien on and security interest in any and all deposits or other sums at any time credited by or due from the Lender or any Lender Affiliate (as hereinafter defined) to the Borrower and/or each endorser or guarantor hereof and any cash, securities, instruments or other property of the Borrower and each endorser and guarantor hereof in the possession of the Lender or any Lender Affiliate, whether for safekeeping or otherwise, or in transit to or from the Lender or any Lender Affiliate (regardless of the reason the Lender or Lender Affiliate had received the same or whether the Lender or Lender Affiliate has conditionally released the same) as security for the full and punctual payment and performance of all of the liabilities and obligations of the Borrower and/or any endorser or guarantor hereof to the Lender or any Lender Affiliate and such deposits and other sums may be applied or set off against such liabilities and obligations of the Borrower or any endorser or guarantor hereof to the Lender or any Lender Affiliate at any time, whether or not such are then due, whether or not demand has been made and whether or not other collateral is then available to the Lender or any Lender Affiliate.
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Notwithstanding anything to the contrary herein, whenever any payment to be made under this Note shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computations of payment of interest.
In the event any payment provided for herein or in any other Loan Document (as defined in the Mortgage, as defined below) shall become overdue for a period in excess of fifteen (15) days, a late charge of six cents ($.06) for each dollar ($1.00) so overdue shall become immediately due and payable to Lender. Each such late charge shall be deemed to be part of the indebtedness and obligations secured by the Mortgage.
This Note is secured by, and the holder is entitled to the benefits and security of, inter alia, that certain Mortgage and Security Agreement from Borrower, as mortgagor, to Lender, as mortgagee, encumbering, among other things, certain real property and improvements and rights relative thereto described in the Mortgage (the “Mortgage”), dated the date hereof, all of the covenants, conditions and agreements of the Mortgage being made a part of this Note by this reference. This Note is also secured by any other mortgage or security instrument executed and delivered by Borrower to Lender from time to time that secures all obligations or indebtedness of Borrower to Lender. Reference is also hereby made to that certain Second Amended and Restated Loan Agreement dated March 28, 2016 between Borrower and Lender with respect to certain financial covenants and reporting requirements (the “Loan Agreement”). This Note shall constitute additional “Indebtedness,” as that term is defined in the Loan Agreement, and the financial covenants and reporting requirements set forth therein shall apply to the loan evidenced by this Note.
Upon the occurrence of any Event of Default (as defined in the Mortgage), Lender may exercise any and all rights and remedies under the Loan Documents (including without limitation, rights to accelerate the Loan), or available at law or equity, or both. Borrower shall be obligated to reimburse Lender for all Expenses (as defined and provided for in the Mortgage), incurred by Lender. From and after the occurrence of any Event of Default, the interest rate of this Note shall be at the Default Rate.
In no event shall the total of all charges payable under this Note, the Mortgage and any other documents executed and delivered in connection herewith and therewith that are or could be held to be in the nature of interest exceed the maximum rate permitted to be charged by applicable law. Should Lender receive any payment that is or would be in excess of that permitted to be charged under any such applicable law, such payment shall have been, and shall be deemed to have been, made in error and shall thereupon be applied to reduce the principal balance outstanding on this Note.
This Note may be prepaid, in whole or in part without Prepayment Premium, so long as Lender is given not less than five (5) Business Days’ notice of such prepayment and each prepayment is made in immediately available federal funds. All partial prepayments shall be applied to the installments of principal due hereunder in the inverse order of their maturity.
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Borrower waives demand, presentment for payment, notice of dishonor, protest and notice of protest of this Note.
Any notice, demand or request relating to any matter set forth in this Note shall be given in the manner provided for in the Mortgage. Time is of the essence as to all dates set forth herein.
This Note may not be waived, changed, modified, terminated or discharged orally, but only by an agreement in writing signed by the party against whom enforcement of any such waiver, change, modification, termination or discharge is sought.
Lender is subject to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56) (signed into law October 26, 2001)) (the “Act”) and hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow Lender to identify the Borrower in accordance with the Act.
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST IN RESPECT OF ANY LITIGATION BASED ON THIS NOTE, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE CONSTITUTES A MATERIAL INDUCEMENT FOR BORROWER AND LENDER TO ENTER INTO THE TRANSACTIONS CONTEMPLATED HEREBY. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.
BORROWER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY OR ON BEHALF OF LENDER ON THIS NOTE, ANY AND EVERY RIGHT BORROWER MAY HAVE (I) TO OBJECT TO THE JURISDICTION OR VENUE OF ANY STATE COURT SITTING IN PORTLAND, CUMBERLAND COUNTY, OR ANY FEDERAL COURT LOCATED IN THE STATE, (II) TO INJUNCTIVE RELIEF, AND (III) TO HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. THE FOREGOING WAIVERS ARE GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF ANY OR ALL OF THE FOREGOING WAIVERS.
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This Note and the rights and obligations of the parties hereunder shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State (without giving effect to the State’s principles of conflicts of law).
This Note evidences a loan for business and commercial purposes, and not for personal, family or household purposes. No invalidity or unenforceability of any portion of this Note shall affect the validity or enforceability of the remaining portions hereof. This Note shall take effect as a sealed instrument, as of the date first set forth above, regardless of the actual date of execution and delivery.
Borrower acknowledges that this paragraph shall constitute notice that State law provides that a borrower may not maintain an action upon any agreement to lend money, extend credit, forbear from collection of a debt, or make any other accommodation for the payment of a debt for more than $250,000 unless the promise, contract or agreement is in writing and is signed by a personal lawfully authorized to sign for the party to be charged with the promise, contract or agreement.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the Borrower has executed and delivered this Note on the Date of Note.
| Address: | Borrower: | |
| ImmuCell Corporation | ||
| 56 Evergreen Drive | ||
| Portland, Maine 04103 | By: | /s/ Michael F. Brigham |
| Name: | Michael Brigham | |
| Title: | President and CEO | |
Note
9
EXHIBIT 23
IMMUCELL CORPORATION
CONSENT OF BAKER NEWMAN & NOYES, LLC
CONSENT OF INDEPENDENT Registered Public Accounting Firm
To the Board of Directors
ImmuCell Corporation
We consent to the incorporation by reference in Registration Statements No. 333-207635 and No. 333-214641 on Form S-3 and Registration Statements No. 333-02631, No. 333-65514 and No. 333-167721 on Form S-8 of ImmuCell Corporation of our report, dated March 25, 2016, relating to our audit of the financial statements of ImmuCell Corporation as of and for the year ended December 31, 2015, which appears in this Annual Report on Form 10-K of ImmuCell Corporation for the year ended December 31, 2016.
| Portland, Maine | /s/ Baker Newman & Noyes | |
| March 30, 2017 | Limited Liability Company |
EXHIBIT 23.1
IMMUCELL CORPORATION
CONSENT OF RSM US LLP
CONSENT OF INDEPENDENT Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Nos. 333-207635 and 333-214641) on Form S-3 and the Registration Statements (Nos. 333-02631, 333-65514, and 333-167721) on Form S-8 of ImmuCell Corporation of our report dated March 30, 2017, relating to our audit of the financial statements as of and for the year ended December 31, 2016, which appears in this Annual Report on Form 10-K of ImmuCell Corporation for the year ended December 31, 2016.
| /s/ RSM US LLP | |
| Boston, Massachusetts | |
| March 30, 2017 |
EXHIBIT 31
IMMUCELL CORPORATION
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 30, 2017 | |
| /s/ Michael F. Brigham | |
| Michael F. Brigham | |
| President, Chief Executive Officer and Principal Financial Officer |
EXHIBIT 32
IMMUCELL CORPORATION
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, 2016, 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 30, 2017 |
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.
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Mar. 20, 2017 |
Jun. 30, 2016 |
|
| Document and Entity Information [Abstract] | |||
| Entity Registrant Name | IMMUCELL CORP /DE/ | ||
| Entity Central Index Key | 0000811641 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Document Type | 10-K | ||
| Amendment Flag | false | ||
| Document Period End Date | Dec. 31, 2016 | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2016 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 22,866,000 | ||
| Entity Common Stock, Shares Outstanding | 4,848,390 |
Balance Sheets (Parenthetical) - $ / shares |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value (in dollars per share) | $ 0.10 | $ 0.10 |
| Common stock, shares authorized | 10,000,000 | 8,000,000 |
| Common stock, shares issued | 5,044,838 | 3,261,148 |
| Common stock, shares outstanding | 4,847,390 | 3,055,034 |
| Treasury stock, shares | 197,448 | 206,114 |
Statements of Operations - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Income Statement [Abstract] | ||
| Product sales | $ 9,543,961 | $ 10,228,689 |
| Cost of goods sold | 4,123,266 | 3,977,787 |
| Gross margin | 5,420,695 | 6,250,902 |
| Sales and marketing expenses | 1,831,317 | 1,606,898 |
| Administrative expenses | 1,454,839 | 1,286,373 |
| Product development expenses | 1,244,335 | 1,235,309 |
| Operating expenses | 4,530,491 | 4,128,580 |
| NET OPERATING INCOME | 890,204 | 2,122,322 |
| Other expenses, net | 131,882 | 58,774 |
| INCOME BEFORE INCOME TAXES | 758,322 | 2,063,548 |
| Income tax expense | 249,874 | 850,309 |
| NET INCOME | $ 508,448 | $ 1,213,239 |
| Weighted average common shares outstanding: | ||
| Basic | 4,225,789 | 3,042,376 |
| Diluted | 4,336,229 | 3,165,735 |
| NET INCOME PER SHARE: | ||
| Basic | $ 0.12 | $ 0.40 |
| Diluted | $ 0.12 | $ 0.38 |
Statements of Comprehensive Income - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Statement of Other Comprehensive Income [Abstract] | ||
| Net income | $ 508,448 | $ 1,213,239 |
| Other comprehensive income (loss): | ||
| Interest rate swaps, before taxes | 41,179 | (39,708) |
| Income tax applicable to interest rate swaps | (14,825) | 12,783 |
| Other comprehensive income (loss), net of taxes | 26,354 | (26,925) |
| Total comprehensive income | $ 534,802 | $ 1,186,314 |
Statements of Stockholders' Equity(Parenthetical) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
USD ($)
| |
| Statement of Stockholders' Equity [Abstract] | |
| Common stock, offering costs | $ 586,779 |
| Common stock, placement costs | $ 303,450 |
Business Operations |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 | |||
| Business Operations [Abstract] | |||
| BUSINESS OPERATIONS |
ImmuCell Corporation (the “Company”, “we”, “us”, “our”) is an animal health company whose purpose is to create scientifically-proven and practical products that improve animal health and productivity in the dairy and beef industries. The Company was originally incorporated in Maine in 1982 and reincorporated in Delaware in 1987, in conjunction with its initial public offering of common stock. We market products that provide immediate immunity to newborn dairy and beef cattle. We are developing product line extensions of our existing products and are in the late stages of developing a novel product that addresses mastitis, the most significant cause of economic loss to the dairy industry. These products help reduce the need to use traditional antibiotics in food producing animals. The Company is subject to certain risks associated with its stage of development including dependence on key individuals, competition from other larger companies, the successful sale of existing products and the development and acquisition of additional commercially viable products with appropriate regulatory approvals, where applicable. The $20,000,000 investment we are making in a Nisin production plant for Mast Out® is being funded from available cash and bank debt, together with cash flows from ongoing operations. |
Summary of Significant Accounting Policies |
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| Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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). Certain prior year accounts have been reclassified to conform with the 2016 financial statement presentation.
