The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. One should review the Cautionary Note below for a discussion of some of the important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Cautionary Note Regarding Forward-Looking Statements (Safe Harbor Statement):
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, but are not limited to, any statements relating to: our plans and strategies for our business; projections of future financial or operational performance; the timing and outcome of pending or anticipated applications for regulatory approvals; factors that may affect the dairy and beef industries and future demand for our products; the extent, nature and duration of the COVID-19 pandemic and its consequences, and their direct and indirect impacts on the Company's production activities, operating results and financial condition and on the customers and markets the Company serves; 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 and producers' level of interest in treating subclinical mastitis given the current economic and market conditions; the expected efficacy of new products; estimates about the market size for our products; future market share of and revenue generated by current products and products still in development; our ability to increase production output and reduce costs of goods sold associated with our new product, Tri-Shield First Defense®; the future adequacy of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for our products on a timely basis; the anticipated costs of (or time to complete) planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the continuing availability to us on reasonable terms of third-party providers of critical products or services; the robustness of our manufacturing processes and related technical issues; estimates about our production capacity, efficiency and yield; the future adequacy of our working capital and the availability and cost of third-party financing; the forgiveness of our repayment obligations with respect to the loan we received under the CARES Act; future regulatory requirements relating to our products; future expense ratios and margins; future compliance with bank debt covenants; costs associated with sustaining compliance with current Good Manufacturing Practice (cGMP) regulations in our current operations and attaining such compliance for the facility to produce the Nisin Drug Substance; implementation of international trade tariffs that could reduce the export of dairy products, which could in turn weaken the price received by our customers for their products; our effectiveness in competing against competitors within both our existing and our anticipated product markets; the cost-effectiveness of additional sales and marketing expenditures and resources; anticipated changes in our manufacturing capabilities and efficiencies; the value of our net deferred tax assets; projections about depreciation expense and its impact on income for book and tax return purposes; anticipated market conditions; and any other statements that are not historical facts. Forward-looking statements can be identified by the use of words such as "expects", "may", "anticipates", "aims", "intends", "would", "could", "should", "will", "plans", "believes", "estimates", "targets", "projects", "forecasts", "seeks" and similar words and expressions. In addition, there can be no assurance that future developments affecting us will be those that we anticipate. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to difficulties or delays in development, testing, regulatory approval, production and marketing of our products (including the First Defense® product line and Re-Tain™), competition within our anticipated product markets, customer acceptance of our new and existing products, product performance, alignment between our manufacturing resources and product demand, our reliance upon third parties for financial support, products and services, changes in laws and regulations, decision making and delays by regulatory authorities, currency values and fluctuations and other risks detailed from time to time in filings we make with theSEC , including our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K and our Current Reports on Form 8-K. Such statements involve risks and uncertainties and are based on our current expectations, but actual results may differ materially due to various factors, including the risk factors summarized under PART II: OTHER INFORMATION, ITEM 1A - RISK FACTORS and uncertainties otherwise referred to in this Quarterly Report on Form 10-Q. 22ImmuCell Corporation
Liquidity and Capital Resources
We believe that our cash, cash equivalents and short-term investments, together with gross margin anticipated to be earned from ongoing product sales, will be sufficient to meet our working capital and capital expenditure requirements and to finance our ongoing business operations for at least twelve months from the date of this filing (which is the period of time required to be addressed for such purposes by accounting disclosure standards). We have funded most of our business operations principally from the gross margin on our product sales and equity and debt financings. We were profitable during the unaudited six-month period endedDecember 31, 2014 , during the years endedDecember 31, 2015 and 2016, during the unaudited nine-month period endedSeptember 30, 2017 and during the unaudited three-month period endedMarch 31, 2019 . The table below summarizes the changes in selected, key accounts (in thousands, except for
percentages):
As of As of
June 30, December 31, Increase (Decrease)
2020 2019 Amount %
Cash, cash equivalents, short-term
investments and restricted cash $ 9,596 $ 8,774 $ 822 9 % Net working capital$ 8,947 $ 10,694 $ (1,747 ) (16 )% Total assets$ 40,661 $ 38,692 $ 1,969 5 % Stockholders' equity$ 28,281 $ 28,991 $ (710 ) (2 )%
Common shares outstanding(1) 7,213 7,213
- -%
(1) There were approximately 421,000 and 389,000 shares of common stock reserved
for issuance under stock options that were outstanding as of
and December 31, 2019 , respectively.
