ImmuCell(ICCC) - 2023 Q4 - Annual Report

Part I Business ImmuCell develops and markets animal health products for cattle, focusing on its First Defense line while navigating production challenges and advancing its Re-Tain drug candidate Production Capacity Increase and Product Contamination The company invested to increase First Defense production capacity but faced significant contamination events in 2022-2023 that impacted output and costs - A series of investments began in 2019 to increase First Defense production capacity to approximately $30 million per year, with necessary facility expansions and equipment in place by the end of 2022[19] - Product contamination events in 2022 and 2023 resulted in charges to cost of goods sold of approximately $589,000 and $527,000, respectively[20][21] - The company believes corrective actions and improved processes will allow for sustained higher production output and help fulfill a large order backlog[20][21] Animal Health Products The company's core offering is the First Defense product line, providing immediate, USDA-licensed immunity against the three leading causes of calf scours - The First Defense product line is the only USDA-licensed, orally delivered scours preventative with claims against E. coli, coronavirus, and rotavirus[22] - Tri-Shield First Defense, approved in Q4 2017, combines antibodies against all three major scours pathogens, differentiating it from competitors[24] - The company's marketing emphasizes providing "Immediate Immunity™" with a measured dose of antibodies; cumulative sales of First Defense exceeded 33 million doses as of Q4 2023[22][25] Sales and Markets The company is gaining market share in the scours preventative market and is preparing a controlled launch for Re-Tain to address the large subclinical mastitis market U.S. Scours Preventative Market Share (Calf-Level) | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | | 36% | 41% | 43% | 44% | 48% | U.S. Scours Preventative Market Share (Calf & Dam-Level) | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | | 11% | 13% | 13% | 14% | 14% | - The total domestic addressable market for scours preventatives is estimated at $75.4 million per year, with the calf-level segment at $25.6 million[32] - Re-Tain targets subclinical mastitis, which affects an estimated 20-40% of the U.S. dairy herd and costs the industry ~$2 billion annually; its key feature is no FDA-required milk discard[36][37][42] - A "Controlled Launch" strategy is planned for Re-Tain over the first 18-24 months post-approval to ensure successful adoption and manage limited initial inventory[43] Product Development The company's primary development focus is Re-Tain, a Nisin-based mastitis treatment, with a cumulative investment of approximately $28.1 million over 24 years - From January 1, 2000, to December 31, 2023, the company invested approximately $28.1 million in the development of Re-Tain[48] - In 2004, the company acquired full control of the animal health applications of Nisin, the active ingredient in Re-Tain, for approximately $965,000[49] - A risk assessment concluded that the risk of milk from Re-Tain treated cows interfering with cultured dairy products is negligible when used according to the product label[50] Competition ImmuCell competes with major animal health firms, differentiating First Defense with its broad-spectrum claim and Re-Tain with its novel formulation and expected market exclusivity - The First Defense product line's primary competitive advantage is being the only calf-level product providing protection against E. coli, coronavirus, and rotavirus[55] - Direct competitors for First Defense include Zoetis's Calf-Guard and Merck's BOVILIS Coronavirus, as well as dam-level vaccines from Elanco, Merck, and Zoetis[56][57][58] - Potential competitors for Re-Tain include established mastitis antibiotic sellers like Boehringer Ingelheim, Merck, and Zoetis; the company expects a five-year market exclusivity period for Re-Tain post-approval[59] Intellectual Property The company relies on patents, trademarks, and trade secrets to protect its products, including a key patent for its pharmaceutical-grade Nisin manufacturing process - Owns U.S. Patent No. 10,023,617, which covers key aspects of the manufacturing process for pharmaceutical-grade Nisin, the active ingredient in Re-Tain[63] - Holds numerous registered trademarks in the U.S., Canada, and Iran, including FIRST DEFENSE®, TRI-SHIELD®, and RE-TAIN®[64] - Relies on confidentiality and proprietary rights agreements with employees and partners to protect trade secrets and other confidential information[62] Government Regulation The company's products are subject to stringent regulation by the USDA for its biologics and the FDA for its veterinary drug candidate, Re-Tain - The First Defense product line is regulated by the USDA, while Re-Tain is regulated by the FDA[65] - Foreign sales require approvals from regulatory authorities in each country, a process often managed with the help of local experts[65] Employees The company employed 79 people as of the report date, with the majority in manufacturing, and considers its employee relations to be excellent - The company employs 79 people, with the majority (51 full-time equivalents) in quality and manufacturing operations[67] Risk Factors The company faces significant financial, product, regulatory, and economic risks, including margin pressures, debt, manufacturing issues, and reliance on its core product line Financial Risks The company faces risks from failing to meet gross margin targets, a significant debt service burden, and covenant waivers indicating financial pressure - The company missed its gross margin goals, realizing 22% in 2023 and 41% in 2022, against a target of 45% or more[70] - As of December 31, 2023, total outstanding debt was $12.1 million, with debt service payments projected to be approximately $2.0 million for each of the years 2024 and 2025[72] - The company received waivers for its Debt Service Coverage (DSC) ratio covenant for the years ended December 31, 2022 and 2023, indicating financial pressure[73] Product Risks Product risks include manufacturing contamination events, heavy reliance on the First Defense line for 99% of sales, and high customer concentration - Production contamination events and equipment failures in 2022 and 2023 resulted in scrapped inventory and significant production slowdowns[85] - The company is