ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
|
|
(Unaudited)
June 30,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
891,247
|
|
|
$
|
1,398,985
|
|
Short-term investments
|
|
|
4,184,000
|
|
|
|
3,227,000
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $15,000 at June 30, 2011 and $13,000 at December 31, 2010
|
|
|
487,644
|
|
|
|
465,278
|
|
Income taxes receivable
|
|
|
648
|
|
|
|
948
|
|
Other receivables
|
|
|
31,465
|
|
|
|
31,287
|
|
Inventory
|
|
|
1,638,795
|
|
|
|
1,601,016
|
|
Prepaid expenses
|
|
|
168,199
|
|
|
|
241,191
|
|
Current portion of deferred tax asset
|
|
|
13,376
|
|
|
|
—
|
|
Total current assets
|
|
|
7,415,374
|
|
|
|
6,965,705
|
|
NET PROPERTY, PLANT AND EQUIPMENT
, at cost
|
|
|
2,617,451
|
|
|
|
2,710,891
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM PORTION OF DEFERRED TAX ASSET
|
|
|
1,238,598
|
|
|
|
1,040,606
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS,
net
|
|
|
17,227
|
|
|
|
33,977
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,288,650
|
|
|
$
|
10,751,179
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
652,882
|
|
|
$
|
372,052
|
|
Accounts payable
|
|
|
58,484
|
|
|
|
105,739
|
|
Current portion of bank debt
|
|
|
168,868
|
|
|
|
42,384
|
|
Current portion of deferred tax liability
|
|
|
—
|
|
|
|
4,843
|
|
Deferred revenue
|
|
|
8,250
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
888,484
|
|
|
|
525,018
|
|
LONG-TERM LIABILITY:
|
|
|
|
|
|
|
|
|
Long-term portion of bank debt
|
|
|
1,355,529
|
|
|
|
943,760
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,244,013
|
|
|
|
1,468,778
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, Par value - $0.10 per share, Authorized - 8,000,000 shares,Issued - 3,261,148 shares at June 30, 2011 and December 31, 2010
|
|
|
326,115
|
|
|
|
326,115
|
|
Capital in excess of par value
|
|
|
9,820,589
|
|
|
|
9,780,392
|
|
Accumulated deficit
|
|
|
(486,136
|
)
|
|
|
(204,805
|
)
|
Treasury stock at cost - 280,496 shares at June 30, 2011 and 287,496 shares at December 31, 2010
|
|
|
(613,619
|
)
|
|
|
(628,932
|
)
|
Accumulated other comprehensive (loss) income - interest rate swap
|
|
|
(2,312
|
)
|
|
|
9,631
|
|
Total stockholders’ equity
|
|
|
9,044,637
|
|
|
|
9,282,401
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
11,288,650
|
|
|
$
|
10,751,179
|
|
The accompanying notes are an integral part of these financial statements.
ImmuCell Corporation
(Unaudited)
STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND
SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND 2010
|
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
1,247,443
|
|
|
$
|
1,077,672
|
|
|
$
|
2,803,144
|
|
|
$
|
2,389,419
|
|
Costs of goods sold
|
|
|
552,917
|
|
|
|
459,055
|
|
|
|
1,240,383
|
|
|
|
1,031,645
|
|
Gross margin
|
|
|
694,526
|
|
|
|
618,617
|
|
|
|
1,562,761
|
|
|
|
1,357,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses
|
|
|
672,763
|
|
|
|
333,320
|
|
|
|
1,144,896
|
|
|
|
738,782
|
|
Administrative expenses
|
|
|
222,566
|
|
|
|
224,569
|
|
|
|
431,453
|
|
|
|
463,495
|
|
Sales and marketing expenses
|
|
|
232,057
|
|
|
|
108,358
|
|
|
|
436,130
|
|
|
|
277,526
|
|
Other operating expenses
|
|
|
1,127,386
|
|
|
|
666,247
|
|
|
|
2,012,479
|
|
|
|
1,479,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET OPERATING LOSS
|
|
|
432,860
|
|
|
|
47,630
|
|
|
|
449,718
|
|
|
|
122,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) revenues, net
|
|
|
(23,793
|
)
|
|
|
10,908
|
|
|
|
(38,430
|
)
|
|
|
20,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
456,653
|
|
|
|
36,722
|
|
|
|
488,148
|
|
|
|
101,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
198,435
|
|
|
|
30,283
|
|
|
|
206,817
|
|
|
|
41,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
258,218
|
|
|
$
|
6,439
|
|
|
$
|
281,331
|
|
|
$
|
59,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,974,245
|
|
|
|
2,970,652
|
|
|
|
2,973,950
|
|
|
|
2,970,652
|
|
Diluted
|
|
|
2,974,245
|
|
|
|
2,970,652
|
|
|
|
2,973,950
|
|
|
|
2,970,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.00
|
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.00
|
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
The accompanying notes are an integral part of these financial statements.
ImmuCell Corporation
(Unaudited)
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2011
|
|
Common Stock
$0.10 Par Value
|
|
|
Capital in
Excess of
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Equity
|
|
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
3,261,148
|
|
|
$
|
326,115
|
|
|
$
|
9,780,392
|
|
|
$
|
(204,805
|
)
|
|
|
287,496
|
|
|
$
|
(628,932
|
)
|
|
$
|
9,631
|
|
|
$
|
9,282,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(281,331
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(281,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss – interest rate swap, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,943
|
)
|
|
|
(11,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(293,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
15,057
|
|
|
|
—
|
|
|
|
(7,000
|
)
|
|
|
15,313
|
|
|
|
—
|
|
|
|
30,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits related to stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
7,404
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
17,736
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
3,261,148
|
|
|
$
|
326,115
|
|
|
$
|
9,820,589
|
|
|
$
|
(486,136
|
)
|
|
|
280,496
|
|
|
$
|
(613,619
|
)
|
|
$
|
(2,312
|
)
|
|
$
|
9,044,637
|
|
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2010
|
|
Common Stock
$0.10 Par Value
|
|
|
Capital in
Excess of
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Surplus
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
3,261,148
|
|
|
$
|
326,115
|
|
|
$
|
9,751,442
|
|
|
$
|
179,879
|
|
|
|
290,496
|
|
|
$
|
(635,495
|
)
|
|
|
—
|
|
|
$
|
9,621,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(59,705
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(59,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income – interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(59,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
14,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
3,261,148
|
|
|
$
|
326,115
|
|
|
$
|
9,765,833
|
|
|
$
|
120,174
|
|
|
|
290,496
|
|
|
$
|
(635,495
|
)
|
|
|
—
|
|
|
$
|
9,576,627
|
|
The accompanying notes are an integral part of these financial statements.
