ImmuCell(US:ICCC)2023-08-10 20:06PART I: FINANCIAL INFORMATION Unaudited Financial Statements For the six months ended June 30, 2023, ImmuCell Corporation reported a significant decrease in product sales and gross margin, leading to a net loss of $3.7 million, a substantial increase from the $171 thousand loss in the same period of 2022; the balance sheet shows a decrease in cash and cash equivalents from $5.8 million to $1.5 million, while total liabilities increased, primarily driven by production slowdowns due to contamination events Balance Sheets As of June 30, 2023, the company's balance sheet shows a significant reduction in cash and cash equivalents to $1.45 million from $5.79 million at year-end 2022, with total assets slightly decreasing to $44.0 million, while total liabilities increased to $17.15 million from $14.48 million, primarily due to a new $1.0 million line of credit, consequently decreasing total stockholders' equity from $30.38 million to $26.86 million Selected Balance Sheet Data (in thousands) | Account | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $1,454 | $5,792 | ($4,338) | | Inventory | $7,536 | $6,039 | $1,497 | | Total current assets | $10,946 | $13,995 | ($3,049) | | Total Assets | $44,007 | $44,861 | ($854) | | Line of credit | $1,000 | $0 | $1,000 | | Total Liabilities | $17,150 | $14,481 | $2,669 | | Total stockholders' equity | $26,857 | $30,380 | ($3,523) | Statements of Operations The company's financial performance significantly worsened in Q2 and H1 2023, with product sales falling 29% to $7.0 million and gross margin plummeting 72% to $1.3 million for the six months ended June 30, 2023, resulting in a net loss of $3.7 million, or ($0.48) per share, compared to a $171 thousand loss, or ($0.02) per share, in H1 2022 Statements of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | YoY Change | H1 2023 | H1 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Product sales | $3,533 | $3,861 | -8.5% | $6,979 | $9,861 | -29.2% | | Gross margin | $1,044 | $1,707 | -38.8% | $1,345 | $4,811 | -72.0% | | Net Operating Loss | ($1,304) | ($619) | +110.7% | ($3,561) | ($48) | +7318.8% | | Net Loss | ($1,380) | ($684) | +101.8% | ($3,695) | ($171) | +2060.8% | | Diluted net loss per share | ($0.18) | ($0.09) | +100.0% | ($0.48) | ($0.02) | +2300.0% | Statements of Cash Flows For the six months ended June 30, 2023, net cash used for operating activities was $3.4 million, a sharp reversal from the $1.0 million provided in 2022, primarily due to increased net loss, while investing activities used $1.4 million and financing activities provided $0.5 million, resulting in an overall $4.3 million decrease in cash and cash equivalents Cash Flow Summary for the Six-Month Periods Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | ($3,443) | $1,012 | | Net cash used for investing activities | ($1,391) | ($1,740) | | Net cash provided by financing activities | $497 | $1,586 | | Net (decrease) increase in cash | ($4,337) | $858 | | Ending Cash and cash equivalents | $1,454 | $11,043 | Notes to Unaudited Financial Statements The notes detail business segments, accounting policies, and financial components, including the impact of production contamination on inventory and sales, debt obligations and covenant waivers, revenue concentration, stock option plans, and segment performance, with a subsequent event revealing a new $3 million debt facility closed in Q3 2023 - The company operates in two segments: Scours (First Defense product line) and Mastitis (Re-Tain development); production slowdowns in H1 2023 to remediate contamination events negatively impacted sales and gross margin20120 - Inventory write-offs from scrapped product due to contamination events totaled $305,334 during the first six months of 202356 - The company's bank waived the debt service coverage (DSC) ratio covenant for the year ending December 31, 2023, requiring a 1.35 DSC ratio for twelve-month periods ending in mid-to-late 202465 - In Q3 2023, the company closed on a new $3 million debt facility and received a $250,000 business interruption insurance benefit related to production contamination losses130 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in H1 2023 financial performance to production slowdowns from contamination events, leading to a 29% sales decrease and 72% gross margin drop, creating an $8.5 million order backlog, while the company invests in capacity expansion and Re-Tain FDA approval, deferring some capital expenditures and securing a new $3 million debt facility in Q3 2023 for liquidity Liquidity and Capital Resources The company's liquidity tightened with cash dropping by $4.3 million in H1 2023 due to a $3.5 million increase in net loss, leading to deferral of approximately $5.4 million in planned capital expenditures, though existing cash, anticipated gross margin, and a new $3 million debt facility secured in Q3 2023 are expected to fund operations for at least the next 12 months - Net cash used for operating activities was ($3.4) million in H1 2023, a $4.5 million negative swing from the $1.0 million provided in H1 2022, largely due to a $3.5 million increase in net loss136 - The company has deferred spending on key capital projects due to the loss in gross margin: approximately $1.7 million for Re-Tain formulation/filling (Project D) and approximately $3.7 million for First Defense capacity expansion (Project H)146151152 - Total investment in capital projects from 2014 through June 30, 2023, amounts to $36.6 million, with an estimated $6.3 million remaining to complete, though a significant portion is currently deferred152 Results of Operations The company's operating results were severely impacted by production contamination events in late 2022 and Q1 2023, leading to a 29% sales decrease to $7.0 million and a 72% gross margin