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 $4,650,044 and $1,073,028 as of December 31, 2016 and 2015, respectively. We account for investments in marketable securities in accordance with Codification Topic 320, Investments – Debt and Equity Securities. Short-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Long-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than twelve months from the balance sheet date. Short-term and long-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. See Note 3.
Inventory includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method, or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead. See Note 4.
Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection and product returns. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as income when received. Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is charged on past due accounts receivable. See Note 5.
We depreciate property, plant and equipment on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. The facility we are constructing to produce the active ingredient, Nisin, for Mast Out® will be depreciated over its useful life beginning when that facility is placed into service, which could be before the Food and Drug Administration (FDA) approval of the product is achieved. This facility is not yet placed in service. We are evaluating the estimated useful lives of the assets associated with this facility. Repairs to fixed assets that benefit more than a current period are capitalized and depreciated over their useful lives. See Note 7.
We amortize intangible assets on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. We have recorded intangible assets related to customer relationships, non-compete agreements, and developed technology, each with defined useful lives. We have classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) acquired in purchase transactions.
We assess the impairment of intangible assets and goodwill that have indefinite lives 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 assess goodwill for impairment annually, at the reporting unit level whenever events or circumstances indicate impairment may exist. In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would then perform step one of the two-step impairment test; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the two-step impairment test. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. Factors that could indicate that an impairment may exist include significant under-performance relative to plan or long-term projections, significant changes in business strategy and significant negative industry or economic trends. Although we believe intangible assets and goodwill are appropriately stated in the accompanying financial statements, changes in strategy or market conditions could significantly impact these judgements and require an adjustment to the recorded balance. No goodwill impairments were recorded during the year ended December 31, 2016. See Notes 2(h), 8 and 9 for additional disclosures.
In determining fair value measurements, we follow the provisions of Codification Topic 820, Fair Value Measurements and Disclosures. Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. At December 31, 2016 and 2015, the carrying amounts of cash and cash equivalents, accounts receivable, inventory, other assets, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value. The three-level hierarchy is as follows:
Level 1 - Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.
Level 2 - Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.
Level 3 - Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors specific to the investment.
Our held to maturity securities are comprised of investments in bank certificates of deposit. The value of these securities is disclosed in Note 3. We also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments is based on their closing published net asset value.
We assess the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with our accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. During the years ended December 31, 2016 and 2015, there were no transfers between levels. As of December 31, 2016 and 2015, 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, 2016 and 2015, our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2016 and 2015, 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, 2016 or 2015.
We periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows. No impairment was recognized during the years ended December 31, 2016 or 2015.
Concentration of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:
Accounts receivable due from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:
*Amount is less than 10%.
We believe that supplies and raw materials for the production of our products are available from more than one vendor or farm. Our policy is to maintain more than one source of supply for the components used in our products. However, there is a risk that we could have difficulty in efficiently acquiring essential supplies.
All derivatives are recognized on the balance sheet at their fair value. We entered into interest rate swap agreements in 2010 and 2015. On the dates the agreements were entered into, we designated the derivatives as hedges of the variability of cash flows to be paid related to our long-term debt. The agreements have been determined to be highly effective in hedging the variability of identified cash flows, so changes in the fair market value of the interest rate swap agreements are recorded as comprehensive income (loss), until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). We formally documented the relationship between the interest rate swap agreements and the related hedged items. We also formally assess, both at the interest rate swap agreements’ inception and on an ongoing basis, whether the agreements are highly effective in offsetting changes in cash flow of hedged items. See Note 11.
We sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met. These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii) the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We offer a 50% account credit to domestic distributors on expired First Defense® product that is returned to us past its expiration date, which is generally two years past its date of manufacture. At the time of sale, we estimate returns and record a corresponding liability. We generally have experienced an immaterial amount of product returns.
Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $114,860 and $94,607 during the years ended December 31, 2016 and 2015, respectively. All product development expenses are expensed as incurred, as are all related patent costs. We capitalize costs to produce inventory during the production cycle, and these costs are charged to costs of goods sold when the inventory is sold to a customer.
We account for income taxes in accordance with Codification Topic 740, Income Taxes, which requires that we recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. We believe it is more likely than not that the deferred tax assets will be realized through future taxable income and future tax effects of temporary differences between book income and taxable income. Accordingly, we have not established a valuation allowance for the deferred tax assets. Codification Topic 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must meet before being recognized in the financial statements. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other taxing authorities. Our tax returns for the years 2013 through 2016 are subject to audit. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as of December 31, 2016. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 14.
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 $67,399 and $23,222 during the years ended December 31, 2016 and 2015, respectively, which resulted in a decrease to income before income taxes of less than $0.01 per share during each of the periods reported.
Net income per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding during the period. The diluted net income per share has been computed by dividing net income by the weighted average number of shares outstanding during the period plus all outstanding stock options with an exercise price that is less than the average market price of the common stock during the period less the number of shares that could have been repurchased at this average market price with the proceeds from the hypothetical stock option exercises. The weighted average and diluted number of shares outstanding consisted of the following:
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, goodwill, accrued expenses and costs of goods sold accounts as well as amortization of our intangible assets.
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 was initially to become effective for the Company on January 1, 2017. Early application was not permitted. In July 2015, the FASB approved a one-year deferral in the effective date to January 1, 2018, with the option of applying the standard on the original effective date. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We intend to utilize the modified retrospective method and have made a preliminary evaluation of the effect that ASU 2014-09 would have on our financial statements and related disclosures and do not expect ASU 2014-09 to have a material impact on our financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern”, which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We implemented this guidance during 2016. The adoption of this guidance did not have a material impact on our financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update is effective for the annual reporting periods beginning after December 15, 2015. During the first quarter of 2016, we adopted ASU 2015-03 and reclassified $40,792 of debt issuance costs (net) from other assets to a reduction in our bank debt liability as of December 31, 2015. In August 2015, the FASB confirmed that ASU No. 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. For line-of-credit arrangements, borrowers have the option of presenting debt issuance costs as an asset which is subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any related outstanding borrowings. ASU No. 2015-03 did not have a material impact on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory, which simplifies the existing guidance which requires entities to subsequently measure inventory at the lower of cost or market value. Under ASU No. 2015-11, an entity should measure inventory valued using a first-in, first-out or average cost method at the lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2015-11 during the third quarter of 2016, and it did not have a material impact on our financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which simplifies the existing guidance which requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Under ASU No. 2015-17, an entity should classify all deferred tax liabilities and assets as one noncurrent deferred tax liability or asset (net) within the statement of financial position. The amendments apply to all entities that present a classified statement of financial position and are effective for the public business entities for annual periods beginning after December 15, 2016, including interim periods therein. Earlier application was permitted. During the first quarter of 2016, we adopted ASU No. 2015-17 early and reclassified $19,588 of current deferred tax liabilities to long-term, which amount was netted against our long-term deferred tax asset, as of December 31, 2015. ASU No. 2015-17 did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. Based on our current lease agreements, we are not subject to material lease obligations, and we do not expect ASU 2016-02 to have a material impact on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows. The most significant change resulting from these amendments is recording all the tax effects related to share-based payments at settlement through the income statement. Under existing guidance, tax benefits in excess of compensation costs (“windfalls”) are recorded in equity. Similarly, tax deficiencies below compensation costs (“shortfalls”) are recorded in equity to the extent of previous windfalls, while shortfalls in excess of this are recorded to the income statement. Furthermore, the new guidance is expected to increase the dilutive effect of share-based payment awards as a result of no longer assuming that tax benefits are used to purchase our common stock under the treasury method. The amendments also provide an alternative to estimating stock award forfeitures and instead recording at the time of forfeiture. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2016-09 during 2016, and it did not have a material impact on our financial statements. |
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Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments |
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| Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS |
Cash, cash equivalents, short-term investments and long-term investments (at amortized cost plus accrued interest) consisted of the following:
Held to maturity securities (certificates of deposit) are carried at amortized cost. The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income. As of December 31, 2016 and 2015, the fair value of held to maturity securities consisted of the following:
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Inventory |
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| Inventory [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORY |
Inventory consisted of the following:
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Accounts Receivable |
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| Accounts Receivable[Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCOUNTS RECEIVABLE |
Accounts receivable consisted of the following:
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Prepaid Expenses and Other Current Assets |
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| Prepaid Expenses and Other Current Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consisted of the following:
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Property, Plant and Equipment |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