ImmuCell Corporation
(Unaudited)
STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(281,331
|
)
|
|
$
|
(59,705
|
)
|
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
210,920
|
|
|
|
210,945
|
|
Amortization
|
|
|
3,372
|
|
|
|
—
|
|
Deferred income taxes
|
|
|
(216,211
|
)
|
|
|
(41,897
|
)
|
Stock-based compensation
|
|
|
17,736
|
|
|
|
14,391
|
|
Loss on disposal of fixed assets
|
|
|
9,582
|
|
|
|
—
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(22,244
|
)
|
|
|
(141,874
|
)
|
Inventory
|
|
|
(37,779
|
)
|
|
|
(267,293
|
)
|
Prepaid expenses and other assets
|
|
|
74,427
|
|
|
|
42,140
|
|
Accrued expenses
|
|
|
280,830
|
|
|
|
(18,351
|
)
|
Accounts payable
|
|
|
(21,773
|
)
|
|
|
(12,922
|
)
|
Deferred revenue
|
|
|
8,250
|
|
|
|
—
|
|
Net cash provided by (used for) operating activities
|
|
|
25,779
|
|
|
|
(274,566
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITES :
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(152,544
|
)
|
|
|
(94,175
|
)
|
Maturities of short-term investments
|
|
|
735,000
|
|
|
|
2,371,000
|
|
Purchases of short-term investments
|
|
|
(1,692,000
|
)
|
|
|
(1,233,000
|
)
|
Net cash (used for) provided by investing activities
|
|
|
(1,109,544
|
)
|
|
|
1,043,825
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from debt issuance
|
|
|
600,000
|
|
|
|
—
|
|
Debt principal repayments
|
|
|
(61,747
|
)
|
|
|
—
|
|
Proceeds from exercise of stock options
|
|
|
30,370
|
|
|
|
—
|
|
Tax benefits related to stock options
|
|
|
7,404
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
576,027
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(507,738
|
)
|
|
|
769,259
|
|
|
|
|
|
|
|
|
|
|
BEGINNING CASH AND CASH EQUIVALENTS
|
|
|
1,398,985
|
|
|
|
975,490
|
|
|
|
|
|
|
|
|
|
|
ENDING CASH AND CASH EQUIVALENTS
|
|
$
|
891,247
|
|
|
$
|
1,744,749
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE PAID
|
|
$
|
(37,841
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES PAID
|
|
$
|
(153
|
)
|
|
$
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in capital expenditures included in accounts payable
|
|
$
|
(25,482
|
)
|
|
$
|
(3,098
|
)
|
Decrease in fair value of interest rate swap, net of taxes
|
|
$
|
11,943
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these financial statements
.
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2011
We have prepared the accompanying financial statements without audit reflecting all adjustments, all of which are of a normal recurring nature, that are, in our opinion, necessary in order to make the financial statements not misleading. We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the 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 issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification
™ (Codification). The FASB finalized the Codification effective for periods ending on or after September 15, 2009. Certain prior year accounts have been reclassified to conform with the 2011 financial statement presentation. Certain information and footnote disclosures normally included in the annual financial statements have been condensed or omitted. Accordingly, we believe that although the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the financial statements for the year ended December 31, 2010 and the notes thereto, contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
2.
|
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
|
We consider all highly liquid investment instruments that mature within three months of their purchase dates to be cash equivalents. Cash equivalents are principally invested in securities backed by the U.S. government. Certain cash balances in excess of Federal Deposit Insurance Corporation (FDIC) limits per financial institution are maintained in money market accounts at financial institutions that are insured, in part, by the Securities Investor Protection Corporation. 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 and are held at different financial institutions that are insured by the FDIC within the FDIC insurance limit of $250,000 per institution per depositor. We are required by bank debt covenant to maintain at least $1,000,000 of otherwise unrestricted cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments consisted of the following (in thousands):
|
|
As of June 30,
2011
|
|
|
As of December 31,
2010
|
|
|
(Decrease)
Increase
|
|
Cash and cash equivalents
|
|
$
|
891
|
|
|
$
|
1,399
|
|
|
$
|
(508
|
)
|
Short-term investments
|
|
|
4,184
|
|
|
|
3,227
|
|
|
|
957
|
|
|
|
$
|
5,075
|
|
|
$
|
4,626
|
|
|
$
|
449
|
|
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 market (net realizable value). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead. Inventory consisted of the following (in thousands):
|
|
As of June 30,
2011
|
|
|
As of December 31,
2010
|
|
|
Increase
(Decrease)
|
|
Raw materials
|
|
$
|
271
|
|
|
$
|
237
|
|
|
$
|
34
|
|
Work-in-process
|
|
|
1,038
|
|
|
|
977
|
|
|
|
61
|
|
Finished goods
|
|
|
330
|
|
|
|
387
|
|
|
|
(57
|
)
|
|
|
$
|
1,639
|
|
|
$
|
1,601
|
|
|
$
|
38
|
|
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
4.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted of the following, at cost (in thousands):
|
|
As of June 30,
2011
|
|
|
As of December 31,
2010
|
|
Laboratory and manufacturing equipment
|
|
$
|
2,905
|
|
|
$
|
2,870
|
|
Building and improvements
|
|
|
2,651
|
|
|
|
2,553
|
|
Office furniture and equipment
|
|
|
227
|
|
|
|
225
|
|
Construction in progress
|
|
|
19
|
|
|
|
40
|
|
Land
|
|
|
50
|
|
|
|
50
|
|
Property, plant and equipment, gross
|
|
|
5,852
|
|
|
|
5,738
|
|
Less-accumulated depreciation
|
|
|
3,235
|
|
|
|
3,027
|
|
Property, plant and equipment, net
|
|
$
|
2,617
|
|
|
$
|
2,711
|
|
Other assets consisted of the following (in thousands):
|
|
As of June 30,
2011
|
|
|
As of December 31,
2010
|
|
Security deposits
|
|
$
|
1
|
|
|
$
|
1
|
|
Debt issue costs
|
|
|
26
|
|
|
|
26
|
|
Interest rate swap (liability) asset
|
|
|
(4
|
)
|
|
|
10
|
|
Other assets, gross
|
|
|
23
|
|
|
|
37
|
|
Accumulated amortization of debt issue costs
|
|
|
6
|
|
|
|
3
|
|
Other assets, net
|
|
$
|
17
|
|
|
$
|
34
|
|