From the first quarter of 2016 through the first quarter of 2019, we raised gross proceeds of approximately$22.5 million (net proceeds were approximately$20.5 million ) from five different common equity transactions priced between$5.25 and$7.30 per share. No warrants were issued in connection with any of these transactions, and no convertible or preferred securities were issued. From 2010 to 2017, we secured five different debt financings withTDBank N.A. , each with different maturity dates and balloon principal repayment obligations. OnMarch 11, 2020 , we closed on a debt refinancing aggregating$8.6 million plus a line of credit in the amount of$1.0 million withGorham Savings Bank . The new debt is comprised of a$5.1 million mortgage loan that bears interest at a fixed rate of 3.50% per annum (with a 10-year term and 25-year amortization schedule) and a$3.5 million note that bears interest at a fixed rate of 3.50% per annum (with a 7-year term and amortization schedule). The refinancing proceeds were used to provide some additional working capital but mostly to refinance$8.3 million of then outstanding bank debt and pay off an interest rate swap termination liability of$165,000 . These credit facilities are subject to certain restrictions and financial covenants and are secured by substantially all of our assets, including our facility at56 Evergreen Drive inPortland (which was independently appraised at$4.2 million in connection with the 2015 financing and at$3 million in connection with the 2020 refinancing) and our facility at33 Caddie Lane inPortland (which was independently appraised at$3.2 million in connection with the 2017 financing and at$2.5 million in connection with the 2020 refinancing). This new debt improves our liquidity by lowering our interest expense and spreading our principal payments out over a longer time period (and by avoiding pending balloon principal payments that existed under some of the repaid debt). Before the debt refinancing, we were required by a bank debt covenant to maintain at least$2 million of otherwise unrestricted cash, cash equivalents and short-term investments. Under the new debt, we are required to hold$1.4 million in escrow (a non-current asset), which reduces the effective availability of our liquid assets for operational needs by that lower amount. If we meet or exceed a minimum debt service coverage ratio set by the bank of 1.35 based on our financial performance during the year endingDecember 31, 2020 , the escrow will be released to the extent that we achieve a loan (the amount of principal then outstanding on the$5.1 million mortgage) to value (based on new real estate appraisals at that time) ratio equal to less than 80%. This debt service coverage ratio was equal to 1.33 and 1.39 during the twelve-month period endedJune 30, 2020 and the year endedDecember 31, 2019 , respectively. DuringJune 2020 , we received a$500,000 subordinated loan from theMaine Technology Institute . The first 27 months of this loan are interest-free with no required principal payments, and interest does not accrue during this initial 27-month period. Principal and interest payments at 5% per annum are due quarterly over the final five years of loan beginning during the fourth quarter of 2022. The loan may be prepaid without penalty at any time. Net cash provided by operating activities improved to$1.8 million during the six-month period endedJune 30, 2020 in comparison to$347,000 during the six-month period endedJune 30, 2019 . Cash paid for capital expenditures was$2.3 million and$300,000 during the six-month periods endedJune 30, 2020 and 2019, respectively. Our total depreciation expense was approximately$1.1 million during both of the six-month periods endedJune 30, 2020 and 2019. We anticipate that depreciation expense, while not affecting our cash flows from operations, will result in net operating losses until product sales increase sufficiently to offset these non-cash expenses. Going forward, repayments of the indebtedness incurred to acquire these assets will reduce our cash flows. Debt principal payments (exclusive of the$8.3 million used to repay our refinanced bank debt) were$344,000 and$429,000 during the six-month periods endedJune 30, 2020 and 2019, respectively. 23ImmuCell Corporation
As detailed in the following table, our capital expenditures during the six-year
period from
Cash Paid During the Years Ended
A B C D E Total
December 31, 2014 $ 1,041 $ - $ - $ - $ - $ 1,041
December 31, 2015 1,991 265 - - 463 2,719
December 31, 2016 1,173 2,093 - - 320 3,586
December 31, 2017 - 17,686 - - 74 17,760
December 31, 2018 - 1,596 - - 434 2,030
December 31, 2019 - - 279 538 574 1,391
Total $ 4,205 $ 21,640 $ 279 $ 538 $ 1,865 $ 28,527
PROJECT A included a 7,100 square foot facility addition at 56 Evergreen Drive
and related equipment and cold storage capacity to increase the production
capacity for the First Defense®product line. During the first quarter of 2016,
we completed this investment, increasing our freeze drying capacity by 100% and
making other improvements to our liquid processing capacity, which, in turn,
increased our annual production capacity (in terms of annual sales dollars) to
approximately $18 million . The actual value of this production output will vary
based on production yields, selling price, product format mix and other factors.
This investment also included the construction and equipping of a pilot plant
for small-scale Drug Substance production facility for Re-Tain™within our First
Defense® production facility that is now used to produce the gel tube formats of
the First Defense® product line. Upon the completion of Project C, the gel tube
operations will be moved to 175 Industrial Way , and this space will be used to
expand our liquid processing capacity at 56 Evergreen Drive .
PROJECT B was related to the Drug Substance production facility for Re-Tain™.
During the fourth quarter of 2017, we completed construction of the Drug
Substance production facility. We began equipment installation during the third
quarter of 2017, and we completed this installation during the third quarter of
2018. The total cost of this investment for the Drug Substance production
facility and related processing equipment was $20.8 million plus $331,000 for
the land and $472,000 for the acquisition of an adjacent 4,100 square foot
warehouse facility, which is now being used for First Defense®operations.
PROJECT C consists of significant renovations to a 14,300 square foot leased
facility at 175 Industrial Way and some facility modifications at 56 Evergreen
Drive and the necessary production equipment to increase the annual production
capacity of the First Defense®product line (in terms of annual sales dollars)
from approximately $18 million to approximately $27 million . The actual value of
this production output will vary based on production yields, selling price,
product format mix and other factors. This expansion involves a 50% increase in
our freeze drying capacity and a doubling of our liquid processing capacity.
Renovations to our leased facility at 175 Industrial Way to enable this
expansion were completed during the second quarter of 2020. A site license
approval for this new facility was issued by the USDA during July of 2020. By
moving our filling and assembly services from 56 Evergreen Drive into this new
space at 175 Industrial Way , we created space at 56 Evergreen Drive for the
installation of the expanded freeze drying capacity. We expect to complete that
installation during the third quarter of 2020. Then we intend to move our gel
formulation equipment from 56 Evergreen Drive to 175 Industrial Way creating
space for the expanded liquid processing at 56 Evergreen Drive . We expect to
complete this final phase of the investment during the fourth quarter of 2020.
The total budget for this project is $3.5 million (including amounts already
paid in 2019 and 2020).
PROJECT D is a$4 million budgeted investment to bring the formulation and aseptic filling services for Re-Tain™Drug Product in-house to end our reliance on third-party Drug Product manufacturing services. We expect this facility
to be operational during 2022.