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Business Acquisition |
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| Business Acquisition [Abstract] | |||
| 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 for an oral delivery option to newborn calves via a syringe (or tube). This product format offers customers an alternative delivery option to the bolus (the standard delivery format of the bivalent First Defense® product since first approval by the U.S. Department of Agriculture (USDA) and product launch in 1991) and could allow more market penetration. The formulation was developed for us and has been sold as a feed product without disease claims since 2012. This purchase also includes certain other related private-label products. The total purchase price was approximately $532,000. Approximately $368,000 of this amount was paid as of the closing date. A technology transfer payment of $97,000 was made during the third quarter of 2016. There are also royalty payments owed based on a percentage of sales made through December 31, 2018. There is no limit to the royalty amount. As of January 4, 2016, we estimated the aggregate royalties to be paid would be approximately $67,000, which was recorded in accounts payable and accrued expenses on the accompanying balance sheet. As of December 31, 2016, this amount was estimated to be approximately $30,000. We made payments of $8,200 for the year ended December 31, 2016. The estimated fair values of the assets purchased in this transaction included inventory of $113,000, machinery and equipment of $132,000, a developed technology intangible of $191,000 (which includes an immaterial amount of value associated with customer relationships and a non-compete agreement, and was valued using the relief from royalty method) and goodwill of $96,000. The intangible assets and goodwill are deductible for tax return purposes. The goodwill arising from the acquisition consists largely of the estimated value of anticipated growth opportunities arising from synergies and efficiencies. The measurement period for the transaction was closed as of June 30, 2016, and we continue to assess any impairment of these assets acquired in accordance with our policies. The impact of the acquisition on our pro forma prior year operations is not material. As of December 31, 2016, we vacated the rented facility in Minnesota that had been used to produce the gel solution format of our product and certain other related private-label products. This resulted in the termination of employment of four employees, as these production functions were consolidated into our Portland facility, which enables us to better utilize existing infrastructure and larger scale equipment to improve operating efficiencies. |
Intangible Assets |
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| Intangible Assets [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE ASSETS |
The intangible assets described in Note 8 are being amortized to cost of goods sold over their useful lives, which are estimated to be 10 years. Intangible amortization expense was $19,104 during the year ended December 31, 2016. The net value of these intangibles was $171,936 as of December 31, 2016. A summary of intangible amortization expense estimated for the five years beginning January 1, 2017 and thereafter is as follows:
Intangible assets as of December 31, 2016 consisted of the following:
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Accounts Payable and Accrued Expenses |
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| Accounts Payable and Accrued Expenses [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consisted of the following:
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Bank Debt |
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| Bank Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BANK DEBT |
During the first quarter of 2016, we entered into bank debt agreements covering certain additional credit facilities with TD Bank N.A. aggregating up to approximately $4.5 million. As a result of loan amendments entered into with TD Bank N.A. on March 1, 2017, these credit facilities now aggregate up to approximately $6.5 million, subject to certain restrictions as defined in the agreements. The first instrument is comprised of a construction loan of up to $2.5 million and not to exceed 80% of the cost of equipment installed in the to-be-constructed commercial-scale Nisin production facility for Mast Out®. Effective March 1, 2017, this loan amount was increased by $1.44 million to $3.94 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through July 2018, at which time the loan converts to a seven-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a seven-year amortization schedule. The second instrument is comprised of a construction loan of up to $2.0 million and not to exceed 80% (75% prior to the March 1, 2017 amendment) of the appraised value of the to-be-constructed commercial-scale Nisin production facility in Portland, Maine. Effective March 1, 2017, this loan amount was increased by $560,000 to $2.56 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through January 2018, at which time the loan converts to a nine-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a twenty-year amortization schedule with a balloon principal payment of approximately $1.654 million due in January 2027. These credit facilities are secured by substantially all of our assets and are subject to certain financial covenants. There were no amounts outstanding under these facilities as of December 31, 2016.
Additionally, we have in place certain credit facilities with TD Bank N.A. not to exceed 80% of the appraised value of our corporate headquarters and production and research facility in Portland, which are secured by substantially all of our assets and are subject to certain financial covenants. Proceeds from the $1.0 million mortgage note were received during the third quarter of 2010. Based on a 15-year amortization schedule, a balloon principal payment of $451,885 will be due during the third quarter of 2020. Proceeds from the $2.5 million mortgage note were received during the third quarter of 2015. Based on a 20-year amortization schedule, a balloon principal payment of approximately $1.55 million will be due during the third quarter of 2025. Principal payments (net of debt issuance costs) due under debt outstanding as of December 31, 2016 (which does not include the debt proceeds not yet drawn under the credit facilities entered into during the first quarter of 2016 and subsequently amended during the first quarter of 2017, as discussed above) are reflected in the following table by the year that payments are due:
We hedged our interest rate exposure on these mortgage notes with interest rate swap agreements that effectively converted floating interest rates based on the one-month LIBOR plus a margin of 3.25% and 2.25% to the fixed rates of 6.04% and 4.38%, respectively. As of December 31, 2016, the variable rates on these two mortgage notes were 3.93% and 2.99%, respectively. All derivatives are recognized on the balance sheet at their fair value. At the time of the closings and thereafter, the agreements were determined to be highly effective in hedging the variability of the identified cash flows and have been designated as cash flow hedges of the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreements are recorded in other comprehensive income (loss), net of taxes. The original notional amounts of the interest rate swap agreements of $1,000,000 and $2,500,000 amortize in accordance with the amortization of the mortgage notes. The notional amount of the interest rate swaps was $3,090,709 as of December 31, 2016. 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.
In connection with the credit facilities entered into during the third quarters of 2010 and 2015 and the first quarter of 2016, we incurred debt issue costs of $26,489, $34,125 and $46,734, respectively, which costs are being recorded as a component of other expenses over the terms of the credit facilities.
Proceeds from a $600,000 note bearing interest at 4.25% were received during the first quarter of 2011. This note was repaid during the third quarter of 2015.
The $500,000 line of credit with TD Bank N.A. was first entered into during the third quarter of 2010 and has been renewed approximately annually since then and is available as needed and has been extended through August 29, 2017. The line of credit, which is subject to certain financial covenants, was unused as of December 31, 2016 and 2015. Interest on any borrowings against the line of credit would be variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum. |
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Stockholders' Equity |
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| Stockholders' Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS' EQUITY |
On October 28, 2015, we filed a registration statement on Form S-3 with the SEC for the potential issuance of up to $10,000,000 in equity (subject to certain limitations). This registration statement became effective on November 10, 2015. Under this form of registration statement, we were limited to raising gross proceeds of no more than one-third of the market capitalization of our common stock (as determined by the high price within the preceding 60 days leading up to a sale of securities) held by non-affiliates (non-insiders) of the Company within a twelve-month period. This limit was approximately $5,958,000, based on the closing price of $8.08 per share as of January 6, 2016. On February 3, 2016, we sold 1,123,810 shares of common stock at a price to the public of $5.25 per share in an underwritten public offering, raising gross proceeds of approximately $5,900,000, resulting in net proceeds to the Company of approximately $5,313,000 after deducting underwriting discounts and offering expenses incurred in connection with the equity financing. On October 21, 2016, we closed on a private placement of 659,880 shares of common stock to nineteen institutional and accredited investors at $5.25 per share, raising gross proceeds of approximately $3,464,000 resulting in net proceeds to the Company of approximately $3,161,000 after deducting placement agent fees and other estimated expenses incurred in connection with the equity financing.
At the June 15, 2016 Annual Meeting of Stockholders, our stockholders voted to approve an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock authorized for issuance from 8,000,000 to 10,000,000.
In June 2000, our stockholders approved the 2000 Stock Option and Incentive Plan (the “2000 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. Originally, 250,000 shares of common stock were reserved for issuance under the 2000 Plan. The stockholders of the Company approved an increase in this number to 500,000 shares in June 2001. All options granted under the 2000 Plan expire no later than ten years from the date of grant. The 2000 Plan expired in February 2010, after which date no further options could be granted under the 2000 Plan. However, outstanding options under the 2000 Plan may be exercised in accordance with their terms.
In June 2010, our stockholders approved the 2010 Stock Option and Incentive Plan (the “2010 Plan”) pursuant to the provisions of the Internal Revenue Code of 1986, under which employees and certain service providers may be granted options to purchase shares of the Company’s common stock at i) no less than fair market value on the date of grant in the case of incentive stock options and ii) no less than 85% of fair market value on the date of grant in the case of non-qualified stock options. At that time, 300,000 shares of common stock were reserved for issuance under the 2010 Plan and subsequently no additional shares have been reserved for the 2010 Plan. Vesting requirements are determined by the Compensation and Stock Option Committee of the Board of Directors on a case by case basis. All options granted under the 2010 Plan expire no later than ten years from the date of grant.
Activity under the stock option plans described above was as follows:
During the year ended December 31, 2016, one employee and one director exercised stock options covering the aggregate of 16,000 shares of which 6,000 were exercised for cash, resulting in total proceeds of $31,900, and 10,000 of these options were exercised by the surrender of 7,334 shares of common stock with a fair market value of $57,425 at the time of exercise and $75 in cash. During the year ended December 31, 2015, eleven employees exercised stock options covering the aggregate of 28,000 shares. These options were exercised for cash, resulting in total proceeds of $120,210. At December 31, 2016, 251,000 shares of common stock were reserved for future issuance under all outstanding stock options described above, and an additional 155,500 shares of common stock were reserved for the potential issuance of stock option grants in the future under the 2010 Plan.
The weighted average remaining life of the options outstanding under the 2000 Plan and the 2010 Plan as of December 31, 2016 was approximately 4 years and 4 months. The weighted average remaining life of the options exercisable under these plans as of December 31, 2016 was approximately 2 years and 4 months. The exercise prices of the options outstanding as of December 31, 2016 ranged from $1.70 to $8.21 per share. The 46,000 stock options granted during 2016 had exercise prices between $6.27 and $8.21 per share. The 16,000 stock options granted during 2015 had exercise prices between $6.05 and $7.54 per share. The aggregate intrinsic value of options exercised during 2016 and 2015 approximated $32,000 and $110,000, respectively. The weighted-average grant date fair values of options granted during 2016 and 2015 were $4.16 and $3.46 per share, respectively. As of December 31, 2016, total unrecognized stock-based compensation related to non-vested stock options aggregated $204,360, which will be recognized over a weighted average period of two years and eleven months. The fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model, for the purpose discussed in Note 2(n), with the following weighted-average assumptions for the years ended December 31, 2016 and 2015:
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.