During the third quarter of 2010, we agreed to terms of certain credit facilities with TD Bank, N.A. aggregating up to approximately $2,100,000, which are secured by substantially all of our assets. These credit facilities are comprised of a $1,000,000 ten-year mortgage loan, a $600,000 fifty-four month note and a $500,000 line of credit. Proceeds from the $1,000,000 mortgage loan were received during the third quarter of 2010. Based on a 15-year amortization schedule, a balloon principal payment of approximately $452,000 will be due in the third quarter of 2020. We hedged our interest rate exposure on this mortgage loan with an interest rate swap agreement that effectively converted a floating interest rate to the fixed rate of 6.04%. All derivatives are recognized on the balance sheet at their fair value. The agreement has been determined to be highly effective in hedging the variability of identified cash flows and has been designated as a cash flow hedge of the variability in the hedged interest payments. Changes in the fair value of the interest rate swap agreement are recorded in other comprehensive (loss) income, net of taxes. The original notional amount of the interest rate swap agreement of $1,000,000 amortizes in accordance with the amortization of the mortgage loan. As the result of our decision to hedge this interest rate risk, we recorded a debit to equity in the amount of approximately $2,000 as of June 30, 2011 and a credit to equity in the amount of approximately $10,000 as of December 31, 2010, which reflect the fair value of the interest rate swap (liability) asset, net of taxes. The fair value of the interest rate swap has been determined using observable market-based inputs or unobservable inputs that are corroborated by market data. Accordingly, the interest rate swap is classified as level 2 within the fair value hierarchy provided in Codification Topic 820,
Fair Value Measurements and Disclosures
. Proceeds from the $600,000 note were received during the first quarter of 2011. Interest on the note is variable at the higher rate of 4.25% or the one month London Interbank Offered Rate (LIBOR) plus 3.25%. The $500,000 line of credit is available as needed and has been extended through October 31, 2011 and is renewable annually thereafter. Interest on the line of credit will be variable at the higher rate of 4.25% or the one month LIBOR plus 3.50%. These credit facilities are subject to certain financial covenants. A technical non-compliance with one of these covenants as of December 31, 2010 was waived by the bank. Because these covenants were calculated anticipating much higher spending on product development expenses than we currently plan, we expect to be in compliance with these covenants going forward. We are in compliance with all applicable covenants as of June 30, 2011. Principal payments due under debt outstanding as of June 30, 2011 are reflected in the following table by the period that payments are due (in thousands):
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
|
|
Six-Month
Period Ending
December
|
|
|
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
31, 2011
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
Thereafter
|
|
|
Total
|
|
$1,000,000 mortgage
|
|
$
|
22
|
|
|
$
|
45
|
|
|
$
|
48
|
|
|
$
|
51
|
|
|
$
|
54
|
|
|
$
|
57
|
|
|
$
|
688
|
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$600,000 note payable
|
|
|
62
|
|
|
|
128
|
|
|
|
134
|
|
|
|
139
|
|
|
|
96
|
|
|
|
-
|
|
|
|
-
|
|
|
|
559
|
|
Total
|
|
$
|
84
|
|
|
$
|
173
|
|
|
$
|
182
|
|
|
$
|
190
|
|
|
$
|
150
|
|
|
$
|
57
|
|
|
$
|
688
|
|
|
$
|
1,524
|
|
7.
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
In connection with a Development and Manufacturing Agreement entered into during the third quarter of 2010 with Lonza Sales Ltd., we have committed approximately an additional $614,000 (46% paid during the fourth quarter of 2010 and 39% paid early in the third quarter of 2011 and the balance due upon completion, which is expected to occur during the third quarter of 2011) to Lonza to generate the manufacturing data required for a regulatory submission to the FDA pertaining to the development of
Mast Out
Ò
. Approximately 95% and 25% of this work was complete as of June 30, 2011 and December 31, 2010, respectively. Accordingly, we expensed approximately $426,000 and $155,000 to product development expenses during the six-month period ended June 30, 2011 and the year ended December 31, 2010, respectively, on the percentage of completion basis. This commitment is in addition to approximately $137,000 that we paid to Lonza during the fourth quarter of 2009 for technology transfer related work. Approximately 97% and 71% of this work was complete as of June 30, 2011 and December 31, 2010, respectively. Accordingly, we expensed approximately $35,000 and $98,000 to product development expenses during the six-month period ended June 30, 2011 and the year ended December 31, 2010, respectively. This work was completed early in the third quarter of 2011.
8.
|
OTHER (EXPENSES) REVENUES, NET
|
Other (expenses) revenues consisted of the following (in thousands):
|
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Royalty income
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest income (expense)
|
|
|
(16
|
)
|
|
|
8
|
|
|
|
(31
|
)
|
|
|
17
|
|
Other gains (losses)
|
|
|
( 9
|
)
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
$
|
(24
|
)
|
|
$
|
11
|
|
|
$
|
(38
|
)
|
|
$
|
21
|
|
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
9.
|
EMPLOYEE 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 $10,000 and $0 during the three-month periods ended June 30, 2011 and 2010, respectively, and $18,000 and $14,000 during the six-month periods ended June 30, 2011 and 2010, respectively. Codification Topic 718 requires us to reflect gross tax savings resulting from tax deductions in excess of expense reflected in our financial statements as a financing cash flow, but there were no significant tax deductions during the three-month or six-month periods ended June 30, 2011 or 2010.
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 carry forwards 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 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 IRS and other taxing authorities. We have evaluated the positions taken on our filed tax returns. We have concluded that no uncertain tax positions exist as of June 30, 2011. Although we believe that our estimates are reasonable, actual results could differ from these estimates.