PROJECT E represents other miscellaneous, routine and necessary capital
investments during the years. The original budget for the year ending
During the six-month period endedJune 30, 2020 , we paid$2.1 million ,$2,000 and$109,000 towards Projects C, D and E, respectively. The combined budget for Projects C and D is$7.5 million . During 2019 and throughJune 30, 2020 , we have spent the aggregate of$2.9 million on these two projects, leaving$4.6 million available to spend to complete both projects. We expect to fund the remainder of Projects C, D and E with available cash on hand. During the third quarter of 2016, theCity of Portland approved a Tax Increment Financing (TIF) credit enhancement package that reduces the real estate taxes on our Drug Substance production facility for Re-Tain™ by 65% over the eleven-year period beginning onJuly 1, 2017 and endingJune 30, 2028 and by 30% during the twelve-month period endingJune 30, 2029 , at which time the rebate expires. During the second quarter of 2017, the TIF was approved by theMaine Department of Economic and Community Development . The value of the tax savings will increase (decrease) in proportion to any increase (decrease) in the assessment of the building for city real estate tax purposes. The following table discloses the split of the new rates we have generated between theCity of Portland and the Company: Total New Taxes Net Amount Twelve-Month Generated by Less: Paid by Assessed Value Period Ended the Project TIF Credit ImmuCell
$1.7M @ April 1, 2017 June 30, 2018$ 36,000 $ 22,000 $ 13,000 $4.0M @ April 1, 2018 June 30, 2019$ 90,000 $ 58,000 $ 32,000 $4.0M @ April 1, 2019 June 30, 2020$ 94,000 $ 60,000 $ 34,000 24 ImmuCell Corporation Results of Operations 2020 Compared to 2019 Product Sales Total product sales during the three-month period endedJune 30, 2020 increased by 9%, or$256,000 , to$3 million from$2.7 million during the second quarter of 2019, with domestic sales increasing by 3% and international sales increasing by 101% in comparison to the same period in 2019. Total product sales during the six-month period endedJune 30, 2020 increased by 11%, or$756,000 , to$7.9 million from$7.1 million during the same period in 2019, with domestic sales increasing by 10% and international sales increasing by 13% in comparison to the same period in 2019. Total product sales during the trailing twelve-month period endedJune 30, 2020 increased by 19%, or$2.3 million , to$14.5 million from$12.2 million during the trailing twelve-month period endedJune 30, 2019 , with domestic sales increasing by 20% and international sales increasing by 10% in comparison to the trailing twelve-month period endedJune 30, 2019 . The compound annual growth rate of our total product sales during the nine years endedDecember 31, 2011 toDecember 31, 2019 was approximately 13%. The compound annual growth rate of our total product sales during the three years endedDecember 31, 2017 toDecember 31, 2019 was approximately 15%. International sales aggregated 12% and 7% of total sales during the three-month periods endedJune 30, 2020 and 2019, respectively. International sales aggregated 12% and 11% of total sales during the six-month periods endedJune 30, 2020 and 2019, respectively. International sales aggregated 11% and 12% of total sales during the trailing twelve-month periods endedJune 30, 2020 and 2019, respectively. Investments in the First Defense®product line have created positive results. Sales of the First Defense® product line increased by 10% during the three-month period endedJune 30, 2020 in comparison to the same period during 2019, aggregating 99% of our total product sales during both of the three-month periods endedJune 30, 2020 and 2019. Sales of the First Defense® product line increased by 14% during the six-month period endedJune 30, 2020 in comparison to the same period during 2019, aggregating 98% and 96% of our total product sales during the six-month periods endedJune 30, 2020 and 2019, respectively. Most of our growth is being realized through higher unit volume sales and a deliberate strategy to maximize sales of Tri-Shield First Defense®(the trivalent format of our product delivered via a gel tube) providing broader protection to calves. Sales of Dual-Force First Defense® (the bivalent formats of our product delivered via either a bolus, gel tube or bulk powder) were generally flat during 2019 in comparison to 2018 and decreased by approximately 17% during the first six months of 2020 in comparison to the first six months of 2019. Most of our backlog of orders as ofJune 30, 2020 was comprised of Dual-Force First Defense®. The First Defense® product line continues to benefit from wide acceptance by dairy and beef producers as an effective tool to prevent scours (diarrhea) in newborn calves. Our Beyond Vaccination® marketing campaign is about providing antibodies without vaccination. A 100% vaccine response rate is biologically impossible. The First Defense®product line removes the variability associated with a scour vaccine response and instead provides a measured level of pre-formed antibodies, protecting each calf with an equal level of scours protection. There is a strong link between how we sell our product and the challenges we face in producing it. We know better than most how variable a cow's response is to any vaccine. We see this in every batch of First Defense®that we produce. The value in First Defense®is that we adjust for this variability in antibody content, as needed, so the newborn is given a steady, equal level of protection with each dose. This technology removes a producer's reliance on variable vaccine responses to generate passive antibody protection and instead protects every calf equally with a measured dose of Immediate Immunity™ against the most common scour pathogens. We are the only manufacturer within the scour prevention space offering polyclonal multi-pathogen antibodies. Plus, an effectively treated calf is much less likely to require expensive antibiotic treatments or build antibiotic resistance. We are gaining U.S. market share year after year with our Beyond Vaccination® strategy. Our share of the market (on a unit volume basis) of scour preventative products administered at the calf-level increased to approximately 36% during 2019 (from 34% during 2018 and 32% during 2017). Our share of calves treated inthe United States with products administered to calves and those administered to the dam prior to calving (adjusting for two doses of dam-level scour vaccines required for primary vaccination of first-calf-heifers) increased to approximately 11% during 2019 (from 10.3% during 2018 and 9.7% during 2017). Our share of the market of scour preventative products administered at the calf level increased to approximately 41% during the first half of 2020 from approximately 37% during the first half of 2019. Our share of calves treated inthe United States with products administered to calves and those administered to the dam prior to calving increased to approximately 15% during the first half of 2020 from approximately 13% during the first half of 2019 suggesting the potential for future growth in the dairy market combined with our increased
focus on the beef market.