decrease to $1.3 million for H1 2023, with net loss swelling to $3.7 million, as the company focuses on remediation, managing a significant order backlog, and advancing Re-Tain toward FDA approval - Production slowdowns in H1 2023 to remediate contamination events resulted in a $305,000 charge to cost of goods sold and an increase in the order backlog from $2.5 million to $8.5 million as of August 4, 2023159161 Sales Performance (in thousands) | Period | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Q2 | $3,533 | $3,861 | (9%) | | H1 | $6,979 | $9,861 | (29%) | | TTM | $15,686 | $20,455 | (23%) | Gross Margin Performance | Period | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Q2 | 30% | 44% | (14 p.p.) | | H1 | 19% | 49% | (30 p.p.) | | TTM | 27% | 48% | (21 p.p.) | - The company is preparing its third submission of the final Chemistry, Manufacturing and Controls (CMC) Technical Section for Re-Tain to the FDA, with approval of this section being the last major step before commercialization184187 Quantitative and Qualitative Disclosures about Market Risk This section is marked as 'Not applicable' in the report Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2023, but identified a material weakness in internal control over financial reporting related to improper capitalization of non-cash depreciation into inventory, which would have understated inventory by approximately $387,000, an error detected and corrected before the 10-Q was issued, with remediation efforts underway - Management identified a material weakness in internal controls over financial reporting as of June 30, 2023226 - The weakness was a failure to properly capitalize non-cash depreciation into inventory, which would have understated inventory by approximately $387,000 if not corrected226 - The company is implementing changes to remediate this material weakness during the third quarter of 2023226 PART II: OTHER INFORMATION Legal Proceedings The company is not currently involved in any pending or threatened legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations - The company does not believe any pending or threatened legal proceedings will have a material adverse effect on its business229 Risk Factors The company outlines significant business risks, including financial risks from failing to meet gross margin goals and debt covenants, product risks from manufacturing contamination and reliance on First Defense, market acceptance uncertainties for Re-Tain, regulatory hurdles for FDA approval, economic pressures from the dairy and beef industries, competition, and global risks like inflation and supply chain disruptions Financial Risks Key financial risks include the potential inability to achieve gross margin goals due to cost increases and production issues, as seen in H1 2023, risks related to approximately $1.6 million in 2023 debt service obligations, and the need to comply with a 1.35 debt service coverage ratio starting in mid-2024, with inflation also materially impacting supply and labor costs - There is a risk the company will not achieve its gross margin goals, which would adversely affect operating results, as experienced during H1 2023 due to contamination events230 - The company's bank waived the debt service coverage (DSC) ratio covenant for 2023, but it must meet a 1.35 ratio for the twelve-month periods ending June 30, September 30, and December 31, 2024232 Product Risks Significant product risks include potential future manufacturing contamination events, heavy reliance on the First Defense product line, which constituted 99% of sales in H1 2023, and specific sales risks for the Re-Tain launch, such as potential milk rejection by processors and challenges in shifting producer practices to treat subclinical mastitis - The company is at risk of further production contaminations, which led to a production slowdown and reduced sales and gross margin in H1 2023242 - The company is highly reliant on the First Defense product line, which accounted for 99% of total product sales during the six-month period ended June 30, 2023248249 - Sales of Re-Tain face risks such as potential rejection of milk by processors due to positive inhibitor tests and challenges in convincing producers to treat subclinical mastitis243244245 Regulatory Risks The company's operations are subject to periodic USDA inspections for First Defense products, with a July 2023 inspection resulting in a temporary halt on distribution and sales, while a major risk remains obtaining final FDA approval for Re-Tain, which hinges on a successful pre-approval re-inspection and approval of the final CMC Technical Section - In July 2023, the USDA imposed a temporary Voluntary Stop Distribution and Sale (VSDS) order on First Defense following an inspection, which has since been rescinded253 - The commercial launch of Re-Tain requires FDA approval of the final Chemistry, Manufacturing and Controls (CMC) Technical Section, which is subject to risk and potential delays254 Other Risks Other notable risks include reliance on a limited number of single-source suppliers for critical components like colostrum and syringes, dependence on a contract manufacturer for initial Re-Tain Drug Product supply, and risks related to protecting intellectual property and ensuring IT system security against cyberattacks - The company is dependent on its manufacturing facilities in Portland and on single-source suppliers for key components like syringes for Re-Tain279 - The company relies on a contract with Norbrook for the initial supply of Re-Tain Drug Product, and any disruption could adversely affect the product launch279 Exhibits This section lists the exhibits filed with the Form 10-Q, including an amendment to the Rights Agreement, loan agreements for the new $3 million debt facility, and required officer certifications