11.
|
NET LOSS PER COMMON SHARE
|
The net loss per common share has been computed in accordance with Codification Topic 260-10,
Earnings Per Share
, by dividing the net loss by the weighted average number of common shares outstanding during the period, without giving consideration to outstanding stock options because the impact would be anti-dilutive. Outstanding stock options not included in the calculation aggregated approximately 244,500 during the three-month and six-month periods ended June 30, 2011 and approximately 273,000 during the three-month and six-month periods ended June 30, 2010.
12.
|
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 or surviving company’s common stock having a market value at that time equal to twice the Right’s exercise price.
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
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 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. No other changes were made to the terms of the Rights or the Rights Agreement at that time. On June 6, 2008, our Board voted to authorize amendments 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. No other changes were made to the terms of the Rights or the Rights Agreement at that time. On August 5, 2011, our Board voted to authorize amendments of the Rights Agreement to extend to 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%. We entered into an amendment to the Rights Agreement with the Rights Agent reflecting such extension and threshold increase as of August 9, 2011. No other changes were made to the terms of the Rights or the Rights Agreement at that time.
Our Board of Directors believes that there is some risk that the potential value of the
Mast Out
®
product development initiative may not be fairly reflected in the market price of our common stock, as it fluctuates from time to time, and that opportunistic buyers could take advantage of that disparity to the detriment of our stockholders. If this were to be true and resulted in a potential threat through an unsolicited acquisition effort or otherwise, the Board feels that the Rights Plan could enhance stockholder value by providing management with negotiating leverage.
13.
|
SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
|
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. Our primary customers for the majority of our product sales (84% and 74% for the three-month periods ended June 30, 2011 and 2010, respectively, and 83% and 82% for the six-month periods ended June 30, 2011 and 2010, 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 16% and 13% of our total product sales for the three-month periods ended June 30, 2011 and 2010, respectively, and 17% and 13% of our total product sales for the six-month periods ended June 30, 2011 and 2010, respectively. Sales to significant distributors that amounted to 10% or more of total product sales are detailed in the following table:
|
|
Three-Month Periods
Ended June 30,
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Animal Health International, Inc. [ 1 ]
|
|
|
38
|
%
|
|
|
37
|
%
|
|
|
40
|
%
|
|
|
36
|
%
|
MWI Veterinary Supply Center
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
TCS Biosciences, Ltd.
|
|
|
*
|
|
|
|
13
|
%
|
|
|
*
|
|
|
|
*
|
|
[ 1 ]
Assumes that the June 2011 acquisition of Animal Health International by Lextron had occurred as of the beginning of
the periods being reported.
*
Amount is less than 10%.
ImmuCell Corporation
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Accounts receivable due from significant distributors that amounted to 10% or more of total trade accounts receivable are detailed in the following table:
|
|
As of June 30,
2011
|
|
|
As of December
31, 2010
|
|
Animal Health International, Inc.
[ 1 ]
|
|
|
41
|
%
|
|
|
35
|
%
|
Robert J. Matthews Company
|
|
|
15
|
%
|
|
|
15
|
%
|
MWI Veterinary Supply Company
|
|
|
*
|
|
|
|
12
|
%
|
Stearns Veterinary Outlet, Inc.
|
|
|
*
|
|
|
|
10
|
%
|
[ 1 ] Assumes that the June 2011 acquisition of Animal Health International by Lextron had occurred as of the dates being reported.
*
Amount is less than 10%.
14.
|
RELATED PARTY TRANSACTIONS
|
Dr. David S. Tomsche (a member of our Board of Directors) is a controlling owner of Stearns Veterinary Outlet, Inc., a domestic distributor of ImmuCell products (
First Defense
Ò
,
Wipe Out
Ò
Dairy Wipes
,
and
CMT
) and of J-t Enterprises of Melrose, Inc., an exporter. His affiliated companies purchased approximately $139,000 and $142,000 of products from ImmuCell during the six-month periods ended June 30, 2011 and 2010, respectively, on terms consistent with those offered to other distributors of similar status. Our accounts receivable (subject to standard and customary payment terms) due from these affiliated companies aggregated approximately $31,000 and $45,000 as of June 30, 2011 and December 31, 2010, respectively.
We have adopted the disclosure provisions of Codification Topic 855-10-50-1,
Subsequent Events
, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued. Entities are required to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Codification Topic 855-10-50-1 requires additional disclosures only, and therefore did not have an impact on our financial condition, results of operations, earnings per share or cash flows. Public entities must evaluate subsequent events through the date that financial statements are issued. Accordingly, we have evaluated subsequent events through the time of filing on August 15, 2011, the date we have issued this Quarterly Report on Form 10-Q.
ImmuCell Corporation
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2011
Product Sales
Product sales increased by approximately 16%, or $170,000, to $1,247,000 during the three-month period ended June 30, 2011 in comparison to $1,078,000 during the same period in 2010. Product sales increased by approximately 17%, or $414,000, to $2,803,000 during the six-month period ended June 30, 2011 in comparison to $2,389,000 during the same period in 2010. Product sales increased by approximately 8% during the twelve-month period ended June 30, 2011, in comparison to the same period ended June 30, 2010. The volatility of the global economy, and its impact on the dairy industry, continues to affect our product sales both domestically and internationally. During the three-month period ended June 30, 2011, domestic sales increased by 31%, or $250,000, and international sales decreased by 29%, or $80,000, in comparison to the same period in 2010. During the first six months of 2011, domestic sales increased by 19%, or $368,000, and international sales increased by 10%, or $46,000, in comparison to the same period in 2010.
The timing of our sales of bulk reagents for use in a drinking water diagnostic test sold by others can influence the reported changes in our total product sales. A sale of these reagents made during the second quarter of 2010 did not repeat during the second quarter of 2011 but is expected to be made during the fourth quarter of 2011. Our animal health sales (excluding sales of the water diagnostic reagents) increased by 32%, 24% and 12% during the three-month, six-month and twelve-month periods ended June 30, 2011, respectively, in comparison to the same periods in the prior year. These figures more accurately reflect the health of our core animal health business.