25
ImmuCell Corporation Since the third quarter of 2016 and through most of 2017, we had sufficient available inventory and were shipping in accordance with the demand of our distributors. However, we quickly sold out of our initial launch quantities of Tri-Shield First Defense® soon after regulatory approval was obtained during the fourth quarter of 2017. During most of 2018 and into the first half of 2019, we could only accept purchase orders from customers for Tri-Shield® to match available inventory, which required a careful allocation of product supply directly to certain end-users and veterinary clinics. Production of this new product format had not kept pace with demand primarily because of our inability to produce enough of the new, complex rotavirus vaccine that is used to immunize our source cows. We worked on production improvements in our vaccine laboratory throughout 2018. Significant improvements in vaccine yield and process repeatability resolved this shortfall going into 2019. Allowing for the five to six month production cycle to produce inventory, we were able to return to a mass market selling approach through distribution for Tri-Shield®during the second half of 2019. By maximizing existing production capacity, we achieved sales of$7.9 million during the first half of 2020, but production output was not enough to meet demand, and we ended the second quarter with a backlog of orders worth approximately$945,000 as ofJune 30, 2020 , which was down from approximately$1.4 million as ofMarch 31, 2020 . Given our projections for future demand for the First Defense® product line, we have initiated a$3.5 million investment to increase our production capacity, discussed above. The extent of the negative impact of the COVID-19 pandemic on the economics of our customers and on the demand for our products going forward is very difficult to assess. Even though we experienced an increase in sales during the first and second quarters of 2020 in comparison to the first and second quarters of 2019, we recognize the need to be prepared for the potential of more than the expected seasonal decline in sales during the balance of the year. During the first six months of 2020, the Class III milk price (measured in dollars per 100 pounds) averaged$16.09 . This price has been extremely volatile during the pandemic, increasing by 73% from a low of$12.14 forMay 2020 to a high of$21.04 forJune 2020 . The price forJuly 2020 increased significantly to$24.54 , which is very close to an all-time record high. Stay at home orders disrupted the food service supply system as schools closed and restaurants were shut down. In response, producers were forced to reduce the supply of milk to the market by drying off cows early, culling cows from the herd and dumping milk, among other tactics. The$938,000 in funding that we received from the federal government through the Paycheck Protection Program (PPP) under the CARES Act should help us maintain full employment without furloughs or layoffs and continue executing our growth plans, even though we may see a decline in sales and gross margin as a result of the pandemic. The PPP funding creates some needed financial liquidity allowing us to move forward with our investments even though we are not achieving the level of sales anticipated in our 2020 budget. We plan to complete the$3.5 million investment to increase our production capacity (discussed above), fill the backlog of orders, meet ongoing demand and use any excess production to build inventory stocks going into the first quarter of 2021 to avoid future backlogs. This will require that we invest available cash in inventory. Our inventory balances were$1.9 million and$2.5 million atJune 30, 2020 andDecember 31, 2019 , respectively. Our inventory balances consisted of approximately 2% and 21% finished goods as ofJune 30, 2020 andDecember 31, 2019 , respectively. See Note 5 to the accompanying unaudited financial statements for more details about our inventory. After making several inquiries into different laboratories, we were able to have our antibodies tested for effectiveness against COVID-19 during the second quarter of 2020. While we understood that COVID-19 and bovine coronavirus are in different taxonomic groups, we wanted to investigate whether our antibodies could offer some cross-neutralization of COVID-19 in the laboratory testing. Unfortunately, the test results indicated, as expected, that our antibodies offered no viral neutralization activity, meaning they would be ineffective against COVID-19. Effective in December of 2018, we implemented an 11% price increase for Tri-Shield First Defense®. EffectiveJanuary 1, 2019 , we implemented a 2% price increase for Dual-Force®. EffectiveFebruary 1, 2020 , we implemented a price increase of approximately 2% on the First Defense® product line (except for Tri-Shield® and the 90-dose bulk powder) and CMT. Going forward, we anticipate implementing annual price increases in line with current rates of inflation. Sales of products other than the First Defense® product line decreased by 5%, or$2,000 , to$35,000 during the three-month period endedJune 30, 2020 in comparison to the same period during 2019. Sales of these other products aggregated approximately 1% of our total product sales during both of the three-month periods endedJune 30, 2020 and 2019. Sales of products other than the First Defense®product line decreased by 59%, or$180,000 , to$127,000 during the six-month period endedJune 30, 2020 in comparison to the same period during 2019. Sales of these other products aggregated approximately 2% and 4% of our total product sales during the six-month periods endedJune 30, 2020 and 2019, respectively. We acquired several private label products (our second leading source of product sales during 2019 and 2018) in connection with ourJanuary 2016 acquisition of certain gel formulation technology. We sell our own CMT (our third leading source of product sales during 2019 and 2018), which is used to detect somatic cell counts in milk. We have made and sold bulk reagents for Isolate™ (our fourth leading source of product sales during 2019 and 2018), which is a drinking water test that is sold by our former distributor in theUnited Kingdom . Sales of this product amounted to just$24,000 during the year endedDecember 31, 2018 . We made one final sale of this product to this distributor worth$134,000 during the first quarter of 2019. Because this product was non-core to our strategic focus, we sold the underlying cell line assets and intellectual property to our former distributor during the third quarter of 2018 for$700,000 . We have retained the rights to all animal health, diagnostic, feed and nutritional applications of this technology. 26ImmuCell 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):
During the Three-Month
Periods Ended June 30, Increase (Decrease)
2020 2019 Amount %
Gross margin $ 1,283 $ 1,249 $ 34 3 %
Percent of product sales 43 % 46 % (3 )% (6 )%
During the Six-Month
Periods Ended June 30, Increase (Decrease)
2020 2019 Amount %
Gross margin $ 3,519 $ 3,450 $ 69 2 %
Percent of product sales 45 % 48 % (4 )% (8 )%
During the Trailing Twelve-Month
Periods Ended June 30, Increase (Decrease)
2020 2019 Amount %
Gross margin $ 6,809 $ 5,798 $ 1,011 17 %
Percent of product sales 47 % 47 % - (1 )%
The gross margin (product sales less costs of goods sold) as a percentage of
product sales was 49%, 47% and 50% during the years ended December 31, 2019 ,
2018 and 2017, respectively. While the gross margin as a percentage of sales is
in line with expectations for the trailing twelve-month period ended June 30,
2020 , it was lower than what we normally expect during the three-month and
six-month periods ended June 30, 2020 . A number of factors account for the
variability in our costs, resulting in some fluctuations in gross margin
percentages from quarter to quarter. Increasing production can be more expensive
in the initial stages. To achieve our inventory production growth objectives, we
are acquiring more raw material (colostrum) from many more cows at many new
farms. As is the case with any vaccine program, animals respond less effectively
to their first exposure to a new vaccine and then the effectiveness of their
immune response improves in response to subsequent immunizations. As a result,
during this expansion phase, we are receiving fewer doses of finished product
from the processing of similar quantities of colostrum, which results in a
higher costs of goods sold. Additionally, the biological yields from our raw
material are always variable, which impacts our costs of goods sold in a similar
way. Just as our customers' cows respond differently to commercial dam-level
vaccines, depending on time of year and immune competency, our source cows have
similar biological variances in response to our proprietary vaccines. The value
of our First Defense® product line is that we compensate for the variability in
a cow's immune response by standardizing each dose of finished product. This
ensures that every calf is equally protected, which is something that dam-level
commercial scours vaccines cannot offer. The gross margin percentage for the
legacy format (capsule) of the First Defense® product line was in line with
prior years in excess of 50%, which was in line with prior years. The new gel
formats of our product are more complex and more expensive to produce and
presently contribute a lower gross margin percentage but a higher gross margin
dollar per unit. These new formats are creating sales growth for us, and we are
focused on increasing total gross margin dollars, even if that is accomplished
with a lower gross margin as a percentage of sales. Like most U.S.
manufacturers, we have also been experiencing increases in the cost of labor and
raw materials. We also invest to sustain compliance with current Good
Manufacturing Practices (cGMP) in our production processes. Over time, we have
been able to reduce the impact of cost increases by implementing yield
improvements. We continue to work on processing and yield improvements and other
opportunities to reduce costs, while enhancing process knowledge and robustness.