On June 8, 2005, our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2008. As of June 30, 2005, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension. On June 6, 2008 our Board of Directors voted to authorize an amendment of the Rights Agreement to extend the Final Expiration Date by an additional three years, to September 19, 2011 and to increase the ownership threshold for determining “Acquiring Person” status from 15% to 18%. As of June 30, 2008, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On August 5, 2011, our Board of Directors voted to authorize amendments of the Rights Agreement to extend the Final Expiration Date by an additional three years to September 19, 2014 and to increase the ownership threshold for determining “Acquiring Person” status from 18% to 20%. As of August 9, 2011, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase. On June 10, 2014, our Board of Directors voted to authorize an amendment to the Rights Agreement to extend the final expiration date by an additional three years to September 19, 2017. As of June 16, 2014, we entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension. No other changes have been made to the terms of the Rights or the Rights Agreement.
During the second quarter of 2015, we amended our Common Stock Rights Plan by removing a provision that prevented a new group of directors elected following the emergence of an Acquiring Person (an owner of more than 20% of our stock) from controlling the Rights Plan by maintaining exclusive authority over the Rights Plan with pre-existing directors. We did this because such provisions have come to be viewed with disfavor by Delaware courts. |
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Other Expenses, Net |
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| Other Expenses, Net [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OTHER EXPENSES, NET |
Other expenses, net, consisted of the following:
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Income Taxes |
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| Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES |
Our income tax expense aggregated $249,874 and $850,309 during the years ended December 31, 2016 and 2015, respectively. In 2015, we utilized $1,625,653 of net operating loss carryforwards to offset otherwise taxable income. As of December 31, 2015, we had federal net operating loss carryforwards of $125,797 (that expire in 2031, (if not utilized before then) of which approximately $98,000 is expected to be utilized against taxable income during 2016. As of December 31, 2016, we have federal general business tax credit carryforwards of approximately $292,000 that expire in 2027 through 2034 (if not utilized before then) and state tax credit carryforwards of approximately $152,000 that expire in 2023 through 2036 (if not utilized before then). The $965,000 licensing payment that we made during the fourth quarter of 2004 was treated as an intangible asset and is being amortized over 15 years, for tax return purposes only. Approximately $1,112,000 of our investment in a small-scale facility to produce the Drug Substance (our Active Pharmaceutical Ingredient, Nisin) for Mast Out® was expensed as incurred for our books. Included in this amount is approximately $820,000 that was capitalized and is being depreciated over statutory periods for tax return purposes only.
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the period such determination was made.
Net operating loss carryforwards, credits, and other tax attributes are subject to review and possible adjustment by the Internal Revenue Service. Section 382 of the Internal Revenue Code contains provisions that could place annual limitations on the future utilization of net operating loss carryforwards and credits in the event of a change in ownership of the Company, as defined.
The Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2013. We currently have no tax examinations in progress. We also have not paid additional taxes, interest or penalties as a result of tax examinations nor do we have any unrecognized tax benefits for any of the periods in the accompanying financial statements.
The income tax provision consisted of the following:
The actual income tax expense differs from the expected tax computed by applying the U.S. federal corporate tax rate of 34% to income before income tax as follows:
The significant components of our deferred tax asset consisted of the following:
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Contingent Liabilities and Commitments |
12 Months Ended | ||
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Dec. 31, 2016 | |||
| Contingent Liabilities and Commitments [Abstract] | |||
| 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, 2016. 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, 2016.
We are committed to purchasing certain key parts (syringes) and services (formulation, filling and packaging of Drug Product) pertaining to Mast Out® exclusively from two contractors. If we do not commercialize the product by the end of 2019, we would be liable for a $100,000 termination fee under one of such agreements.
During the second quarter of 2009, we entered into an exclusive license with the Baylor College of Medicine covering the underlying rotavirus vaccine technology used to generate the specific antibodies for our product line extension that is under development. This perpetual license (if not terminated for cause) is subject to a milestone payment of $150,000 upon regulatory approval and a royalty equal to 4% of sales above current sales of our bivalent product plus a growth assumption.
During the third quarter of 2016, we initiated construction of our Nisin production facility for Mast Out®. The estimated total cost of the Nisin facility is $20,000,000. As of December 31, 2016, we had incurred approximately $3,280,000 of capital expenditures related to this project, of which $2,080,000 had been paid as of year-end. The majority of this investment is expected to be paid during the nine-month period ending September 30, 2017. As of December 31, 2016, we had committed $12,320,000 of the remaining $17,920,000 expected to be paid on this project. Approximately $8,865,000 of these capital expenditures is committed under a guaranteed maximum price contract with our construction management firm, net of payments made. This contract includes provisions that could reduce the amount of the commitment generally by the amount not expended or committed by the construction manager at the time of an unexpected and unlikely early termination. We expect to fund the remaining costs in excess of our current cash and investments with cash to be generated from operations during 2017 and borrowings under the credit facilities described in Note 11. Additionally, as of December 31, 2016, we had committed $617,000 to the production of inventory and $100,000 to other obligations. |
Segment Information |
12 Months Ended | ||
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Dec. 31, 2016 | |||
| Segment Information [Abstract] | |||
| 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 cows for the dairy and beef industries. Almost all of our internally funded product development expenses are in support of such products. The significant accounting policies of this segment are described in Note 2. Our single operating segment is defined as the component of our business for which financial information is available and evaluated regularly by our chief operating decision-maker in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our President and CEO.
Sales of the First Defense® product line aggregated 93% of our total product sales during the years ended December 31, 2016 and 2015. Our primary customers for the majority of our product sales (85% and 83% for the years ended December 31, 2016, and 2015 respectively) are in the U.S. dairy and beef industries. Product sales to international customers, who are also in the dairy and beef industries, aggregated 13% and 14% of our total product sales for the years ended December 31, 2016 and 2015, respectively. |
Related Party Transactions |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 | |||
| Related Party Transactions [Abstract] | |||
| RELATED PARTY TRANSACTIONS |
Dr. David S. Tomsche (Chair of our Board of Directors) is a controlling owner of Leedstone Inc. (formerly Stearns Veterinary Outlet, Inc.), a domestic distributor of ImmuCell products (First Defense®, Wipe Out® Dairy Wipes, and CMT) and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased $551,020 and $573,165 of products from ImmuCell during the years ended December 31, 2016 and 2015, respectively, on terms consistent with those offered to other distributors of similar status. We made marketing-related payments of $5,286 and $3,222 to these affiliate companies during the years ended December 31, 2016 and 2015, respectively, that were expensed as incurred. Our accounts receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated $3,221 and $36,528 as of December 31, 2016 and 2015, respectively. |
Employee Benefits |
12 Months Ended | ||
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Dec. 31, 2016 | |||
| Employee Benefits [Abstract] | |||
| 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. Since August 2012, we have matched 100% of the first 3% of each employee’s salary that is contributed to the Plan and 50% of the next 2% of each employee’s salary that is contributed to the Plan. Under this matching plan, we paid $74,507 and $73,514 into the plan for the years ended December 31, 2016 and 2015, respectively. |
Unaudited Quarterly Financial Data |
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| Unaudited Quarterly Financial Data [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UNAUDITED QUARTERLY FINANCIAL DATA |
The following tables present the quarterly information for the years ended December 31, 2016 and 2015, respectively:
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Subsequent Events |
12 Months Ended | ||
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Dec. 31, 2016 | |||
| Subsequent Events [Abstract] | |||
| SUBSEQUENT EVENTS |
We have evaluated subsequent events through the time of filing on March 30, 2017, the date we have issued this Annual Report on Form 10-K. As of such date, except as described below, there were no material, reportable subsequent events.
During the first quarter of 2017, we acquired a 4,114 square foot building that is adjacent to our Nisin production plant for additional warehousing and storage space. The purchase price was $465,500, and we financed this purchase, in part, with a mortgage loan in the amount of $340,000 bearing interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25% with monthly principal and interest payments due for ten years based on a twenty-year amortization schedule.
During the first quarter of 2017, we amended two loan agreements, as described in Note 11, increasing the total available loan amount from up to approximately $4.5 million to up to approximately $6.5 million.
During the first quarter of 2017, we discontinued the production and sale of our topical wipes product line. In connection therewith, we wrote off approximately $38,000 worth of fixed assets and recognized $45,000 from the sale of certain other fixed assets and product rights, resulting in a net gain of approximately $7,000.
During the first quarter of 2017, our $500,000 line of credit was extended through August 29, 2017. |
Summary of Significant Accounting Policies (Policies) |
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| Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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). Certain prior year accounts have been reclassified to conform with the 2016 financial statement presentation. |
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| Cash, Cash Equivalents, Short-Term Investments and Long-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 $4,650,044 and $1,073,028 as of December 31, 2016 and 2015, respectively. We account for investments in marketable securities in accordance with Codification Topic 320, Investments – Debt and Equity Securities. Short-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than three months from their purchase dates and not more than twelve months from the balance sheet date. Long-term investments are classified as held to maturity and are comprised principally of certificates of deposit that mature in more than twelve months from the balance sheet date. Short-term and long-term investments are held at different financial institutions that are insured by the FDIC, within the FDIC limits per financial institution. See Note 3. |
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| 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. See Note 4. |
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| Accounts receivable |
Accounts receivable are carried at the original invoice amount less an estimate made for doubtful collection and product returns. Management determines the allowance for doubtful accounts on a monthly basis by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as income when received. Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is charged on past due accounts receivable. See Note 5. |
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| Property, Plant and Equipment |
We depreciate property, plant and equipment on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. The facility we are constructing to produce the active ingredient, Nisin, for Mast Out® will be depreciated over its useful life beginning when that facility is placed into service, which could be before the Food and Drug Administration (FDA) approval of the product is achieved. This facility is not yet placed in service. We are evaluating the estimated useful lives of the assets associated with this facility. Repairs to fixed assets that benefit more than a current period are capitalized and depreciated over their useful lives. See Note 7. |
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| Intangible Assets and Goodwill |
We amortize intangible assets on the straight-line method by charges to operations in amounts estimated to expense the cost of the assets from the date they are first put into service to the end of the estimated useful lives of the assets. We have recorded intangible assets related to customer relationships, non-compete agreements, and developed technology, each with defined useful lives. We have classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) acquired in purchase transactions.