We believe that this growth may reflect, at least in part, the success of our strategic decision to invest in additional sales and marketing efforts. We launched a communications campaign at the end of 2010 that is highlighting how the unique features of
First Defense
Ò
provide a dependable return on investment for producers. Effective for 2011 and renewable annually by mutual agreement, we entered into a sales and marketing collaboration with Agri Laboratories Ltd. of St. Joseph Missouri, under which the AgriLabs sales and marketing teams are working with us to expand market demand for
First Defense
Ò
. It is our production and customer service objective to ship orders within one day of receipt. We have been operating in accordance with this objective since the third quarter of 2009. Competition for resources that dairy producers allocate to their calf enterprises has been increased by the severe economic challenges that producers have been facing since the start of the current down cycle in 2008 and by the many new products that have been introduced to the calf market. This competitive pressure increases the importance for us to be successful with new development initiatives such as product line extensions and the addition of a new rotavirus claim for
First Defense
Ò
.
We appreciate the growing volume of business that we have achieved during these difficult economic times when many of our customers are taking cost-cutting measures. Even in this challenging market with moderately higher milk prices but persistently high feed costs, our lead product,
First Defense
Ò
, continues to benefit from wide acceptance as an effective tool to prevent bovine enteritis (scours) in newborn calves. During the third quarter of 2010, we sold our 10,000,000
th
dose of
First Defense
Ò
. The fourth quarter of 2011 will mark the 20
th
anniversary of the original USDA approval of this product in 1991. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product. Sales are normally seasonal, with higher sales expected during the first quarter. During the three-month period ended June 30, 2011, domestic sales of
First Defense
Ò
increased by 36%, and this increase was complemented by a 46% increase in international sales of
First Defense
Ò
, in comparison to the same period in 2010. During the six-month period ended June 30, 2011, domestic sales of
First Defense
Ò
increased by 22%, and this increase was complemented by a 61% increase in international sales of
First Defense
Ò
, in comparison to the same period in 2010. Sales of
First Defense
Ò
increased by 37% during the three-month period ended June 30, 2011 in comparison to the same period in 2010. This follows a 21% increase in sales of
First Defense
Ò
during the three-month period ended March 31, 2011 in comparison to the same period in 2010 and a 13% increase in sales of
First Defense
Ò
during the three-month period ended December 31, 2010 in comparison to the same period in 2009. Sales of
First Defense
Ò
increased by 28% during the six-month period ended June 30, 2011 in comparison to the six-month period ended June 30, 2010. Sales of
Wipe Out
Ò
Dairy Wipes
decreased by 12% during the six-month period ended June 30, 2011 in comparison to the same period in 2010. We are competing aggressively on selling price to earn new business against less expensive products and alternative teat sanitizing methods.
ImmuCell Corporation
Gross Margin
The gross margin as a percentage of product sales was 56% and 57% during the three-month periods ended June 30, 2011 and 2010, respectively. The gross margin as a percentage of product sales was 56% and 57% during the six-month periods ended June 30, 2011 and 2010, respectively. The gross margin as a percentage of product sales was 52% and 57% during the twelve-month periods ended June 30, 2011 and 2010, respectively. Our annual objective for gross margin percentage is approximately 50%, and our gross margin as a percentage of product sales has been maintained moderately above that target during the periods being reported. Our gross margin percentages were 52%, 53% and 45% for the years ended December 31, 2010, 2009 and 2008, respectively. We expect some fluctuations in gross margin percentages from quarter to quarter. We believe that a number of factors can cause our costs to be variable. Biological yields from the raw material used in the production of
First Defense
Ò
do fluctuate over time. Like most manufacturers in the U.S., we have been experiencing increases in the cost of raw materials that we purchase. Product mix also affects gross margin in that we earn a higher gross margin on
First Defense
Ò
and a lower gross margin on
Wipe Out
Ò
Dairy Wipes
. We had held our selling prices without significant increase for approximately the seven-year period ended December 31, 2007, believing that we could benefit more from higher unit sales volume than through a higher average selling price per unit. During the first quarter of 2008, we implemented a modest increase to the selling price of
First Defense
Ò
and have held that selling price without increase since then. Changes in the gross margin on product sales are summarized in the following table for the respective periods (in thousands, except for percentages):
|
|
Three-Month Periods
Ended June 30,
|
|
|
Increase
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
695
|
|
|
$
|
619
|
|
|
$
|
76
|
|
|
|
12
|
%
|
Percent of product sales
|
|
|
56
|
%
|
|
|
57
|
%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
Six-Month Periods
Ended June 30,
|
|
|
Increase
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
1,563
|
|
|
$
|
1,358
|
|
|
$
|
205
|
|
|
|
15
|
%
|
Percent of product sales
|
|
|
56
|
%
|
|
|
57
|
%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
Twelve-Month Periods
Ended June 30,
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
Gross margin
|
|
$
|
2,507
|
|
|
$
|
2,547
|
|
|
$
|
(40
|
)
|
|
|
(2
|
)%
|
Percent of product sales
|
|
|
52
|
%
|
|
|
57
|
%
|
|
|
(5
|
)%
|
|
|
(9
|
)%
|
Product Development
Product development expenses increased by approximately 102%, or $339,000, to $673,000 during the three-month period ended June 30, 2011 in comparison to the same period in 2010. Product development expenses aggregated 54% and 31% of product sales during the three-month periods ended June 30, 2011 and 2010, respectively. Product development expenses increased by approximately 55%, or $406,000, to $1,145,000 during the six-month period ended June 30, 2011 in comparison to the same period in 2010. Product development expenses aggregated 41% and 31% of product sales during the six-month periods ended June 30, 2011 and 2010, respectively. The product development expenses principally reflect the costs related to the development of the commercial manufacturing process for
Mast Out
Ò
and to the studies investigating a rotavirus claim for
First Defense
Ò
.
We spent approximately $1,493,000, $1,645,000 and $1,746,000 on product development activities during the years ended December 31, 2010, 2009 and 2008, respectively. We expect higher product development expenses during the year ending December 31, 2011. We are currently seeking a partner to complete the development of
Mast Out
Ò
and to support the manufacturing, marketing and sales efforts. Additional investments, related principally to manufacturing scale-up and preparations of full-scale batches of
Mast Out
Ò
, could amount to approximately $6,000,000 prior to receiving FDA approval. If a partner agrees to fund the completion of the
Mast Out
Ò
product development effort, our product development expenses would be expected to increase even higher, but only if they are offset, at least in part, by the funds contributed by such a partner in a potential strategic collaboration.