As we evaluate our product costs and selling price, it is one of our goals to
continue to achieve a gross margin (before related depreciation and amortization
expenses) as a percentage of total sales of almost 50%.
Product Development Expenses
During the three-month period endedJune 30, 2020 , product development expenses increased by 33%, or$267,000 , to$1.1 million in comparison to$820,000 during the same period in 2019. Product development expenses aggregated 37% and 30% of product sales during the three-month periods endedJune 30, 2020 and 2019, respectively. It is important to note that these figures include$401,000 and$397,000 of non-cash depreciation and stock-based compensation expenses during the three-month periods endedJune 30, 2020 and 2019, respectively. During the six-month period endedJune 30, 2020 , product development expenses increased by 19%, or$331,000 , to$2.1 million in comparison to$1.7 million during the same period in 2019. Product development expenses aggregated 26% and 24% of product sales during the six-month periods endedJune 30, 2020 and 2019, respectively. It is important to note that these figures include$806,000 and$802,000 of non-cash depreciation and stock-based compensation expenses during the six-month periods endedJune 30, 2020 and 2019, respectively. We do expect our product development expenses to decrease after Re-Tain™ is commercialized and most of the costs incurred to maintain and run our Drug Substance production facility become part of our costs of goods sold. 27ImmuCell Corporation The majority of our product development spending has been focused on the development of Re-Tain™, our purified Nisin treatment for subclinical mastitis in lactating dairy cows. Approval by theCenter for Veterinary Medicine ,U.S. Food and Drug Administration (FDA) of the New Animal Drug Application (NADA) for Re-Tain™ is required before any sales of the product can be initiated. TheNADA is comprised of five principal Technical Sections and one administrative submission that are subject to phased review by the FDA. By statute, each Technical Section submission is generally subject to a six-month review cycle by the FDA. Each Technical Section can be reviewed and approved separately. Upon review and assessment by the FDA that all requirements for a Technical Section have been met, the FDA may issue a Technical Section Complete Letter. The current status of our work on these submissions to the FDA is as follows:
1) Environmental Impact: During the third quarter of 2008, we received the
Environmental Impact Technical Section Complete Letter from the FDA.
2) Target Animal Safety: During the second quarter of 2012, we received the
Target Animal Safety Technical Section Complete Letter from the FDA.
3) Effectiveness: During the third quarter of 2012, we received the Effectiveness
Technical Section Complete Letter from the FDA. The draft product label
carries claims for the treatment of subclinical mastitis associated with
Streptococcus agalactiae, Streptococcus dysgalactiae, Streptococcus uberis,
and coagulase-negative staphylococci in lactating dairy cattle. In our pivotal
effectiveness study, statistically significant cure rates were associated with
a statistically significant reduction in milk somatic cell count, which is an
important measure of milk quality.
4) Human Food Safety: During the third quarter of 2018, we received the Human
Food Safety Technical Section Complete Letter from the FDA confirming, among
other things, a zero milk discard period and a zero meat withhold period
during and after treatment with our product.
5) Chemistry, Manufacturing and Controls (CMC): Having previously achieved the
four different Technical Section Complete Letters from the FDA discussed
above, approval of the CMC Technical Section is the fifth and final
significant step required before Re-Tain™ product sales can be initiated in
pharmaceutical ingredient) production at our commercial facility, which is a
required component of the CMC Technical Section, has been the most expensive
and lengthy part of this project. We previously entered into an agreement with
a multi-national pharmaceutical ingredient manufacturer for our
commercial-scale supplies of Nisin. However, we determined during 2014 that
the agreement did not offer us the most advantageous supply arrangement in
terms of either cost or long-term dependability. We presented this product
development opportunity to a variety of large and small animal health
companies. While such a corporate partnership could have provided access to a
much larger sales and marketing team and allowed us to avoid the large
investment in a commercial-scale production facility, we concluded that a
partner would have taken an unduly large share of the gross margin from all
future product sales of Re-Tain™. The regulatory and marketing feedback about
the prospects for this product that we received from prospective partners,
following their due diligence, was positive. During the third quarter of 2014,
we completed an investment in facility modifications and processing equipment
necessary to produce the Nisin Drug Substance at small-scale. This small-scale
facility was used to: i) expand our process knowledge and controls, ii)
establish operating ranges for critical process parameters, iii) conduct
product stability studies, iv) optimize process yields and v) verify the cost
of production. We believe these efforts have reduced the risks associated with
our investment in the commercial-scale Drug Substance production facility.
Having raised equity during 2016 and 2017, we were able to move away from
these earlier strategies and assume control over the commercial-scale
manufacturing process in our own facility. During the fourth quarter of 2015,
we acquired land near our existing
new commercial-scale Drug Substance production facility. We commenced
construction of this facility during the third quarter of 2016 and completed
construction during the fourth quarter of 2017. Equipment installation and
qualification was initiated during the third quarter of 2017 and completed
during the third quarter of 2018. Total construction and equipment costs
aggregated approximately $20.8 million .
28
ImmuCell Corporation
We have always believed that the fastest route to FDA approval and market launch
is with the services of Norbrook Laboratories Limited of Newry , Northern Ireland
(an FDA-approved Drug Product manufacturer), benefiting from their demonstrated
expertise in aseptic filling. From 2010 to 2015, we had been a party to an
exclusive product development and contract manufacturing agreement with Norbrook
covering the Drug Product formulation, aseptic filling and final packaging
services. Norbrook provided services to us under this contract throughout the
FDA process for use in all of our pivotal studies. During the fourth quarter of
2015, this agreement was amended and restated to create a Product Development
and Contract Manufacture Agreement (the 2015 Agreement) to, among other things,
extend the term of the agreement to January 1, 2024 provided that FDA approval
for commercial sales of Re-Tain™in the United States was obtained by December
19, 2019 . It had been our expectation that we would have these services
available through both the remainder of the development process to FDA approval
and for approximately the first four years of commercial sales of Re-Tain™. Due
to unexpected difficulties and delays encountered by Norbrook and the statutory
FDA timeline for processing CMC Technical Sections, this December 2019 product
approval target date was not achieved. During the third quarter of 2019, we
entered into a Development Services and Commercial Supply Agreement (the 2019
Agreement) with Norbrook. The 2019 Agreement replaces and supersedes the 2015
Agreement in its entirety. Under the 2019 Agreement, Norbrook will continue to
provide formulation, aseptic filling and final packaging services as required in
order for us to make the needed Drug Product submission to obtain the FDA's
approval of the CMC Technical Section. The 2019 Agreement also provides for
Norbrook to perform formulation, aseptic filling and final packaging services in
accordance with purchase orders that we submit from time to time for inventory
build and subsequent product sales worth up to approximately $7 million for
orders placed through December 31, 2021 with deliveries extending into early
2022. We believe that the 2019 Agreement will enable us to commence sales of
Re-Tain™ without delay upon receipt of the anticipated FDA approval. We intend
to use the supply provided under the 2019 Agreement to bridge until our own
formulation and aseptic filling capacity is available, which we expect to occur
later in 2022.
