10-Q 1 form10-q_10695.txt IMMUCELL CORPORATION ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 0-15507 ------- Commission file number IMMUCELL CORPORATION ------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 01-0382980 ---------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 56 Evergreen Drive Portland, ME 04103 --------------------------------------------------- (Address of principal executive office and zip code) (207) 878-2770 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Class of Securities: Outstanding at May 10, 2001: Common Stock, par value $.10 per share 2,715,184 ================================================================================ IMMUCELL CORPORATION INDEX TO FORM 10-Q March 31, 2001 PART I: FINANCIAL INFORMATION Page ---- ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets at December 31, 2000 and March 31, 2001 3-4 Consolidated Statements of Operations for the three month periods ended March 31, 2000 and 2001 5 Consolidated Statements of Cash Flows for the three month periods ended March 31, 2000 and 2001 6 Notes to Unaudited Consolidated Financial Statements 7-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-11 PART II: OTHER INFORMATION Items 1 through 6 11 Signatures 12 -2- IMMUCELL CORPORATION PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ASSETS (unaudited) December 31, March 31, 2000 2001 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,895,149 $ 1,918,841 Accounts receivable, net of allowance for doubtful accounts of $39,000 at December 31, 2000 and March 31, 2001 875,066 875,042 Inventories 502,448 644,908 Current portion of deferred tax asset 77,651 588 Prepaid expenses 34,680 55,620 ------------ ------------ Total current assets 3,384,994 3,494,999 PROPERTY, PLANT AND EQUIPMENT, at cost: Laboratory and manufacturing equipment 1,005,914 1,014,862 Building and improvements 586,242 586,242 Construction in progress 219,269 405,975 Office furniture and equipment 73,347 75,568 Land 50,000 50,000 ------------ ------------ 1,934,772 2,132,647 Less - accumulated depreciation 988,374 1,000,537 ------------ ------------ Net property, plant and Equipment 946,398 1,132,110 DEFERRED TAX ASSET 1,851,684 1,851,684 PRODUCT RIGHTS AND OTHER ASSETS, net of allowance for amortization of $25,000 and $32,000 at December 31, 2000 and March 31, 2001, respectively 260,840 253,423 ------------ ------------ TOTAL ASSETS $ 6,443,916 $ 6,732,216 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -3- IMMUCELL CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) December 31, March 31, 2000 2001 ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 239,254 $ 289,008 Accrued expenses 226,010 260,731 Deferred revenue 5,000 45,455 Current portion of long term debt 20,481 20,919 ------------ ------------ Total current liabilities 490,745 616,113 LONG TERM DEBT 414,178 408,658 STOCKHOLDERS' EQUITY: Common stock, Par value--$.10 per share Authorized--8,000,000 shares Issued--3,054,782 and 3,104,782 shares at December 31, 2000 and March 31, 2001, respectively 305,478 310,478 Capital in excess of par value 8,833,785 8,881,129 Accumulated deficit (3,013,535) (2,897,427) Treasury stock, at cost -- 389,598 shares (586,735) (586,735) ------------ ------------ Total stockholders' equity 5,538,993 5,707,445 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,443,916 $ 6,732,216 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -4- IMMUCELL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 2001 (Unaudited) Three Months Ended March 31 2000 2001 ------------ ------------ REVENUES: Product sales $ 1,432,904 $ 1,470,278 Grant income 10,910 8,571 Royalty income 3,206 5,284 Technology licensing income -- 4,545 ------------ ------------ Total revenues 1,447,020 1,488,678 ------------ ------------ COSTS AND EXPENSES: Product costs 677,554 691,984 Research and development expenses 161,392 164,671 Sales and marketing expenses 274,530 320,765 General and administrative expenses 119,985 132,815 ------------ ------------ Total costs and expenses 1,233,461 1,310,235 ------------ ------------ Net operating income 213,559 178,443 ------------ ------------ Interest and other income 23,121 23,894 Interest expense (9,666) (9,167) ------------ ------------ Net interest and other income 13,455 14,727 ------------ ------------ NET PROFIT BEFORE TAXES 227,014 193,170 TAX EXPENSE -- 77,063 ------------ ------------ NET PROFIT AFTER TAXES $ 227,014 $ 116,107 ============ ============ NET PROFIT PER COMMON SHARE: Basic $ 0.09 $ 0.04 Diluted $ 0.08 $ 0.04 ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 2,544,779 2,714,351 Diluted 2,812,389 2,814,052 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -5- IMMUCELL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 2001 (Unaudited) Three Months Ended March 31, ---------------------------- 2000 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net profit after taxes $ 227,014 $ 116,107 Adjustments to reconcile net profit to net cash provided by operating activities- Depreciation and amortization 32,598 34,010 Changes in: Accounts receivable (117,632) 24 Inventories (102,969) (142,460) Prepaid expenses 2,343 (20,940) Accounts payable 4,501 126,817 Accrued expenses (21,908) 75,177 ------------ ------------ Net cash provided by operating activities 23,947 188,735 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (6,756) (212,306) ------------ ------------ Net cash used for investing activities (6,756) (212,306) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of debt obligations (4,575) (5,082) Proceeds from exercise of stock options 266,716 52,345 ------------ ------------ Net cash provided by financing activities 262,141 47,263 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 279,332 23,692 BEGINNING CASH AND CASH EQUIVALENTS 1,823,688 1,895,149 ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 2,103,020 $ 1,918,841 ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -6- IMMUCELL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- The accompanying financial statements have been prepared by ImmuCell Corporation (the "Company") without audit, and reflect the adjustments, all of which are of a normal recurring nature, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and footnote disclosures normally included in the annual financial statements which are prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, the Company believes 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 and the notes to the financial statements as of December 31, 2000, contained in the Company's Annual Report to shareholders on Form 10-K as filed with the Securities and Exchange Commission. The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiary, the Kamar Marketing Group, Inc. All intercompany accounts and transactions have been eliminated in consolidation. (2) INVENTORIES ----------- Inventories consist of the following: December 31, March 31, 2000 2001 ------------ ------------ Raw materials $ 110,728 $ 171,407 Work-in-process 336,087 315,629 Finished goods 55,633 157,872 $ 502,448 $ 644,908 (3) DEBT OBLIGATIONS ---------------- The Company has long term debt obligations, net of current maturities, as follows: December 31, March 31, 2000 2001 ------------ ------------ 8.62% Bank mortgage, collateralized by first security interest in building, due 2001 to 2003 $ 434,659 $ 429,577 Less current portion 20,481 20,919 Long term debt $ 414,178 $ 408,658 The mortgage, which was entered into in May 1998, has a 15 year amortization schedule with interest payable at the fixed rate of 8.62% per year for the first five years. The Company intends to repay the then outstanding principal at the end of this five year period, but the mortgage does provide the option of resetting at a new fixed interest rate to be determined at that time for one additional five year period. Principal payments under this mortgage obligation, due in monthly installments subsequent to March 31, 2001, aggregate approximately the following: $16,000 - 2001; $22,000 - 2002; and $392,000 - 2003. -7- IMMUCELL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) NET PROFIT PER COMMON SHARE --------------------------- The basic net profit per share of common stock is determined by dividing the net profit by the weighted average number of shares of common stock outstanding during the period. The diluted profit per share reflects the potential dilution that would occur if existing stock options were exercised. (5) SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION -------------------------------------------- The Company principally operates in the business segment described in Note 1 to its Annual Report on Form 10-K for the year ended December 31, 2000. The Company's primary customers for the majority (84% and 78% for the three month periods ended March 31, 2000 and 2001, respectively, of its product sales are in the United States dairy and beef industries. Sales to foreign customers, who are principally in the dairy industry, aggregated 14% and 20% of product sales for the three month periods ended March 31, 2000 and 2001, respectively. Pursuant to Statement of Financial Accounting Standards No. 131, the Company's two reportable segments are: (1) Animal Health Products and (2) Research and Development ("R&D"). The accounting policies of the segments are the same as those described in Note 2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The Company evaluates the performance of its segments and allocates resources to them based on contribution before allocation of corporate overhead charges. The table below presents information about reported segments for the three month periods ended March 31, 2000 and 2001:
Three Months Ended March 31, 2000 Animal Health (in thousands) Products R&D Other Total ------------ ------------ ------------ ------------ Product sales $ 1,407 -- $ 26 $ 1,433 Grant income -- $ 11 -- 11 Royalty income -- -- 3 3 ------------ ------------ ------------ ------------ Total revenues 1,407 11 29 1,447 Product costs 666 -- 12 678 Research and development expenses -- 161 -- 161 Sales and marketing expenses 275 -- -- 275 Other expenses, net -- -- 106 106 Net profit (loss) before taxes 466 (150) (89) 227 Tax expense -- -- -- -- ------------ ------------ ------------ ------------ Net profit (loss) after taxes $ 466 $ (150) $ (89) $ 227 ============ ============ ============ ============ Three Months Ended March 31, 2001: Animal Health (in thousands) Products R&D Other Total ------------ ------------ ------------ ------------ Product sales $ 1,426 -- $ 44 $ 1,470 Grant income -- $ 9 -- 9 Royalty income -- -- 5 5 Technology licensing income -- -- 5 5 ------------ ------------ ------------ ------------ Total revenues 1,426 9 54 1,489 Product costs 667 -- 25 692 Research and development expenses -- 165 -- 165 Sales and marketing expenses 321 -- -- 321 Other expenses, net -- -- 118 118 ------------ ------------ ------------ ------------ Net profit (loss) before taxes 438 (156) (89) 193 Tax expense -- -- 77 77 ------------ ------------ ------------ ------------ Net profit (loss) after taxes $ 438 $ (156) $ (166) $ 116 ============ ============ ============ ============