We assess the impairment of intangible assets and goodwill that have indefinite lives 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 assess goodwill for impairment annually, at the reporting unit level whenever events or circumstances indicate impairment may exist. In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would then perform step one of the two-step impairment test; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the two-step impairment test. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. Factors that could indicate that an impairment may exist include significant under-performance relative to plan or long-term projections, significant changes in business strategy and significant negative industry or economic trends. Although we believe intangible assets and goodwill are appropriately stated in the accompanying financial statements, changes in strategy or market conditions could significantly impact these judgements and require an adjustment to the recorded balance. No goodwill impairments were recorded during the year ended December 31, 2016. See Notes 2(h), 8 and 9 for additional disclosures. |
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| Fair Value Measurements |
In determining fair value measurements, we follow the provisions of Codification Topic 820, Fair Value Measurements and Disclosures. Codification Topic 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. At December 31, 2016 and 2015, the carrying amounts of cash and cash equivalents, accounts receivable, inventory, other assets, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The amount outstanding under our bank debt facilities is measured at carrying value in our accompanying balance sheets. Our bank debt facilities are valued using Level 2 inputs. The estimated fair value of our bank debt facilities approximates their carrying value. The three-level hierarchy is as follows:
Level 1 - Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.
Level 2 - Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.
Level 3 - Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors specific to the investment.
Our held to maturity securities are comprised of investments in bank certificates of deposit. The value of these securities is disclosed in Note 3. We also hold money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments is based on their closing published net asset value.
We assess the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with our accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. During the years ended December 31, 2016 and 2015, there were no transfers between levels. As of December 31, 2016 and 2015, 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, 2016 and 2015, our bank certificates of deposit were classified as Level 2 and were measured by significant other observable inputs. As of December 31, 2016 and 2015, 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, 2016 or 2015.
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| Valuation of Long-Lived Assets |
We periodically evaluate our long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows. No impairment was recognized during the years ended December 31, 2016 or 2015. |
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| Concentration of Risk |
Concentration of credit risk with respect to accounts receivable is principally limited to certain customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, as a consequence, believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Sales to significant customers that amounted to 10% or more of total product sales are detailed in the following table:
Accounts receivable due from significant customers amounted to the percentages of total trade accounts receivable as detailed in the following table:
*Amount is less than 10%.
We believe that supplies and raw materials for the production of our products are available from more than one vendor or farm. Our policy is to maintain more than one source of supply for the components used in our products. However, there is a risk that we could have difficulty in efficiently acquiring essential supplies. |
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| 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. |
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| Revenue Recognition |
We sell products that provide immediate immunity to newborn dairy and beef cattle. We recognize revenue when four criteria are met. These include i) persuasive evidence that an arrangement exists, ii) delivery has occurred or services have been rendered, iii) the seller’s price is fixed and determinable and iv) collectability is reasonably assured. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We offer a 50% account credit to domestic distributors on expired First Defense® product that is returned to us past its expiration date, which is generally two years past its date of manufacture. At the time of sale, we estimate returns and record a corresponding liability. We generally have experienced an immaterial amount of product returns. |
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| Expense Recognition |
Advertising costs are expensed when incurred, which is generally during the month in which the advertisement is published. Advertising expenses amounted to $114,860 and $94,607 during the years ended December 31, 2016 and 2015, 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. |
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| 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. We believe it is more likely than not that the deferred tax assets will be realized through future taxable income and future tax effects of temporary differences between book income and taxable income. Accordingly, we have not established a valuation allowance for the deferred tax assets. Codification Topic 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must meet before being recognized in the financial statements. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other taxing authorities. Our tax returns for the years 2013 through 2016 are subject to audit. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as of December 31, 2016. Although we believe that our estimates are reasonable, actual results could differ from these estimates. See Note 14. |
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| 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 $67,399 and $23,222 during the years ended December 31, 2016 and 2015, respectively, which resulted in a decrease to income before income taxes of less than $0.01 per share during each of the periods reported. |
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| Net Income Per Common Share |
Net income per common share has been computed in accordance with Codification Topic 260-10, Earnings Per Share. The basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding during the period. The diluted net income per share has been computed by dividing net income by the weighted average number of shares outstanding during the period plus all outstanding stock options with an exercise price that is less than the average market price of the common stock during the period less the number of shares that could have been repurchased at this average market price with the proceeds from the hypothetical stock option exercises. The weighted average and diluted number of shares outstanding consisted of the following:
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| 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, goodwill, accrued expenses and costs of goods sold accounts as well as amortization of our intangible assets. |
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| New Accounting Pronouncements |
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 was initially to become effective for the Company on January 1, 2017. Early application was not permitted. In July 2015, the FASB approved a one-year deferral in the effective date to January 1, 2018, with the option of applying the standard on the original effective date. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We intend to utilize the modified retrospective method and have made a preliminary evaluation of the effect that ASU 2014-09 would have on our financial statements and related disclosures and do not expect ASU 2014-09 to have a material impact on our financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern”, which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We implemented this guidance during 2016. The adoption of this guidance did not have a material impact on our financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update is effective for the annual reporting periods beginning after December 15, 2015. During the first quarter of 2016, we adopted ASU 2015-03 and reclassified $40,792 of debt issuance costs (net) from other assets to a reduction in our bank debt liability as of December 31, 2015. In August 2015, the FASB confirmed that ASU No. 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. For line-of-credit arrangements, borrowers have the option of presenting debt issuance costs as an asset which is subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any related outstanding borrowings. ASU No. 2015-03 did not have a material impact on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory, which simplifies the existing guidance which requires entities to subsequently measure inventory at the lower of cost or market value. Under ASU No. 2015-11, an entity should measure inventory valued using a first-in, first-out or average cost method at the lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2015-11 during the third quarter of 2016, and it did not have a material impact on our financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which simplifies the existing guidance which requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Under ASU No. 2015-17, an entity should classify all deferred tax liabilities and assets as one noncurrent deferred tax liability or asset (net) within the statement of financial position. The amendments apply to all entities that present a classified statement of financial position and are effective for the public business entities for annual periods beginning after December 15, 2016, including interim periods therein. Earlier application was permitted. During the first quarter of 2016, we adopted ASU No. 2015-17 early and reclassified $19,588 of current deferred tax liabilities to long-term, which amount was netted against our long-term deferred tax asset, as of December 31, 2015. ASU No. 2015-17 did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. Based on our current lease agreements, we are not subject to material lease obligations, and we do not expect ASU 2016-02 to have a material impact on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows. The most significant change resulting from these amendments is recording all the tax effects related to share-based payments at settlement through the income statement. Under existing guidance, tax benefits in excess of compensation costs (“windfalls”) are recorded in equity. Similarly, tax deficiencies below compensation costs (“shortfalls”) are recorded in equity to the extent of previous windfalls, while shortfalls in excess of this are recorded to the income statement. Furthermore, the new guidance is expected to increase the dilutive effect of share-based payment awards as a result of no longer assuming that tax benefits are used to purchase our common stock under the treasury method. The amendments also provide an alternative to estimating stock award forfeitures and instead recording at the time of forfeiture. This update is effective for public business entities during fiscal years beginning after December 15, 2016 with early adoption permitted. We adopted ASU 2016-09 during 2016, and it did not have a material impact on our financial statements. |