Our potential alternative options for the formulation and aseptic filling
services are narrowed considerably because our product cannot be formulated or
filled in a facility that also processes traditional antibiotics (i.e., beta
lactams). Consequently, we have decided to perform these services internally.
Through a public offering of our common stock in March of 2019, we received net
proceeds of approximately $8.3 million , of which approximately $4 million has
been allocated to the equipping and commencement of operations of our own Drug
Product formulation and aseptic filling facility. Our objective is to meet up to
the first $7 million of market demand for Re-Tain™ with product produced by
Norbrook under the 2019 Agreement until long-term supply is available from our
new, in-house facility. Based on current construction plans and equipment
ordering and installation timelines, we expect this facility to be operational
during the first half of 2022, and we are working to achieve FDA approval of
this facility by the fourth quarter of 2022. This new facility will be subject
to FDA inspection and approval and will have enough formulation and aseptic
filling capacity to exceed the expected production capacity of our Drug
Substance facility, which is at least $10 million in annual sales. This
production capacity estimate is based on our assumptions as to product pricing
and does not yet reflect inventory build strategies in advance of product
approval or ongoing yield improvement initiatives. Establishing our own Drug
Product formulation and aseptic filling capability provides us with the
longer-term advantage of controlling the manufacturing process for Re-Tain™in
one facility, thereby potentially reducing our manufacturing costs and
eliminating international cold chain shipping costs. The Drug Product
formulation and aseptic filling operation will be located in existing facility
space that we had intended to utilize to double our Drug Substance production
capacity if warranted by sales volumes following market launch. As a result, we
would need to explore alternative strategies (in parallel with ongoing Drug
Substance yield improvement initiatives) to expand our Drug Substance production
capacity in order to meet anticipated long-term Re-Tain™ sales demand. This
integrated manufacturing capability for Re-Tain™ will substantially reduce our
dependence on third parties. Upon completion of our formulation and aseptic
filling facility, the only significant third-party input for Re-Tain™ will be
the Drug Product syringes. It is anticipated that Hubert De Backer of Belgium
(HDB) will supply these syringes in accordance with purchase orders that we
submit. HDB is a syringe supplier for many of the largest participants in the
human and veterinary medical industries, and with whom Norbrook presently works.
Based on HDB's performance history and reputation in the industry, we are
confident that HDB will be a dependable supplier of syringes in the quantity and
of the quality needed for Re-Tain™. We have not yet determined if we will
perform the final packaging services in-house or contract to have those services
performed by a qualified third party.
Under the FDA's phased submission process, Phase 1 covers the Nisin Drug
Substance (DS), and Phase 2 covers the Re-Tain™ Drug Product (formulated Nisin
DS filled in a syringe, or DP). This process allows a sponsor to respond to
identified queries and/or deficiencies from the first-phased DS submission at
the time of the second-phased DS and DP submission, which will include detailed
information about the manufacturing process and controls for the DP. This is a
very complex and comprehensive Technical Section. We made our first-phased DS
submission during the first quarter of 2019. This submission included data from
the DS Registration Batches produced at commercial scale in our new DS
manufacturing facility. As part of the phased submission process, the FDA issued
a Technical Section Incomplete Letter with regard to this first-phased DS
submission during the third quarter of 2019 with various requests and queries in
addition to referring to the fact that the second-phased DS and DP submission
had yet to be submitted. We expected this response. Having reviewed the comments
from the FDA, we see no roadblocks on our path to FDA approval for Re-Tain™. We
believe we can respond effectively to the FDA's comments without significant
additional cost or time delays. In addition to responding to comments raised by
the FDA regarding the first-phased DS submission, one of the key components of
the second-phased DS and DP submission is demonstrating stability of the product
over time using the commercial process and the commercial syringe in its final
packaged form. Given a current assessment of the work that has been completed
and that needs to be performed, we believe that the second-phased DS and DP
submission could be made before the end of 2020. A response from the FDA to our
second-phased DS and DP submission is anticipated six months after the
submission date. The response from the FDA to this second-phased DS and DP
submission determines the critical path to the timeline to FDA approval of our
NADA . If the FDA responds with a Technical Section Complete Letter, approval of
our NADA can be expected after a final 60-day administrative review period (the
last step in the regulatory approval process). If the FDA responds with a
Technical Section Incomplete Letter, one or more additional submissions (each
subject to its own six-month review period) would be required until the FDA is
satisfied that we have adequately responded to their queries before the final
60-day administrative review period.
29
ImmuCell Corporation
Successful FDA inspections of the manufacturing facilities must also be achieved
before the NADA can be approved. During the third quarter of 2019, the FDA
conducted a pre-approval inspection of our DS facility. This resulted in the
issuance of certain deficiencies as identified on the FDA's Form 483. We
submitted responses and data summaries in a phased manner over the fourth
quarter of 2019 and first quarter of 2020. This inspection process has been
managed without significant cost or impact on the timeline to product approval.
We expect to remain prepared for subsequent inspections by the FDA on an ongoing
basis.
Our second most important product development initiative (in terms of dollars
invested and, we believe, potential market impact) has been focused on other
improvements, extensions or additions to our First Defense® product line. During
the second quarter of 2009, we entered into an exclusive license with the Baylor
College of Medicine covering the animal health rights to the underlying
rotavirus vaccine technology that we use to generate the specific antibodies.