-8- IMMUCELL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) INCOME TAXES ------------ The Company accounts for income taxes in accordance with Financial Accounting Standards Board Statement No. 109. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company utilized approximately $204,000 and $360,000 of net operating loss carryforwards to offset taxable income in fiscal years 1999 and 2000, respectively. Given the Company's two consecutive years of profitable results and the expectation of continued profitability, the Company recorded a tax benefit of approximately $1,967,000 in the fourth quarter of 2000 as a result of the release of the valuation allowance on the deferred tax asset related to net operating loss carryforwards. For federal and state income tax purposes, the Company had remaining net operating loss carryforwards of $3,819,000 as of December 31, 2000 expiring from 2002 to 2018, that are available to offset future taxable income. Accordingly, during the first quarter of 2001, the Company recorded approximately $77,000 in non-cash tax expense and offset its accrued income taxes payable against its deferred tax assets at March 31, 2001. PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001 Total revenues increased by $42,000 (3%) to $1,489,000 during the three month period ended March 31, 2001 in comparison to the same period in the prior year. The Company received $50,000 in March 2001 and anticipates receiving an additional $50,000 in technology licensing payments in 2001 under a license agreement covering certain nutritional rights to its DiffGAM technology. This income is being recognized over the period from March 2001 to December 2002, during which period the Company has accepted certain obligations to supply clinical material to the licensee. Product sales increased by $37,000 (3%) to $1,470,000 during the three month period ended March 31, 2001, in comparison to the same period in the prior year. Product sales in the first quarter of 2000 were negatively impacted by a backlog of orders for FIRST DEFENSE(R) valued at approximately $250,000 as of March 31, 2000. The value of this backlog increased to approximately $1,000,000 as of March 31, 2001. The Company is completing a facility addition to increase its production capacity to enable the Company to fill the backlog of orders. Sales of FIRST DEFENSE and the KAMAR(R) HEATMOUNT(R) DETECTOR increased by 5% during the three month period ended March 31, 2001, as compared to the same period in 2000. Sales of FIRST DEFENSE and the KAMAR HEATMOUNT DETECTOR aggregated 86% and 89% of total product sales during the three month periods ended March 31, 2000 and 2001, respectively. Sales of WIPE OUT(R) DAIRY WIPES comprise the third most significant component of the product sales mix on a dollar basis. The introduction of sales of TIP-TEST(TM): JOHNE'S has not had a significant impact on the product mix yet because those sales have been limited to date principally due to state regulatory barriers that the Company is working to overcome. In September 2000, the Company entered into a one year extension to the term of its product license from Kamar, Inc. covering the exclusive distribution of the KAMAR(R) HEATMOUNT(R) DETECTOR from December 31, 2003 through December 31, 2004. Under the amended license, the Company agreed to increase the royalty paid to Kamar in return for a reduction in the Company's obligation to fund certain marketing expenses in support of the product that will instead be funded by Kamar. The license was also amended so that Kamar no longer has the right to terminate before expiration of the term without cause. Gross margin as a percentage of product sales was 53% during the three month periods ended March 31, 2000 and 2001. The gross margin increased by $23,000 (3%) during the three month period ended March 31, 2001, compared to the respective period of the prior year. Research and development expenses increased by $3,000 (2%) to $165,000 during the three month period ended March 31, 2001, as compared to the respective period in 2000. Research and development expenses aggregated 11% of total revenues during the three month periods ended March 31, 2000 and 2001. Research and development expenses exceeded grant income by $150,000 (which amount equals 11% of product sales) and by $156,000 (which -9- IMMUCELL CORPORATION PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) amount equals 11% of product sales) during the three month periods ended March 31, 2000 and 2001, respectively. Since 1999, internal resources have been invested principally in the development of new animal health products that fit the Company's objective of commercializing its proprietary technologies and helping dairy and beef producers and their veterinarians manage disease and reproduction in their herds. During the second quarter of 2000, the Company initiated a new product development effort utilizing Nisin (the same natural, antimicrobial protein that is the active disease fighting agent in WIPE OUT) as a treatment for mastitis in dairy cows. Additionally in 2000, funds were invested in the development of a product to detect infectious pathogens in water. While the Company continues to focus its internally funded research and development efforts on products for the dairy and beef industry, it is still the Company's intent to realize some value from its past efforts outside of the animal health industry through collaborations with others. One such example is a license agreement entered into in March 2001. The Company licensed certain DIFFGAM rights for nutritional, risk reduction applications outside of North America to Novatreat Ltd of