ImmuCell(ICCC) - 2023 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Unaudited Financial Statements Unaudited Q1 2023 financial statements reveal significant deterioration, marked by a net loss and negative operating cash flow due to production issues Balance Sheets - Cash and cash equivalents decreased by $2.7 million, from $5.8 million at year-end 2022 to $3.1 million as of March 31, 2023[8] - Total liabilities increased by approximately $0.5 million during the quarter, primarily due to a $1.0 million draw on the line of credit[8] - Stockholders' equity decreased by $2.2 million, driven by the net loss of $2.3 million for the quarter[12] Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $3,096 | $5,792 | | Total current assets | $12,248 | $13,995 | | Property, plant and equipment, net | $28,461 | $28,442 | | Total Assets | $43,123 | $44,861 | | Liabilities & Equity | | | | Total current liabilities | $3,838 | $3,072 | | Total long-term liabilities | $11,124 | $11,409 | | Total Liabilities | $14,962 | $14,481 | | Total stockholders' equity | $28,161 | $30,380 | Statements of Operations - Product sales plummeted by 43% year-over-year, from $6.0 million in Q1 2022 to $3.4 million in Q1 2023[10] - Gross margin collapsed to $301,000 (9% of sales) from $3.1 million (52% of sales) in the prior-year period[10] - The company reported a net loss of $2.3 million, or ($0.30) per share, a significant reversal from the net income of $513,000, or $0.07 per share, in Q1 2022[10] Quarterly Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Product sales | $3,447 | $6,000 | | Gross margin | $301 | $3,103 | | Operating expenses | $2,557 | $2,533 | | Net Operating (Loss) Income | ($2,256) | $571 | | Net (Loss) Income | ($2,315) | $513 | | Diluted net (loss) income per share | ($0.30) | $0.07 | Statements of Cash Flows - Net cash used for operating activities was $2.8 million, a $3.4 million negative swing from the $639,000 of cash provided by operations in Q1 2022, primarily due to the net loss[15][132] - Cash used for investing activities was $682,000, mainly for the purchase of property, plant, and equipment[15] - Net cash provided by financing activities was $749,000, largely from a $1.0 million draw on the line of credit, offset by debt principal repayments[15] Notes to Unaudited Financial Statements - The company operates in two business segments: Scours (First Defense product line) and Mastitis (Re-Tain development)[20][117] - There is a high concentration of credit risk, with two customers (Company A and Company B) accounting for 77% of total product sales and 71% of total trade accounts receivable[38] - As of March 31, 2023, the company had total debt obligations of approximately $10.0 million (excluding line of credit), with principal payments of $1.1 million due in 2024[69][133] Segment Operating Results - Q1 2023 (in thousands) | Segment | Product Sales | Gross Margin | Net Operating Loss | | :--- | :--- | :--- | :--- | | Scours | $3,411 | $307 | ($384) | | Mastitis | $35 | ($6) | ($1,272) | | Other | $0 | $0 | ($601) | | Total | $3,446 | $301 | ($2,256) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes poor Q1 2023 results to production contamination, causing sales decline, gross margin collapse, and capital expenditure deferrals, while focusing on remediation and Re-Tain FDA approval Liquidity and Capital Resources - Net cash used for operating activities was $2.8 million in Q1 2023, a $3.4 million negative swing from Q1 2022, largely due to the net loss from the production slowdown[132] - The company's bank, Gorham Savings Bank (GSB), waived the debt service coverage (DSC) ratio covenant for the year ending December 31, 2023; the company must meet a 1.35 DSC ratio for the twelve-month periods ending in mid-to-late 2024[133] - Due to the loss in gross margin, the company has decided to defer spending on capital projects, including approximately $1.7 million for Re-Tain formulation/filling (Project D) and $4.2 million for First Defense capacity expansion (Project H)[142][147][148] Results of Operations - A product contamination event detected in Q1 2023 forced a production slowdown, causing the order backlog to increase from $2.5 million at year-end 2022 to approximately $8 million as of May 3, 2023[154][155] Quarterly Financial Performance Summary | Metric | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total product sales | $3.4M | $6.0M | (43)% | | Gross margin | $0.3M | $3.1M | (90)% | | Gross margin % | 9% | 52% | (83)% | - The final major step for Re-Tain approval, the Chemistry, Manufacturing and Controls (CMC) Technical Section, is now projected to be submitted to the FDA during the second quarter of 2023, a delay from