This perpetual license (if not terminated for cause) is subject to ongoing
royalty payments. We achieved product license approval and initiated market
launch of this product, Tri-Shield First Defense®, during the fourth quarter of
2017. During the third quarter of 2018, we obtained approval from the Canadian
Food Inspection Agency (CFIA) to sell Tri-Shield® in Canada . We initiated sales
in Canada during the fourth quarter of 2019. We achieved USDA approval of our
bivalent gel tube formulation (formerly marketed as First Defense Technology®)
during the fourth quarter of 2018 and have re-branded this product format as
Dual-Force First Defense®. During the first quarter of 2019, we obtained CFIA
approval to sell the gel tube format of Dual-Force® in Canada and have initiated
commercial sales there. We are currently working to establish USDA claims for
our bivalent bulk powder formulation of First Defense Technology®. We are also
investing in additional studies to further support the First Defense® product
line in the market.
At the same time, we are working to expand our product development pipeline of bacteriocins that can be used as alternatives to traditional antibiotics. During the second quarter of 2015, we entered into an exclusive option agreement to license new bacteriocin technology from theUniversity of Massachusetts Amherst . During the first quarter of 2019, we extended this exclusive option agreement through the first quarter of 2021. This technology focuses on bacteriocins having activity against Gram-negative infections (as opposed the Gram-positive coverage offered by Nisin) for use in combating mastitis in dairy cattle. Subject to the availability of resources, we intend to begin new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring, on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.
Sales and Marketing Expenses
During the three-month period endedJune 30, 2020 , sales and marketing expenses decreased by approximately 11%, or$58,000 to$466,000 in comparison to$524,000 during the same period in 2019, amounting to 16% and 19% of product sales during the three-month periods endedJune 30, 2020 and 2019, respectively. Sales and marketing expenses included$22,000 and$33,000 of non-cash depreciation and stock-based compensation expenses during the three-month periods endedJune 30, 2020 and 2019, respectively. During the six-month period endedJune 30, 2020 , sales and marketing expenses decreased by approximately 7%, or$82,000 , to$1 million in comparison to$1.1 million during the same period in 2019, amounting to 13% and 16% of product sales during the six-month periods endedJune 30, 2020 and 2019, respectively. Sales and marketing expenses included$52,000 and$67,000 of non-cash depreciation and stock-based compensation expenses during the six-month period endedJune 30, 2020 and 2019, respectively. Our sales team has pivoted effectively to alternative selling strategies and methods during the COVID-19 pandemic to be successful at a time when most trade shows have been cancelled and travel and on-farm visitations have been limited. The reduced travel and trade show expenses and having two open sales positions resulted in some cost savings during the reported periods. We continue to leverage the efforts of our small sales force by using animal health distributors. Our current budgetary objective in 2020 is to invest less than 20% of product sales in sales and marketing expenses on an annual basis. This ratio is expected to come down incrementally as sales grow. 30ImmuCell Corporation Administrative Expenses
During the three-month period endedJune 30, 2020 , administrative expenses decreased by approximately 7%, or$30,000 , to$422,000 in comparison to$452,000 during the same period in 2019. Administrative expenses included$34,000 and$47,000 of non-cash depreciation and stock-based compensation expenses during the three-month periods endedJune 30, 2020 and 2019, respectively. During the six-month period endedJune 30, 2020 , administrative expenses increased by approximately 4%, or$34,000 , to$904,000 in comparison to$871,000 during the same period in 2019. Expenses during first quarter of 2020 included fees paid to predecessor auditors, a new employee hiring fee and some extra legal work. Administrative expenses included$80,000 and$99,000 of non-cash depreciation and stock-based compensation expense during the six-month periods endedJune 30, 2020 and 2019, respectively. We strive to be efficient with these expenses while funding costs associated with complying with the Sarbanes-Oxley Act of 2002 and all the legal, audit and other costs associated with being a publicly-held company. Prior to 2014, we had limited our investment in investor relations spending. Beginning in the second quarter of 2014, we initiated an investment in a more active investor relations program, which includes meeting investors in face-to-face meetings in different cities approximately four days per quarter. Given travel restrictions related to the COVID-19 pandemic, this initiative has pivoted to a virtual meeting format, which is less expensive. At the same time, we continue to provide full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year, as well as in Current Reports on Form 8-K when legally required or deemed appropriate by management. These efforts may have helped us access the capital markets to fund our growth objectives. Additional information about us is available in our annual Proxy Statement. All of these reports are filed with theSEC and are available on-line or upon request to the Company. Net Operating Loss During the three-month period endedJune 30, 2020 , our net operating loss was$691,000 in comparison to$547,000 during the same period in 2019. The net operating losses included$630,000 and$639,000 of non-cash depreciation, amortization of intangible assets and stock-based compensation expenses during the three-month periods endedJune 30, 2020 and 2019, respectively. During the six-month period endedJune 30, 2020 , our net operating loss was$494,000 in comparison to$282,000 during the same period in 2019. The net operating losses included$1.3 million of non-cash depreciation, amortization of intangible assets and stock-based compensation during both of the six-month periods endedJune 30, 2020 and 2019. Our debt principal payments are a partial offset to these non-cash expenses, as they represent uses of cash that are not recorded as an expense. The COVID-19 pandemic is causing very challenging economic conditions. What comes next is very uncertain as we proceed quarter by quarter. The$938,000 in Paycheck Protection Program (PPP) funding from the federal government under the CARES Act that we received during the second quarter of 2020 provides increased financial flexibility, strengthening our balance sheet with more liquidity and cash on hand, thereby enabling us to remain focused on our critical growth objectives and investments. The PPP funding has also given us the confidence to advance our$4 million investment to bring the formulation and aseptic filing services for Re-Tain™Drug Product in-house. Nationally, the PPP has provided$521 billion in forgivable loans to approximately 650,000 businesses, supporting employers and workers by paying salaries and benefits through the economic downturn. This support has helped us avoid layoffs and furloughs thus far. The PPP funding has been recorded as a liability on our balance sheet. While the funds can be used to support certain operating costs as long as at least 60% of the total amount to be forgiven is used for payroll costs, we have requested forgiveness of this full loan amount using 100% payroll costs. Any portion not forgiven can be repaid over two years at 1% per annum (unless this repayment period is extended). Our results for the six-month period endedJune 30, 2020 do not include any income recognized from forgiveness of the PPP loan. Revenue will not be recognized until the eligibility of our expenses is certified by our bank and the federal government. Based on our current estimates, we believe that we will be able to achieve forgiveness of the full$938,000 and recognize this as a reduction in operating expenses later this