Turku, Finland. The Company received $50,000 in March 2001 and anticipates receiving an additional $50,000 in technology licensing payments during 2001 in connection with the initial supply of clinical material to Novatreat under the license and supply agreement. Novatreat will fund the necessary product development, clinical trial and regulatory costs going forward. Beginning in 2003 and thereafter, the Company expects to earn a manufacturing gross margin and royalties on product sales under the long-term supply component of the agreement. Product ordered by Novatreat will be manufactured at the Company's plant. The license agreement does not cover the Company's colonic delivery or milk processing and other related patents. Management believes that the expenses incurred from the investment in the research and development of new products are necessary to foster growth for the Company in the future. Beginning in late 1998, the Company determined to increase the development of new animal health products and to decrease its internally funded research and development investment in products targeted towards the human health care markets. Because funding requirements for animal health programs are generally less than the requirements for human health programs, the Company anticipates continued profitable operations. Sales and marketing expenses increased by $46,000 (17%) during the three month period ended March 31, 2001 compared to the same period in 2000, aggregating 19% of product sales in the 2000 period compared to 22% in 2001. It is the Company's objective to maintain this ratio reasonably consistent with the rate experienced in the first quarter of 2001 as it launches new products incurring sales and marketing expenses before significant product sales are achieved. General and administrative expenses increased by $13,000 (11%) during the three month period ended March 31, 2001, while the Company continues its efforts to control these expenses while incurring all the necessary costs associated with being a publicly held company. LIQUIDITY AND CAPITAL RESOURCES Total assets increased by approximately $288,000 to $6,732,000 at March 31, 2001 from $6,444,000 at December 31, 2000. Cash and cash equivalents increased by approximately $24,000 to $1,919,000 at March 31, 2001 from $1,895,000 at December 31, 2000. Net working capital decreased by $15,000 to $2,879,000 at March 31, 2001 from $2,894,000 at December 31, 2000. Stockholders' equity increased by $168,000 to $5,707,000 at March 31, 2001 from $5,539,000 at December 31, 2000. In March 2001, the Company received a two year grant award aggregating up to $400,000 from the Maine Technology Institute, a non-profit corporation created by the General Assembly of the State of Maine. The grant augments the Company's development of its Nisin-based mastitis treatment, MAST OUT(TM), by funding significant portions of the costs related to conducting tHE clinical trials and developing the proprietary manufacturing process required to obtain FDA approval of the product. If commercialization of the product occurs, the Company has agreed to repay up to $400,000 within two years after first commercial sale or up to $800,000 at the rate of 2% of such product sales. Additionally, in April 2001, the Company received a $70,000 grant from the USDA to fund certain other aspects of this development program. Furthermore, also in April 2001, the Company received another $70,000 grant from the USDA to fund certain aspects of the Company's Johne's disease diagnostic product development efforts. -10- IMMUCELL CORPORATION PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) To increase the production capacity of FIRST DEFENSE(R) in response to the current backlog of orders and to accommodatE other increasing manufacturing demands, the Company began construction of a 5,300 square foot addition to its facility in December 2000 that is estimated to cost approximately $600,000. Additionally, to benefit from efficiencies in the production of WIPE OUT(R), the Company intends to invest approximately $200,000 in manufacturing equipment necessary to bring a significant element of the assembly of this product in-house. Both of these projects are expected to be completed in the second quarter of 2001. The Company believes that it has sufficient capital resources to meet its working capital requirements and to finance its ongoing business operations during the next twelve months. FORWARD-LOOKING STATEMENTS This Quarterly Report 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 the Company's objectives concerning future product sales, profitability, expense ratios and any other statements that are not historical facts. 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 the Company's products, competition within the Company's anticipated product markets, the uncertainties associated with product development, and other risks detailed from time to time in filings the Company makes with the Securities and Exchange Commission, including its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q. Such statements are based on management's current expectations, but actual results may differ materially due to various factors, including those risks and uncertainties mentioned or referred to in this Quarterly Report. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None -11- IMMUCELL CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. IMMUCELL CORPORATION -------------------- Registrant Date: May 14, 2001 By: /s/ Michael F. Brigham ------------------------------------- Michael F. Brigham President and Chief Executive Officer and Treasurer -12-