ImmuCell Corporation
In 2000, we acquired an exclusive license from Nutrition 21, Inc. to develop and market Nisin-based products for animal health applications, which allowed us to initiate the development of
Mast Out
Ò
, our intramammary infusion product. 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, the same active ingredient contained in
Wipe Out
Ò
Dairy Wipes
, is
an antibacterial peptide. Nisin is known to have activity against most gram positive and some gram negative bacteria. Nisin is a well characterized substance, having been used in food preservation applications for over 50 years. Nisin has been granted GRAS (Generally Regarded as Safe) status by the FDA for food preservative applications, which may be of some help in obtaining approval for the use of
Mast Out
Ò
on organic farms. Food-grade Nisin, however, cannot be used in pharmaceutical applications because of its low purity. Our Nisin technology includes methods to achieve pharmaceutical-grade purity.
Traditional antibiotic products currently on the market for use in the treatment of mastitis are sold subject to a regulatory requirement to discard milk from treated cows during the course of and for a period following antibiotic treatment (the milk discard requirement). Currently, mastitis treatment is generally limited to only clinical cases - those cases where cows are producing abnormal milk - since that milk already is unsuitable for commercial sale. Because milk from cows infected with subclinical mastitis (those with infected udders, but still producing normal milk) can be sold, dairy producers generally do not treat subclinical mastitis. Doing so would give rise to the milk discard requirement and a resulting loss in revenue to the dairy producer. Without a milk discard requirement, we believe
Mast Out
Ò
could expand the subclinical mastitis treatment market niche. We are not aware of any other intramammary mastitis treatment product that has such a “zero discard” claim. While the benefit of treating clinical mastitis is widely known, there is a growing awareness of the cascade of events associated with subclinical mastitis, including reduced or foregone milk quality premiums, increased abortions, lower milk production and increased cull rates. Some industry experts have estimated that subclinical mastitis costs the U.S. dairy industry approximately $1 billion per year. Regulations in the European Union will likely require that
Mast Out
Ò
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 products on the market.
In 2004, we entered into a product development and marketing agreement with Pfizer Animal Health, a division of Pfizer, Inc., covering
Mast Out
Ò
. Under that agreement (as amended and supplemented and later terminated), we received $2,375,000 in payments from Pfizer. Pfizer elected to terminate the agreement in 2007. Soon thereafter, Pfizer returned to us all rights, data, information, files, regulatory filings, materials and stocks of Nisin and Nisin producing cultures relating to the development of
Mast Out
Ò
. We believe that Pfizer’s decision to terminate the agreement was not based on any unanticipated efficacy or regulatory issues. Rather, we believe Pfizer’s decision was primarily market driven, largely relating to concerns that the use of
Mast Out
Ò
may require specific treatment restrictions at the herd level.
Due to its antibacterial nature, Nisin in bulk tank milk could interfere with the manufacture of certain (but not all) cultured milk products, such as some kinds of cheese and yogurt, if a high enough percentage of animals from a herd is treated at any one time. We have developed potential strategies to quantify and manage this risk. Milk that is sold exclusively for fluid milk products would not be subject to this restriction. We believe that the benefits of using
Mast Out
Ò
would outweigh the management costs associated with implementing a potential treatment restriction. Another risk is that
Mast Out
Ò
likely will be priced at a premium to the traditional antibiotic products currently on the market, that are all sold subject to a milk discard requirement. However, we believe that we can demonstrate a return on the investment to the producer that will justify this premium.
Mastitis is estimated to cost U.S. dairy producers approximately $2 billion per year. These losses include the cost of treatment products, reduced milk production, discarded milk and lost cows. We estimate that the U.S. market for the use of antibiotics to treat clinical mastitis in lactating cows is approximately $40,000,000 per year and that similar market opportunities also exist outside of the United States and for the treatment of dry (non-lactating) cows. Because milk from cows treated with traditional antibiotics must be discarded for a period of time during and after treatment due to concerns about antibiotic residue in the milk, currently it is not common practice to treat subclinical mastitis (those cases where cows have infected udders, but still produce saleable milk). The ability to treat such cases without a milk discard could revolutionize the way mastitis is managed in a herd. If
Mast Out
Ò
is approved by the FDA as the first treatment for mastitis without a milk discard requirement, we believe it could open the market to treatment of subclinical mastitis and could compete effectively against the traditional antibiotic products currently on the market, which are all sold subject to a milk discard. It is difficult to evaluate the potential size of the as-yet undeveloped subclinical mastitis treatment market.
ImmuCell Corporation
In 2007, we began the production of registration batches of drug product at 10% of commercial scale to fulfill the pivotal regulatory requirements of effectiveness, target animal safety and stability. During the second quarter of 2008, we initiated the pivotal effectiveness study. Positive results from the study were announced during the third quarter of 2009. With enrollment of approximately 300 qualified cows with subclinical mastitis, the
Mast Out
Ò
treatment group showed a statistically highly significant (p<0.0001) overall cure rate in comparison to the placebo group. We believe that the breakdown of the data by species suggests both the necessary numerical superiority and clinical relevancy to support robust product performance in the field. For example, one of the most important mastitis pathogens, coagulase-negative staphylococci, predominated in our study, and
Mast Out
Ò
achieved almost 10-fold higher cure rates than the placebo-treated animals against this pathogen. Further,
Mast Out
Ò
treatment was associated with a statistically significant (p<0.005) reduction in milk somatic cell count (SCC), which is an important measure of milk quality.
Commercial introduction of
Mast Out
Ò
in the United States is subject to approval of our New Animal Drug Application (NADA) by the Center for Veterinary Medicine, U.S. 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 and would involve some similar and some different requirements. The NADA is comprised of five principal Technical Sections subject to the FDA’s phased review of a NADA. By statute, each Technical Section submission is subject to a six-month review cycle by the FDA. The current status of our work on these Technical Sections 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) Effectiveness: During the third quarter of 2010, we made our first submission of the Effectiveness Technical Section. This 65 volume submission contains the results from our pivotal trial conducted from 2008 to 2009 as well as all supporting data related to the effectiveness of Nisin, demonstrating the effectiveness of
Mast Out
Ò
in the field at a level similar to currently marketed intramammary antibiotics and confirming prior results from two major field studies conducted since 2003. During the first quarter of 2011, we received an Effectiveness Technical Section Incomplete Letter from the FDA. The FDA requested additional information and clarification in the areas of raw data, subject eligibility and statistical analyses and has requested that certain treatment outcomes be changed or justified. Additional clinical studies were not required. Our response to the FDA does not materially change our initial conclusions about the product’s effectiveness. We expect to make a second submission of this Technical Section responsive to the questions raised by the FDA during the third quarter of 2011. We expect to receive the FDA’s response to this second submission during the first quarter of 2012 after one, six-month review cycle.