year. Other expenses, net During the three-month periods endedJune 30, 2020 and 2019, other expenses, net, aggregated$75,000 and$65,000 , respectively. During the six-month periodsJune 30, 2020 and 2019, other expenses, net, aggregated$408,000 and$177,000 , respectively. Interest expense (including non-cash amortization of debt issuance costs of approximately$2,000 and$4,000 during the three-month periods endedJune 30, 2020 and 2019, respectively) decreased by approximately 31%, or$35,000 , to$77,000 during the three-month period endedJune 30, 2020 in comparison to$112,000 during the same period in 2019. Interest expense (including non-cash amortization and write-off of debt issuance costs of approximately$100,000 and$8,000 during the six-month periods endedJune 30, 2020 and 2019, respectively) increased by approximately 88%, or$198,000 , to$424,000 during the six-month period endedJune 30, 2020 in comparison to$226,000 during the same period in 2019. In connection with ourMarch 2020 bank debt refinancing, we wrote off$95,000 in debt issuance costs and paid$165,000 to terminate our interest rate swap agreements, both of which were associated with the repaid debt. Given the debt refinancing to fixed rate loans duringMarch 2020 , we now anticipate that our interest expense will be approximately$322,000 (excluding the write-off of debt issuance costs and the payment to terminate interest rate swaps, discussed above) during the year endingDecember 31, 2020 . In comparison, during the year endedDecember 31, 2019 , interest expense was$432,000 . This projected expense reduction is achieved with more principal outstanding under the refinanced debt structure than would have been outstanding had we not refinanced the debt. Interest income decreased by 95%, or$45,000 , to$3,000 during the three-month period endedJune 30, 2020 , in comparison to$47,000 during the same period in 2019. Interest income decreased by 68%, or$34,000 , to$16,000 during the six-month period endedJune 30, 2020 , in comparison to$49,000 during the same period in 2019. Less interest income was earned during 2020 because we had less cash and short-term investments on hand due largely to cash generated from an equity issuance during the latter part of the first quarter of 2019 that has not yet been fully invested in capital expenditures. 31ImmuCell Corporation Loss Before Income Taxes During the three-month period endedJune 30, 2020 , our loss before income taxes of$766,000 was in comparison to a loss before income taxes of$612,000 during the three-month period endedJune 30, 2019 . Our losses before income taxes included$631,000 and$644,000 of non-cash depreciation, amortization of intangible assets, amortization of debt issuance costs and stock-based compensation expenses during the three-month periods endedJune 30, 2020 and 2019, respectively. During the six-month period endedJune 30, 2020 , our loss before income taxes of$903,000 was in comparison to a loss before income taxes of$458,000 during the six-month period endedJune 30, 2019 . Our losses before income taxes included$1.4 million and$1.3 million of non-cash depreciation, amortization of intangible assets, amortization and write-off of debt issuance costs and stock-based compensation expenses during the six-month periods endedJune 30, 2020 and 2019, respectively. Income Taxes and Net Loss During the three-month period endedJune 30, 2020 , we recorded no income tax expense (benefit). During the three-month period endedJune 30, 2019 , we recorded income tax expense at the rate of 3% of our loss before income taxes. Our net loss of$766,000 , or$0.11 per share, during the three-month period endedJune 30, 2020 was in comparison to a net loss of$627,000 , or$0.09 per share, during the three-month period endedJune 30, 2019 . During the six-month period endedJune 30, 2020 , we recorded income tax benefit of the rate of 2% of our loss before income taxes. During the six-month period endedJune 30, 2019 , we recorded income tax expense at the rate of 5% of our loss before income taxes. Our net loss of$888,000 , or$0.12 per share, during the six-month period endedJune 30, 2020 was in comparison to a net loss of$483,000 or$0.08 per share during the six-month period endedJune 30, 2019 . We are currently providing for a full valuation allowance against our deferred tax assets. As a result, our income tax expense (benefit) has been generated from the tax effect of our interest rate swap agreements that were terminated during the first quarter of 2020. For tax return purposes only, our depreciation expense for the Nisin Drug Substance production facility and equipment was approximately$9.2 million and$1.5 million for the years endedDecember 31, 2018 and 2017, respectively. This significant increase was largely related to accelerated depreciation allowed for tax purposes. This increased our federal net operating loss carryforward to approximately$11.8 million as ofDecember 31, 2018 from approximately$1.7 million as ofDecember 31, 2017 . As ofDecember 31, 2019 , our federal net operating loss carryforward was approximately$12 million , which will be available to offset future taxable income. OnDecember 22, 2017 , the Tax Cuts and Jobs Act was signed into law. This legislation makes significant changes in theU.S. tax laws, including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced theU.S. corporate tax rate from 34% to 21%. Our income tax rate differs from this standard tax rate. While we are recording a full valuation allowance for our net deferred tax assets, and therefore not recognizing a benefit on our tax losses, our income tax expense is largely comprised of the tax effect of the interest rate swap agreements that we terminated during the first quarter of 2020. In addition to the above results from our Statements of Operations, we believe it is important to consider our Statements of Cash Flows in the accompanying unaudited financial statements to assess the cash generating ability of our operations.
Critical Accounting Policies
The financial statements are presented on the basis of accounting principles that are generally accepted inthe United States . All professional accounting standards that were effective and applicable to us as ofJune 30, 2020 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. 32ImmuCell Corporation We sell products that provide Immediate Immunity™ to newborn dairy and beef calves. We recognize revenue in accordance with the five step model in ASC 606. These include i) identification of the contract with the customer, ii) identification of the performance obligations in the contract, iii) determination of the transaction price, iv) allocation of the transaction price to the separate performance obligations in the contract and v) recognition of revenue associated with performance obligations as they are satisfied. We recognize revenue at the time of shipment (including to distributors) for substantially all products, as title and risk of loss pass to the customer on delivery to the common carrier after concluding that collectability is reasonably assured. We do not bill for or collect sales tax because our sales are generally made to distributors and thus our sales to them are not subject to sales tax. We generally have experienced an immaterial amount of product returns.
Inventory includes raw materials, work-in-process and finished goods and is recorded at the lower of cost, on the first-in, first-out method, or net realizable value (determined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation). Work-in-process and finished goods inventories include materials, labor and manufacturing overhead.
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