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Summary of Significant Accounting Policies (Tables) |
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| Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of financial assets measured at fair value on recurring basis |
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| Schedule of sales to significant customers |
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| Schedule of accounts receivable due from significant customers |
*Amount is less than 10%. |
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| Schedule of weighted average and diluted number of shares outstanding |
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Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments (Tables) |
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| Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of cash, cash equivalents and short-term investments and long-term investments |
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| Schedule of held to maturity securities |
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Inventory (Tables) |
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| Inventory [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of inventory |
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Accounts Receivable (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Receivable[Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accounts receivable |
|
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Prepaid Expenses and Other Current Assets (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Prepaid Expenses and Other Current Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of prepaid expenses and other assets |
|
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Property, Plant and Equipment (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property, plant and equipment |
|
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Intangible Assets (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of intangible amortization expense |
|
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| Schedule of intangible assets |
|
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Accounts Payable and Accrued Expenses (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Payable and Accrued Expenses [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accounts payable and accrued expenses |
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Bank Debt (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bank Debt [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of principal payments due under debt outstanding |
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| Schedule of interest rate swaps classified as level 2 fair value |
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Stockholders' Equity (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of activity under the stock option plans |
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| Schedule of share based compensation non-vested stock options activity |
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| Schedule of fair value stock option grant using black-scholes option valuation model with the weighted-average assumptions |
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Other Expenses, Net (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Expenses, Net [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of other expenses, net |
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Income Taxes (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of income tax provision |
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| Summary of reconciliation of the federal statutory rate |
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| Schedule of deferred tax asset |
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Unaudited Quarterly Financial Data (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unaudited Quarterly Financial Data [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of quarterly financial information |
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Business Operations (Details) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Business Operations (Textual) | |
| Investment in production plant | $ 20,000,000 |
Summary of Significant Accounting Policies (Details 1) |
12 Months Ended | ||||||
|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||||
| Patterson Companies, Inc. [Member] | |||||||
| Revenue, Major Customer [Line Items] | |||||||
| Concentration risk percentage | [1] | 39.00% | 42.00% | ||||
| AmerisourceBergen Corporation [Member] | |||||||
| Revenue, Major Customer [Line Items] | |||||||
| Concentration risk percentage | [2] | 21.00% | 20.00% | ||||
| |||||||
Summary of Significant Accounting Policies (Details 2) |
Dec. 31, 2016 |
Dec. 31, 2015 |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AmerisourceBergen Corporation [Member] | ||||||||||||
| Revenue, Major Customer [Line Items] | ||||||||||||
| Accounts receivable due from significant customers | [1] | 33.00% | 27.00% | |||||||||
| Patterson Companies, Inc. [Member] | ||||||||||||
| Revenue, Major Customer [Line Items] | ||||||||||||
| Accounts receivable due from significant customers | [2] | 31.00% | 26.00% | |||||||||
| ANIMART LLC [Member] | ||||||||||||
| Revenue, Major Customer [Line Items] | ||||||||||||
| Accounts receivable due from significant customers | [4] | 0.00% | [3] | 11.00% | ||||||||
| ||||||||||||
Summary of Significant Accounting Policies (Details 3) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Net Income Per Common Share | ||
| Weighted average number of shares outstanding | 4,225,789 | 3,042,376 |
| Effect of dilutive stock options | 110,440 | 123,359 |
| Diluted number of shares outstanding | 4,336,229 | 3,165,735 |
| Outstanding stock options not included in the calculation because the effect would be anti-dilutive | 34,250 | 6,000 |
Summary of Significant Accounting Policies (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Summary of Significant Accounting Policies (Textual) | ||
| Federal deposit insurance corporation limits | $ 250,000 | |
| U.S. government aggregated amount | $ 4,650,044 | $ 1,073,028 |
| Decrease to income before income taxes, Description | Less than $0.01 | Less than $0.01 |
| Revenue recognition sales returns, description | We offer a 50% account credit to domestic distributors on expired First Defense® product that is returned to us past its expiration date, which is generally two years past its date of manufacture. | |
| Advertising expense | $ 114,860 | $ 94,607 |
| Stock-based compensation | $ 67,399 | 23,222 |
| Reclassification of debt issuance costs (net) | 40,792 | |
| Reclassification of current deferred tax liabilities | $ 19,588 | |
| Concentration risk percentage, description | Sales to significant customers that amounted to 10% or more of total product sales. | |
Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Schedule of Cash, cash equivalents, short-term investments and long-term investments | |||
| Cash and cash equivalents | $ 5,150,344 | $ 1,573,328 | $ 850,028 |
| Short-term investments | 5,474,013 | 4,470,574 | |
| Subtotal | 10,624,357 | 6,043,902 | |
| Long-term investments | 489,648 | ||
| Total | 10,624,357 | 6,533,550 | |
| Increase (Decrease) in cash and cash equivalents | 3,577,016 | $ 723,300 | |
| Increase (Decrease) in short-term investments | 1,003,439 | ||
| Increase (Decrease) in Subtotal | 4,580,455 | ||
| Increase (Decrease) in long term investments | (489,648) | ||
| Increase (Decrease) in Total | $ 4,090,807 | ||
Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments (Details 1) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Schedule of held to maturity securities | ||
| Amortized cost | $ 5,450,000 | $ 4,951,000 |
| Accrued interest | 24,013 | 9,222 |
| Gross unrealized gains | 2,073 | 25 |
| Gross unrealized losses | (59) | (6,277) |
| Estimated fair value | $ 5,476,027 | $ 4,953,970 |
Inventory (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Schedule of inventory | ||
| Raw materials | $ 318,443 | $ 284,331 |
| Work-in-process | 968,810 | 452,024 |
| Finished goods | 839,646 | 133,852 |
| Total | 2,126,899 | 870,207 |
| Increase in Raw materials | 34,112 | |
| Increase in Work-in-process | 516,786 | |
| Increase in Finished goods | 705,794 | |
| Increase in inventory, Total | $ 1,143,693 | $ (75,548) |
Accounts Receivable (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Schedule of accounts receivable | ||
| Trade accounts receivable, gross | $ 1,013,716 | $ 736,195 |
| Allowance for bad debt and product returns | (21,326) | (18,092) |
| Trade accounts receivable, net | 992,390 | $ 718,103 |
| Increase (Decrease) in Trade accounts receivable, gross | 277,521 | |
| Increase (Decrease) in Allowance for bad debt and product returns | (3,234) | |
| Increase (Decrease) in Trade accounts receivable, net | $ 274,287 |
Prepaid Expenses and Other Current Assets (Details) - USD ($) |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||
| Prepaid Expenses and Other Current Assets [Abstract] | |||||
| Prepaid expenses | $ 126,523 | $ 183,217 | |||
| Other receivables | 144,848 | 26,958 | |||
| Security deposits | [1] | 333,111 | 37,301 | ||
| Total | 604,482 | 247,476 | |||
| (Decrease) Increase in Prepaid expenses | (56,694) | ||||
| (Decrease) Increase in Other receivables | 117,890 | ||||
| (Decrease) Increase in Security deposits | [1] | 295,810 | |||
| (Decrease) Increase in Prepaid expense and other assets, Total | $ 391,270 | $ 59,672 | |||
| |||||
Prepaid Expenses and Other Current Assets (Details Textual) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Prepaid Expenses and Other Current Assets (Textual) | |
| Option to purchase additional land | $ 20,500 |
Business Acquisition (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Sep. 30, 2016 |
Jan. 04, 2016 |
|
| Business Acquisition (Textual) | |||
| Total purchase price | $ 532,000 | ||
| Amount paid on acquisition | 368,000 | ||
| Technology transfer payment | $ 97,000 | ||
| Aggregate royalties to be paid | $ 67,000 | ||
| Estimated fair values of accounts payable and accrued expenses | 30,000 | ||
| Payments for business acquisition | 8,200 | ||
| 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 |
Intangible Assets (Details) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Summary of intangible amortization expense | |
| Year ending December 31, 2017 | $ 19,104 |
| Year ending December 31, 2018 | 19,104 |
| Year ending December 31, 2019 | 19,104 |
| Year ending December 31, 2020 | 19,104 |
| Year ending December 31, 2021 | 19,104 |
| After December 31, 2021 | 76,416 |
| Total | $ 171,936 |
Intangible Assets (Details 1) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Finite-Lived Intangible Assets [Line Items] | |
| Gross Carrying Value | $ 191,040 |
| Accumulated Amortization | (19,104) |
| Net Book Value | 171,936 |
| Developed technology [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Gross Carrying Value | 184,100 |
| Accumulated Amortization | (18,410) |
| Net Book Value | 165,690 |
| Customer relationships [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Gross Carrying Value | 1,300 |
| Accumulated Amortization | (130) |
| Net Book Value | 1,170 |
| Non-compete agreements [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Gross Carrying Value | 5,640 |