3) Human Food Safety (HFS): The HFS Technical Section submission was made during the fourth quarter of 2010. This Technical Section determines if a milk discard period or meat withhold period will be required. 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 our pivotal Nisin residue in milk data and granted
Mast Out
Ò
a zero milk discard time and a zero meat withhold period. Before we can obtain the Technical Section Complete Letter, we must adapt our analytical method that measures Nisin residues in milk around the newly assigned tolerance limit and transfer that method to the FDA laboratory.
4) Target Animal Safety: Under a protocol approved in advance by the FDA, the pivotal Target Animal Safety trial was completed during the first quarter of 2010. We submitted the Target Animal Safety Technical Section to the FDA for review during the third quarter of 2011. We expect to receive the FDA’s response to this submission during the first quarter of 2012 after one, six-month review cycle.
ImmuCell Corporation
5) Chemistry, Manufacturing and Controls (CMC): We have entered into agreements with three manufacturers to produce inventory for us utilizing our proprietary technology and processes. We have entered into a long-term, exclusive supply agreement with Plas-Pak Inc. of Norwich, Connecticut covering the proprietary syringe that was developed specifically for
Mast Out
Ò
. These syringes were used for all pivotal studies of
Mast Out
Ò
. During the third quarter of 2010, we entered into a Development and Manufacturing Agreement with Lonza Sales, Ltd. of Basel, Switzerland covering the exclusive manufacture of the Active Pharmaceutical Ingredient (API) by Lonza for
Mast Out
Ò
. The identified manufacturing site in Europe is FDA-approved, compliant with current Good Manufacturing Practices (cGMP) regulations and subject to future FDA approval and inspection. During the third quarter of 2010, we entered into an exclusive Contract Manufacture Agreement with Norbrook Laboratories Limited of Newry, Northern Ireland, an FDA-approved drug product manufacturer, to formulate the API into drug product, conduct sterile-fill of syringes and perform final packaging. Norbrook provided these services for clinical material used in all pivotal studies of
Mast Out
Ò
. Our successful operation under these collaborative agreements with these highly qualified partners is crucial to the success of the
Mast Out
Ò
development initiative. We expect to make our first submission of the CMC Technical Section to the FDA for review during the third quarter of 2011. We expect to receive the FDA’s response to this submission during the first quarter of 2012 after its first, six-month review cycle. We expect that a second CMC Technical Section submission will be required because production facility modifications and full-scale manufacturing batches (which will not be completed for the first submission) will be required for approval of this Technical Section. The completion of this work and compilation of the relevant data is subject to our establishing a third party strategic funding collaboration providing financial support for
Mast Out
Ò
development, manufacturing, sales and marketing, as discussed above. The timing of the second submission of the CMC Technical Section and the following six-month FDA review cycle defines the critical path to the submission of the administrative NADA to the FDA.
6) Several Administrative Requirements: After obtaining the last Technical Section Complete Letter, preparing materials responsive to other administrative requirements and assembling the administrative NADA submission for final review by the FDA - a statutory sixty-day review period of the administrative NADA would be expected. The timing of the administrative NADA submission and the timing of a potential market launch (if the FDA grants approval) will be determined by the FDA’s responses to our outstanding Technical Section submissions and by the successful resolution of any identified issues. Product produced for the validation batches under the CMC Technical Section could be sold in test markets upon FDA approval. Assuming our entry into a satisfactory development support arrangement with a marketing partner this year and timely receipt of the remaining required Technical Section approvals from the FDA, we could commence sale of
Mast Out
Ò
by the end of 2012. The FDA may grant a period of five years of market exclusivity for
Mast Out
Ò
(meaning the FDA might not grant approval to a second and similar NADA 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.
In addition to our work on
Mast Out
Ò
, we are actively exploring further improvements, extensions or additions to our current product line. For example, we currently are investigating therapies that could prevent scours in calves caused by enteric pathogens other than
E. coli
K99 and bovine coronavirus (the current
First Defense
Ò
claims). In connection with that effort, during the second quarter of 2009 we entered into an exclusive license with Baylor College of Medicine covering certain rotavirus vaccine technology. This perpetual license (if not terminated for cause) is subject to milestone and royalty payments. Results from pilot studies completed during the first quarter of 2009 justify continued product development. We initiated a pivotal effectiveness study during the second quarter of 2011. Successful results could position us for USDA approval of an additional disease claim for
First Defense
Ò
to prevent scours caused by rotavirus by the first quarter of 2012. As additional opportunities arise to commercialize our own technology, or licensable technology, we begin new development projects. While we continue to pursue internally funded product development programs, we also remain interested in acquiring new products and technologies that fit with our sales and marketing focus on the dairy and beef industries.
Administrative Expenses
During the three-month period ended June 30, 2011, administrative expenses decreased by 1%, or $2,000, to $223,000 as compared to the same period in 2010. During the six-month period ended June 30, 2011 administrative expenses decreased by 7%, or $32,000, to $431,000 as compared to the same period in 2010. While we implement efficiencies where possible, we continue to incur costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company. At this stage in our development, we have limited our investment in investor relations spending. We provide a full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year. 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. At this time, our financial and time resources are committed principally to managing our commercial business and developing
Mast Out
Ò
. Our board of directors is very involved with and supportive of this resource allocation. While this strategy of providing cost-effective investor relations through our SEC reporting is subject to change, we believe that this focus currently is in the best long-term interest of all stockholders.