the previous end-of-April target[178] - The company projects Re-Tain sales of approximately $1 million in the first year post-launch, doubling to $2 million in the second year, under a controlled launch strategy[198] Quantitative and Qualitative Disclosures about Market Risk This section is not applicable for the registrant - This section is not applicable for the registrant[213] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - Management evaluated the effectiveness of disclosure controls and procedures as of March 31, 2023, and concluded that they were effective[213] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[214] PART II: OTHER INFORMATION Legal Proceedings The company is not subject to any pending or threatened legal proceedings that would materially adversely affect its business or financial condition - The company is not aware of any pending or threatened legal proceedings that would have a material adverse effect on its business[216] Risk Factors The company faces significant financial, product, regulatory, economic, and operational risks, including manufacturing issues, Re-Tain launch challenges, and market volatility Financial Risks - There is a risk that the company cannot achieve its gross margin goal of approaching 50% (before depreciation) due to cost increases, manufacturing contamination events, or inability to raise prices[217] - The company's debt service coverage (DSC) ratio was 0.44 for 2022, below the required level, necessitating a waiver from its bank; failure to meet future DSC requirements could result in a covenant violation[219] - Inflation is having a material adverse impact on the cost of supplies and labor, which could reduce gross margin if not offset by price increases[222] Product Risks - The company is at risk of further production contaminations, similar to those experienced in late 2022 and Q1 2023, which could result in more scrapped inventory and production slowdowns[229] - The successful launch of Re-Tain faces risks including potential for positive milk inhibitor tests, failed cheese tanks if milk concentration limits are exceeded, and the need to change producer behavior from treating only clinical mastitis to treating subclinical disease[230][231][232] - The business is highly reliant on the First Defense product line, which accounted for 99% of total sales in Q1 2023[235][236] Regulatory Risks - The commercial launch of Re-Tain requires FDA approval of the final Chemistry, Manufacturing and Controls (CMC) Technical Section and a successful pre-approval re-inspection of the manufacturing facility, which presents a risk of delay or non-approval[241] Economic Risks Pertaining to the Dairy and Beef Industries - The U.S. cattle count has been declining, reaching 89.3 million as of January 1, 2023, which could negatively affect the size of the addressable market[243] - The dairy market is highly volatile; the Class III milk price, a key revenue indicator for customers, has seen significant fluctuations, and the milk-to-feed price ratio remains low, indicating financial pressure on producers[248] Small Size of Company - As a small company with 74 employees, there is a heavy reliance on key personnel with limited redundancy, and their loss could adversely affect operations[251] - The company is dependent on its contract manufacturer, Norbrook, for Re-Tain Drug Product (DP) supply in 2023; there is a risk of supply interruption in managing the transition to in-house DP production, which is expected to be operational in 2025[252] Global Risks - The company faces significant production constraints, supply disruptions, and inflation caused in part by the global COVID-19 pandemic and Russia's invasion of Ukraine[254] - Climate change poses risks through potential disruption to the company's activities and those of its customers and suppliers, including altered weather patterns and increased prevalence of livestock diseases[258] Risks Pertaining to Common Stock - The company's common stock has low average daily trading volume, which can lead to price volatility and difficulty for investors looking to sell shares[260] - Anti-takeover provisions, including a Common Stock Rights Plan (poison pill), may discourage or prevent a change in control that stockholders might consider favorable[261][262] Other Items (2-6) Items 2 through 5 are reported as "None", while Item 6 lists the exhibits filed with the report - There were no unregistered sales of equity securities, defaults upon senior securities, mine safety disclosures, or other information to report for the period[271] - Item 6 lists the exhibits filed with the Form 10-Q, including management compensation agreements and required certifications[274]