| Accumulated Amortization | (564) |
| Net Book Value | $ 5,076 |
Intangible Assets (Details Textual) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
USD ($)
| |
| Intangible Assets (Textual) | |
| Intangible amortization expense | $ 19,104 |
| Intangible asset amortized, useful lives | 10 years |
| Net value | $ 171,936 |
Accounts Payable and Accrued Expenses (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Accounts Payable and Accrued Expenses [Abstract] | ||
| Accounts payable - capital | $ 1,249,862 | $ 1,510 |
| Accounts payable - trade | 257,397 | 199,105 |
| Accrued payroll | 200,477 | 242,690 |
| Accrued clinical studies | 68,428 | |
| Accrued professional fees | 82,500 | 56,450 |
| Accrued other | 101,527 | 93,982 |
| Total | 1,891,763 | $ 662,165 |
| Increase (Decrease) in Accounts payable - capital | 1,248,352 | |
| Increase (Decrease) in Accounts payable - trade | 58,292 | |
| Increase (Decrease) in Accrued payroll | (42,213) | |
| Increase (Decrease) in Accrued clinical studies | (68,428) | |
| Increase (Decrease) in Accrued professional fees | 26,050 | |
| Increase (Decrease) in Accrued other | 7,545 | |
| Increase (Decrease) in Total | $ 1,229,598 |
Bank Debt (Details) |
Dec. 31, 2016
USD ($)
|
|---|---|
| Debt Instrument [Line Items] | |
| Year ending December 31, 2017 | $ 133,269 |
| Year ending December 31, 2018 | 140,878 |
| Year ending December 31, 2019 | 148,810 |
| Year ending December 31, 2020 | 578,239 |
| Year ending December 31, 2021 | 90,090 |
| After December 31, 2021 | 1,920,788 |
| Total | 3,012,074 |
| $1,000,000 Mortgage Note [Member] | |
| Debt Instrument [Line Items] | |
| Year ending December 31, 2017 | 61,056 |
| Year ending December 31, 2018 | 64,876 |
| Year ending December 31, 2019 | 68,908 |
| Year ending December 31, 2020 | 493,696 |
| Year ending December 31, 2021 | |
| After December 31, 2021 | |
| Total | 688,536 |
| $2,500,000 Mortgage Note [Member] | |
| Debt Instrument [Line Items] | |
| Year ending December 31, 2017 | 82,308 |
| Year ending December 31, 2018 | 86,097 |
| Year ending December 31, 2019 | 89,997 |
| Year ending December 31, 2020 | 94,005 |
| Year ending December 31, 2021 | 98,538 |
| After December 31, 2021 | 1,951,228 |
| Total | 2,402,173 |
| Debt Issuance Costs [Member] | |
| Debt Instrument [Line Items] | |
| Year ending December 31, 2017 | (10,095) |
| Year ending December 31, 2018 | (10,095) |
| Year ending December 31, 2019 | (10,095) |
| Year ending December 31, 2020 | (9,462) |
| Year ending December 31, 2021 | (8,448) |
| After December 31, 2021 | (30,440) |
| Total | $ (78,635) |
Bank Debt (Details 1) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Bank Debt [Abstract] | ||
| Payments required by interest rate swaps | $ 58,346 | $ 32,515 |
| Other comprehensive income (loss) net of taxes | $ 26,354 | $ (26,925) |
Bank Debt (Details Textual) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 |
Sep. 30, 2015 |
Mar. 31, 2011 |
Sep. 30, 2010 |
Dec. 31, 2016 |
Dec. 31, 2015 |
Mar. 31, 2017 |
Mar. 01, 2017 |
|
| Bank Debt (Textual) | ||||||||
| Long-term debt, percentage bearing fixed interest, percentage rate | 4.25% | |||||||
| Derivatives interest rate swap payments | $ 58,346 | $ 32,515 | ||||||
| Other comprehensive income (loss), net of tax | 26,354 | (26,925) | ||||||
| Proceeds from notes payable | $ 600,000 | |||||||
| Debt issuance costs | $ 46,734 | $ 34,125 | $ 26,489 | 46,734 | $ 34,125 | |||
| Subsequent Event [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit | $ 500,000 | |||||||
| TD Bank NA [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit | $ 4,500,000 | |||||||
| TD Bank NA [Member] | Subsequent Event [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit | $ 6,500,000 | |||||||
| TD Bank NA [Member] | Construction Loan One [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit facility, Description | The first instrument is comprised of a construction loan of up to $2.5 million and not to exceed 80% of the cost of equipment installed in the to-be-constructed commercial-scale Nisin production facility for Mast Out®. Effective March 1, 2017, this loan amount was increased by $1.44 million to $3.94 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through July 2018, at which time the loan converts to a seven-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a seven-year amortization schedule. | |||||||
| TD Bank NA [Member] | Construction Loan One [Member] | Subsequent Event [Member] | Maximum [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Loan amount | 1,440,000 | |||||||
| TD Bank NA [Member] | Construction Loan One [Member] | Subsequent Event [Member] | Minimum [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Loan amount | 3,940,000 | |||||||
| TD Bank NA [Member] | Construction Loan Two [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit facility, Description | The second instrument is comprised of a construction loan of up to $2.0 million and not to exceed 80% (75% prior to the March 1, 2017 amendment) of the appraised value of the to-be-constructed commercial-scale Nisin production facility in Portland, Maine. Effective March 1, 2017, this loan amount was increased by $560,000 to $2.56 million. As amended, interest only will be payable at a variable rate equal to the one-month LIBOR plus a margin of 2.25% through January 2018, at which time the loan converts to a nine-year term loan facility at the same variable interest rate with monthly principal and interest payments due based on a twenty-year amortization schedule with a balloon principal payment of approximately $1.654 million due in January 2027. | |||||||
| TD Bank NA [Member] | Construction Loan Two [Member] | Subsequent Event [Member] | Minimum [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Loan amount | $ 560,000 | |||||||
| Interest Rate Swap [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Long-term debt, percentage bearing fixed interest, percentage rate | 4.38% | 6.04% | ||||||
| Derivative notional amount | $ 2,500,000 | $ 1,000,000 | $ 3,090,709 | |||||
| LIBOR, Description | LIBOR plus a margin of 3.25% and 2.25 | |||||||
| Mortgages One [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Proceeds from mortgage note | $ 1,000,000 | |||||||
| Debt instrument term | 15 years | |||||||
| Balloon principal payment | $ 451,885 | |||||||
| Mortgage loans on real estate periodic payment terms | Will be due during the third quarter of 2020. | |||||||
| Long-term debt, percentage bearing fixed interest, percentage rate | 3.93% | |||||||
| Mortgages Two [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Proceeds from mortgage note | $ 2,500,000 | |||||||
| Debt instrument term | 20 years | |||||||
| Balloon principal payment | $ 1,550,000 | |||||||
| Mortgage loans on real estate periodic payment terms | Will be due during the third quarter of 2025. | |||||||
| Long-term debt, percentage bearing variable interest, percentage rate | 2.99% | |||||||
| Line of Credit [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Extended date of line of credit | Aug. 29, 2017 | |||||||
| LIBOR, Description | Interest on any borrowings against the line of credit would be variable at the higher of 4.25% per annum or the one-month LIBOR plus 3.5% per annum. | |||||||
| Line of Credit [Member] | TD Bank NA [Member] | ||||||||
| Bank Debt (Textual) | ||||||||
| Line of credit | $ 500,000 | |||||||
Stockholders' Equity (Details) - USD ($) |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||
| Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract] | |||||
| Outstanding balance, Weighted Average Exercise Price | $ 3.57 | $ 3.42 | |||
| Grants, Weighted Average Exercise Price | 6.98 | 7.40 | |||
| Terminations, Weighted Average Exercise Price | 6.16 | 4.95 | |||
| Exercises, Weighted Average Exercise Price | 5.59 | 4.29 | |||
| Outstanding balance, Weighted Average Exercise Price | 3.89 | $ 3.57 | |||
| Exercisable, Weighted Average Exercise Price | $ 2.52 | ||||
| Aggregate Intrinsic Value | |||||
| Outstanding balance, Aggregate Intrinsic Value | [1] | $ 945,000 | $ 364,000 | ||
| Outstanding balance, Aggregate Intrinsic Value | [1] | 517,000 | $ 945,000 | ||
| Exercisable, Aggregate Intrinsic Value | [1] | $ 524,000 | |||
| Stock Option [Member] | |||||
| Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward] | |||||
| Exercises | 16,000 | ||||
| 2000 Plan [Member] | Stock Option [Member] | |||||
| Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward] | |||||
| Beginning Balance, Outstanding | 131,500 | 157,500 | |||
| Grants | |||||
| Terminations | (5,000) | ||||
| Exercises | (26,000) | ||||
| Ending balance, Outstanding | 126,500 | 131,500 | |||
| Exercisable | 126,500 | ||||
| Aggregate Intrinsic Value | |||||
| Reserved for future grants | |||||
| 2010 Plan [Member] | Stock Option [Member] | |||||
| Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward] | |||||
| Beginning Balance, Outstanding | 106,500 | 95,500 | |||
| Grants | 46,000 | 16,000 | |||
| Terminations | (12,000) | (3,000) | |||
| Exercises | (16,000) | (2,000) | |||
| Ending balance, Outstanding | 124,500 | 106,500 | |||
| Exercisable | 26,500 | ||||
| Aggregate Intrinsic Value | |||||
| Reserved for future grants | 155,500 | ||||
| |||||
Stockholders' Equity (Details 1) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
$ / shares
shares
| |
| Stockholders' Equity [Abstract] | |
| Number of Shares, Non-vested stock options, begining balance | shares | 65,000 |
| Number of Shares, Non-vested stock options, ending balance | shares | 98,000 |
| Number of Shares, Stock options granted | shares | 46,000 |
| Number of Shares, Stock options vested | shares | 1,000 |
| Number of Shares, Stock options forfeited | shares | 17,000 |
| Weighted Average Fair Value at Grant Date, Non-vested stock options, begining balance | $ / shares | $ 5.35 |
| Weighted Average Fair Value at Grant Date, Non-vested stock options, ending balance | $ / shares | 6.03 |
| Weighted Average Fair Value at Grant Date, Stock options granted | $ / shares | 6.98 |
| Weighted Average Fair Value at Grant Date, Stock options vested | $ / shares | 4.15 |
| Weighted Average Fair Value at Grant Date, Stock options forfeited | $ / shares | $ 6.16 |
Stockholders' Equity (Details 2) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Stockholders' Equity [Abstract] | ||
| Risk-free interest rate | 1.20% | 2.00% |
| Dividend yield | 0.00% | 0.00% |
| Expected volatility | 63.00% | 47.00% |
| Expected life | 6 years 6 months | 6 years |
Stockholders' Equity (Details Textual) |
1 Months Ended | 3 Months Ended | 12 Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Feb. 03, 2016
USD ($)
$ / shares
shares
|
Jan. 06, 2016
USD ($)
$ / shares
|
Sep. 30, 1995
$ / shares
|
Oct. 21, 2016
USD ($)
$ / shares
shares
|
Oct. 28, 2015
USD ($)
|
Jun. 30, 2010
shares
|
Jun. 30, 2000
shares
|
Jun. 30, 2015 |
Dec. 31, 2016
USD ($)
Employee
Director
$ / shares
shares
|
Dec. 31, 2015
USD ($)
Employee
$ / shares
shares
|
Dec. 31, 2014
$ / shares
|
Aug. 05, 2011 |
Jun. 06, 2008 |
Jun. 30, 2001
shares
|
|
| Stockholders' Equity (Textual) | ||||||||||||||
| Potential issuance or sale of equity | $ | $ 10,000,000 | |||||||||||||
| Gross proceeds | $ | $ 5,900,000 | $ 5,958,000 | ||||||||||||
| Net proceeds | $ | $ 5,313,000 | |||||||||||||
| Common stock shares sold | 1,123,810 | |||||||||||||
| Sale of stock, per share | $ / shares | $ 5.25 | |||||||||||||
| Closing share price | $ / shares | $ 8.08 | |||||||||||||
| Common stock, shares authorized | 10,000,000 | 8,000,000 | ||||||||||||
| Proceeds from exercise of stock options | $ | $ 31,975 | $ 120,210 | ||||||||||||