ImmuCell Corporation
Sales and Marketing Expenses
During the three-month period ended June 30, 2011, sales and marketing expenses increased by 114%, or $124,000, to $232,000, as compared to the same period in 2010, aggregating 19% and 10% of product sales during the three-month periods ended June 30, 2011 and 2010, respectively. During the six-month period ended June 30, 2011, sales and marketing expenses increased by 57%, or $159,000, to $436,000 as compared to the same period in 2010, aggregating 16% and 12% of product sales during the six-month period ended June 30, 2011 and 2010, respectively. This increase was expected and planned given our strategic decision to invest in additional sales and marketing personnel and efforts. This investment may have created, at least in part, our recent increase in product sales. Our objective is to maintain the ratio of product selling expenses to product sales below 20% for the full year 2011.
Loss Before Income Taxes and Net Loss
Our loss before income taxes of $457,000 during the three-month period ended June 30, 2011 compares to a loss before income taxes of $37,000 during the three-month period ended June 30, 2010. Our income tax benefit was 43% and 82% of our loss before income taxes during the three-month periods ended June 30, 2011 and 2010, respectively. Our net loss for the three-month period ended June 30, 2011 was $258,000, or $0.09 per share, in comparison to a net loss of $6,000, or $0.00 per share, during the three-month period ended June 30, 2010.
Our loss before income taxes of $488,000 during the six-month period ended June 30, 2011 compares to a loss before income taxes of $102,000 during the six-month period ended June 30, 2010. Our income tax benefit was 42% and 41% of our loss before income taxes during the six-month periods ended June 30, 2011 and 2010, respectively. Our net loss for the six-month period ended June 30, 2011 was $281,000, or $0.09 per share, in comparison to a net loss of $60,000, or $0.02 per share, during the six-month period ended June 30, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our strategic decision to continue developing
Mast Out
Ò
after the product rights were returned to us in 2007 has caused us to increase our spending on product development expenses that were previously funded by Pfizer. After the nine consecutive years of profitability that we recorded during the years ended December 31, 1999 to December 31, 2007, we incurred net losses of $385,000, $216,000, and $469,000 during the years ended December 31, 2010, 2009, and 2008, respectively, and $281,000 during the six-month period ended June 30, 2011. We have committed approximately $614,000 (46% paid during the fourth quarter of 2010 and 39% paid during the third quarter of 2011 and the balance due upon completion, which is expected to occur during the third quarter of 2011) to Lonza (our API manufacturer) for the scale-up and testing of the Nisin Active Pharmaceutical Ingredient (API) manufacturing process required for a first submission of the CMC Technical Section. We are working to make the first submission of the CMC Technical Section during the third quarter of 2011. This submission will be subject to a six-month review by the FDA.
Third party funding is required to pay for the additional and larger financial commitments to Lonza required for production facility modifications and full-scale manufacturing batches that would be required to make a second submission of the CMC Technical Section, which commitments are beyond the scope of what we are willing to invest internally. While we have always been very open about our view of the commercial prospects of
Mast Out
Ò
in our SEC disclosures and with prospective partners, we did not initiate serious partnering discussions until the second quarter of 2011 in order to give us time to advance the product development initiative to the point when we believe we have the best opportunity for success. All anticipated initial discussions are now complete, and some prospective partners are conducting their due diligence. It is difficult to predict when or if this partnering effort will be successful. This second submission of the CMC Technical Section would also be subject to a six-month review by the FDA. Anticipating Technical Section complete letters on all other FDA submissions and allowing for a 60-day review of our administrative NADA submission at the end, the timing of the second CMC submission defines the critical path to potential FDA approval and market launch. We believe that the commercial prospects for
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warrant this level of investment.
As we reduce product development spending on
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, we expect to return to profitable operations. We have not invested the time and resources to carefully make an exact projection about the timing of our anticipated return to profitability. The direction is clear, and the actual results will be reported quarterly. We believe that the three key indicators that investors should watch going forward will be our gross margin, our net operating income (loss) and our net income (loss).
ImmuCell Corporation
During the third quarter of 2010, we agreed to terms of certain credit facilities with TD Bank, N.A. aggregating up to approximately $2,100,000, which are secured by substantially all of our assets. These credit facilities are comprised of a $1,000,000 ten-year mortgage loan, a $600,000 fifty-four month note and a $500,000 line of credit. Proceeds from the $1,000,000 mortgage loan were received during the third quarter of 2010. Proceeds from the $600,000 note were received during the first quarter of 2011. The $500,000 line of credit is available as needed. We believe that this debt financing (together with available cash and gross margin from ongoing product sales) provides us with sufficient funding to finance our working capital requirements while completing the first submissions to the FDA of all Technical Sections pertaining to
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. We chose debt financing because we believe that in this market environment, the option to generate funds through the sale of equity securities at an acceptable level of stockholder dilution is very unlikely.
As part of our sustained investment in compliance with cGMP regulations across our product lines and as we make other process improvements, we are investing in personnel, equipment and facility modifications to increase the efficiency and quality of our operations. In 2008, our Board of Directors authorized an investment of approximately $1,314,000 for capital expenditures (facility modifications and production equipment). We have not increased this authorized limit to date. As of July 1, 2011, we had remaining authorization to spend up to $159,000 on capital expenditures, net of expenditures made from January 1, 2008 through June 30, 2011.
Cash, cash equivalents and short-term investments increased by 10%, or $449,000, to $5,075,000 at June 30, 2011 from $4,626,000 at December 31, 2010. Net cash provided by operating activities amounted to $26,000 during the six-month period ended June 30, 2011 in contrast to net cash used for operating activities of $275,000 during the six-month period ended June 30, 2010. Net working capital increased by 1%
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or $86,000, to $6,527,000 at June 30, 2011 from $6,441,000 at December 31, 2010. Proceeds from bank debt received during the first six months of 2011 aggregated $538,000, net of debt repayments made prior to July 1, 2011. Total assets increased by 5%, or $537,000, to $11,289,000 at June 30, 2011 from $10,751,000 at December 31, 2010. Stockholders' equity decreased by 3%, or $238,000, to $9,045,000 at June 30, 2011 from $9,282,000 at December 31, 2010. 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. However, as noted above, in order to complete the planned development and commercialization of
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we will need to receive approximately $6,000,000 in financial support from a marketing partner to complement the internally generated and borrowed funds that we are willing to commit to this initiative. The production of commercial batches of inventory and other market launch expenses (if
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is approved by the FDA) would require a significant amount of additional capital. It is not necessary for all of this funding to occur within the next twelve months.