| Exercise prices of options outstanding | $ / shares | $ 3.89 | $ 3.57 | $ 3.42 | |||||||||||
| 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 | |||||||||||||
| Employee [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Common stock reserved for issuance under the plan | 251,000 | |||||||||||||
| Stock Option [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Number of stock options exercised | 16,000 | |||||||||||||
| Aggregate intrinsic value of options exercised | $ | $ 32,000 | $ 110,000 | ||||||||||||
| Weighted-average grant date fair values of options granted | $ / shares | $ 4.16 | $ 3.46 | ||||||||||||
| Weighted average remaining life of options exercisable | 2 years 11 months | |||||||||||||
| Total unrecognized stock-based compensation related to non-vested stock options | $ | $ 204,360 | |||||||||||||
| Number of director exercised stock options | Director | 1 | |||||||||||||
| Share-based payment, description | The aggregate of 16,000 shares of which 6,000 were exercised for cash, resulting in total proceeds of $31,900, and 10,000 of these options were exercised by the surrender of 7,334 shares of common stock with a fair market value of $57,425 at the time of exercise and $75 in cash. | |||||||||||||
| Stock Option [Member] | 46,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Stock option granted during the period | 46,000 | |||||||||||||
| Stock Option [Member] | 16,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Stock option granted during the period | 16,000 | |||||||||||||
| Stock Option [Member] | Minimum [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | $ 1.70 | |||||||||||||
| Stock Option [Member] | Minimum [Member] | 46,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | 6.27 | |||||||||||||
| Stock Option [Member] | Minimum [Member] | 16,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | 6.05 | |||||||||||||
| Stock Option [Member] | Maximum [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | 8.21 | |||||||||||||
| Stock Option [Member] | Maximum [Member] | 46,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | $ 8.21 | |||||||||||||
| Stock Option [Member] | Maximum [Member] | 16,000 stock options granted [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Exercise prices of options outstanding | $ / shares | $ 7.54 | |||||||||||||
| Stock Option [Member] | Employee [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Number of stock options exercised | 16,000 | 28,000 | ||||||||||||
| Proceeds from exercise of stock options | $ | $ 31,900 | $ 120,210 | ||||||||||||
| Number of employee exercised stock options | Employee | 1 | 11 | ||||||||||||
| 2000 Plan [Member] | Stock Option [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Common stock reserved for issuance under the plan | ||||||||||||||
| Number of stock options exercised | (26,000) | |||||||||||||
| Stock option granted during the period | ||||||||||||||
| 2000 Plan [Member] | Stock Option [Member] | Employee [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 | 4 years 4 months | ||||||||||||
| Weighted average remaining life of options exercisable | 2 years 4 months | |||||||||||||
| 2010 Plan [Member] | Stock Option [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Common stock reserved for issuance under the plan | 155,500 | |||||||||||||
| Number of stock options exercised | (16,000) | (2,000) | ||||||||||||
| Stock option granted during the period | 46,000 | 16,000 | ||||||||||||
| 2010 Plan [Member] | Stock Option [Member] | Employee [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 | 300,000 | |||||||||||||
| Stock option expiration period | 10 years | 4 years 4 months | ||||||||||||
| Weighted average remaining life of options exercisable | 2 years 4 months | |||||||||||||
| 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). | During the second quarter of 2015, we amended our Common Stock Rights Plan by removing a provision that prevented a new group of directors elected following the emergence of an Acquiring Person (an owner of more than 20% of our stock) from controlling the Rights Plan by maintaining exclusive authority over the Rights Plan with pre-existing directors. | ||||||||||||
| 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. | |||||||||||||
| Outstanding rights price per share | $ / shares | $ 0.005 | |||||||||||||
| Common Stock Rights Plan [Member] | Minimum [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Ownership percentage | 18.00% | 15.00% | ||||||||||||
| Common Stock Rights Plan [Member] | Maximum [Member] | ||||||||||||||
| Stockholders' Equity (Textual) | ||||||||||||||
| Ownership percentage | 20.00% | 18.00% | ||||||||||||
Other Expenses, Net (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Other Expenses, Net [Abstract] | ||
| Interest expense | $ 161,697 | $ 83,578 |
| Interest income | (54,662) | (19,169) |
| Other losses (gains) | 24,847 | (5,635) |
| Other expenses, net | $ 131,882 | $ 58,774 |
Income Taxes (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Income Taxes [Abstract] | ||
| Federal | ||
| State | 13,585 | 3,150 |
| Current | 13,585 | 3,150 |
| Federal | 252,659 | 641,733 |
| State | (16,370) | 205,426 |
| Deferred | 236,289 | 847,159 |
| Total | $ 249,874 | $ 850,309 |
Income Taxes (Details 1) - USD ($) |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||
| Income Taxes [Abstract] | |||||
| Computed expected tax expense | $ 257,829 | $ 701,607 | |||
| State income taxes, net of federal expense | 38,855 | 44,754 | |||
| Share-based compensation | 13,362 | (7,524) | |||
| Tax credits | (70,967) | (54,719) | |||
| State income tax rate change, net of federal | [1] | 109,112 | |||
| Other | 10,795 | 57,079 | |||
| Total income tax expense | $ 249,874 | $ 850,309 | |||
| Computed expected tax expense, rate | 34.00% | 34.00% | |||
| State income taxes, net of federal expense, rate | 5.12% | 2.17% | |||
| Share-based compensation, rate | 1.76% | (0.36%) | |||
| Tax credits, rate | (9.36%) | (2.65%) | |||
| State income tax rate change, net of federal, rate | [1] | 5.29% | |||
| Other, rate | 1.43% | 2.76% | |||
| Total income tax expense, rate | 32.95% | 41.21% | |||
| |||||
Income Taxes (Details 2) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Income Taxes [Abstract] | ||
| Product rights | $ 68,197 | $ 91,344 |
| Property, plant and equipment | (307,976) | (26,717) |
| Federal and state tax credits | 292,516 | 339,585 |
| Federal net operating loss carryforward | 8,856 | 39,241 |
| State tax credits carryover | 100,528 | |
| Interest rate swap | 13,437 | 28,253 |
| Prepaid expenses and other | (6,240) | (19,589) |
| UNICAP | 31,685 | |
| Deferred tax asset | $ 201,003 | $ 452,117 |
Income Taxes (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Income Taxes (Textual) | ||
| Income tax expense | $ 249,874 | $ 850,309 |
| Net operating loss carryforward | 1,625,653 | |
| Federal net operating loss carryforwards | 98,000 | $ 125,797 |
| Federal general business tax credit carryforwards | $ 292,000 | |
| Tax credit carryforward, description | We have federal general business tax credit carryforwards of approximately $292,000 that expire in 2027 through 2034 (if not utilized before then) and state tax credit carryforwards of approximately $152,000 that expire in 2023 through 2036 (if not utilized before then). | |
| Investment | $ 820,000 | |
| State tax credit carryforwards | 152,000 | |
| Intangible asset | $ 965,000 | |
| Amortization period | 15 years | |
| Net operating loss carryforwards, expiration date | Dec. 31, 2031 | |
| U.S. federal corporate tax rate | 34.00% | |
| Investment Income [Member] | ||
| Income Taxes (Textual) | ||
| Investment | $ 1,112,000 | |
Contingent Liabilities and Commitments (Details) - USD ($) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
Sep. 30, 2016 |
Jun. 30, 2009 |
Dec. 31, 2016 |
|
| Contingent Liabilities and Commitments (Textual) | |||
| Termination fee | $ 100,000 | ||
| Capital expenditure | 3,280,000 | ||
| Payment of capital expenditure | 2,080,000 | ||
| Production of inventory | 617,000 | ||
| Other obligations | 100,000 | ||
| Construction costs | $ 20,000,000 | 12,320,000 | |
| Milestone payment | $ 150,000 | ||
| Capital expenditures committed | 8,865,000 | ||
| Construction cost payable | $ 17,920,000 | ||
| Royalty, percentage | 4.00% | ||
Segment Information (Details) - Sales Revenue, Net [Member] |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Segment Information (Textual) | ||
| Concentration risk percentage | 93.00% | 93.00% |
| U.S. dairy and beef industries [Member] | ||
| Segment Information (Textual) | ||
| Concentration risk percentage | 85.00% | 83.00% |
| Foreign dairy and beef industries [Member] | ||
| Segment Information (Textual) | ||
| Concentration risk percentage | 13.00% | 14.00% |
Related Party Transactions (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Related Party Transactions (Textual) | ||
| Revenues from transactions with related party | $ 551,020 | $ 573,165 |
| Accounts receivable, related parties | 3,221 | 36,528 |
| Related party transaction, expenses from transactions with related party | $ 5,286 | $ 3,222 |
Employee Benefits (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Employee Benefits (Textual) | ||
| Employee savings plan, description | All employees completing one month of service with the Company are eligible to participate. | |
| Defined benefit plans general information | August 2012, we have matched 100% of the first 3% of each employee's salary that is contributed to the Plan and 50% of the next 2% of each employee's salary that is contributed to the Plan. | |
| Defined benefit plan benefits paid | $ 74,507 | $ 73,514 |
Unaudited Quarterly Financial Data (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2015 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Condensed Financial Statements, Captions [Line Items] | ||||||||||
| Product sales | $ 2,213,818 | $ 1,968,122 | $ 2,375,662 | $ 2,986,359 | $ 2,694,407 | $ 2,472,428 | $ 1,960,363 | $ 3,101,491 | $ 9,543,961 | $ 10,228,689 |
| Gross margin | 1,218,647 | 1,204,627 | 1,239,861 | 1,757,560 | 1,657,502 | 1,611,902 | 1,130,574 | 1,850,925 | 5,420,695 | 6,250,902 |
| Product development expenses | 253,737 | 307,721 | 380,434 | 302,443 | 331,139 | 301,746 | 271,759 | 330,665 | 1,244,335 | 1,235,309 |
| Net operating income | 119,309 | 50,467 | 21,465 | 698,964 | 461,437 | 626,850 | 213,983 | 820,052 | 890,204 | 2,122,322 |
| Net income (loss) | $ 30,285 | $ 34,870 | $ (9,155) | $ 452,448 | $ 288,807 | $ 351,292 | $ 94,058 | $ 479,082 | $ 508,448 | $ 1,213,239 |
| Net income (loss) per common share: | ||||||||||
| Basic | $ 0.01 | $ 0.01 | $ (0.00) | $ 0.12 | $ 0.09 | $ 0.12 | $ 0.03 | $ 0.16 | $ 0.12 | $ 0.40 |
| Diluted | $ 0.01 | $ 0.01 | $ (0.00) | $ 0.11 | $ 0.09 | $ 0.11 | $ 0.03 | $ 0.15 | $ 0.12 | $ 0.38 |
Subsequent Events (Details) - Subsequent Event [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2017
USD ($)
ft²
| |
| Subsequent Event [Line Items] | |
| Building area | ft² | 4,114 |
| Purchase price | $ 465,500 |
| Mortgage loan | 340,000 |
| Wrote off of fixed assets | $ 38,000 |
| Variable rate, description | Bearing interest at a variable rate equal to the one-month LIBOR plus a margin of 2.25% with monthly principal and interest payments due for ten years based on a twenty-year amortization schedule.
|
| Sale of certain other fixed assets and product rights | $ 45,000 |
| Net gain from sale | 7,000 |
| Line of credit | 500,000 |
| Maximum [Member] | |
| Subsequent Event [Line Items] | |
| Mortgage loan | 6,500,000 |
| Minimum [Member] | |
| Subsequent Event [Line Items] | |
| Mortgage loan | $ 4,500,000 |
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