highly reliant on the First Defense product line, which constituted 99% of total product sales in both 2023 and 2022[92][93] - Sales are concentrated, with two large distributors accounting for 79% of product sales in 2023[93] - Specific risks for Re-Tain include potential rejection of milk tanks due to inhibitor tests and the challenge of convincing producers to treat subclinical mastitis[86][88] Regulatory Risks The company faces critical regulatory risks, including obtaining final FDA approval for Re-Tain and maintaining compliance with USDA inspections for its existing products - In July 2023, the USDA issued a temporary Voluntary Stop Distribution and Sale (VSDS) on First Defense, which was rescinded in early August 2023[98] - Final FDA approval for Re-Tain remains a major hurdle, with the Chemistry, Manufacturing and Controls (CMC) section currently under review after multiple submissions[99] - The FDA conducted a pre-approval inspection of the Drug Substance (DS) facility in early 2024, resulting in one deficiency on a Form 483, to which the company has responded[99] Economic Risks Pertaining to the Dairy and Beef Industries The company's performance is tied to the economic health of the dairy and beef industries, facing risks from declining cattle counts and volatile milk prices - The U.S. cattle count has been declining, reaching 87.2 million as of January 1, 2024, which could affect the size of the addressable market[103] Average Class III Milk Price (per cwt) | Year | Price | % Change YoY | | :--- | :--- | :--- | | 2021 | $17.08 | (6)% | | 2022 | $21.96 | 29% | | 2023 | $17.02 | (22)% | Average Milk-To-Feed Price Ratio | Year | Ratio | % Change YoY | | :--- | :--- | :--- | | 2021 | 1.74 | (25)% | | 2022 | 1.91 | 10% | | 2023 | 1.69 | (12)% | Cybersecurity The company manages cybersecurity through its overall risk program with board oversight and has experienced no material incidents to date - The Board of Directors has overall oversight of cybersecurity risk, with operational responsibility delegated to the management team[131] - The company engages outside consultants to assess, identify, and manage material cybersecurity risks[130] - No known cybersecurity risks have materially affected the company to date, but the risk of future incidents remains[130] Properties ImmuCell owns and leases several properties in Portland, Maine, for its office, lab, and manufacturing operations for both USDA and FDA-regulated products - Owns a 34,850 sq. ft. facility at 56 Evergreen Drive, Portland, ME, for office, lab, and USDA-regulated production[132] - Owns a 16,202 sq. ft. FDA-regulated facility at 33 Caddie Lane for Re-Tain Drug Substance (DS) manufacturing[133] - Leases approximately 29,700 sq. ft. of manufacturing and warehouse space at 175 Industrial Way to support the expansion of the First Defense product line[136][137] Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company does not believe any pending or threatened legal proceedings will have a material adverse effect on its business[139] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (ICCC), with 7,750,864 shares outstanding as of March 2024, and it does not currently pay dividends - Common stock trades on Nasdaq under the symbol ICCC[142] - As of March 8, 2024, there were 7,750,864 shares outstanding[142] - The company does not currently pay dividends and has no plans to in the future[142] Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance in 2023 was severely impacted by production issues, leading to a 6% sales decrease, a drop in gross margin to 22%, and a widened net loss of $5.8 million Liquidity and Capital Resources Liquidity was strained in 2023, with cash from operations turning negative, cash balances falling 83%, and debt increasing to $12 million to fund operations - Net cash used for operating activities was $4.7 million in 2023, a significant increase from $1.5 million used in 2022, largely due to a $3.3 million increase in net loss[145] Selected Balance Sheet Data (in thousands) | | As of Dec 31, 2023 | As of Dec 31, 2022 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $979 | $5,792 | $(4,813) | (83)% | | Net working capital | $7,272 | $10,923 | $(3,650) | (33)% | | Total assets | $43,808 | $44,861 | $(1,053) | (2)% | | Stockholders' equity | $24,993 | $30,380 | $(5,387) | (18)% | - Total debt outstanding was approximately $12 million as of December 31, 2023, up from $10.2 million in 2022[146] - The company has deferred approximately $5.5 million in planned capital expenditures for First Defense and Re-Tain projects due to recent financial performance[154] Results of Operations Product sales fell 6% to $17.5 million in 2023, gross margin dropped to 22% from 41%, and the net loss widened to $5.8 million due to production disruptions Annual Product Sales (in thousands) | | 2023 | 2022 | (Decrease) Amount | % | | :--- | :--- | :--- | :--- | :--- | | Total product sales | $17,472 | $18,568 | $(1,096) | (6)% | Annual Gross Margin (in thousands) | | 2023 | 2022 | (Decrease) Amount | % | | :--- | :--- | :--- | :--- | :--- | | Gross margin | $3,869 | $7,649 | $(3,779) | (49)% | | Percent of product sales | 22% | 41% | (19)% | (46)% | Annual Net Loss (in thousands, except per share) | | 2023 | 2022 | | :--- | :--- | :--- | | Net Operating Loss | $(5,748) | $(2,299) | | Net Loss | $(5,775) | $(2,494) | | Net Loss Per Share | $(0.75) | $(0.32) | Critical Accounting Policies Key critical accounting policies involve significant estimates for inventory valuation, long-lived assets, and deferred tax assets, with revenue recognized at shipment - Revenue is recognized at the time of shipment, as title and risk of loss pass to the customer, in accordance with ASC 606[228] - Inventory is valued at the lower of cost (FIFO) or net realizable value, a critical estimate due to the variability of biological yields impacting cost per dose[229][328] - Other significant estimates include the valuation of long-lived assets, deferred tax assets, and costs of goods sold[226] Financial Statements and Supplementary Data This section presents the audited financial statements for 2023 and 2022, with the auditor's report highlighting inventory valuation as a Critical Audit Matter Balance Sheet Summary (As of Dec 31, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Total Current Assets | $11,470 | $13,995 | | Total Assets | $43,808 | $44,861 | | Total Current Liabilities | $4,197 | $3,072 | | Total Liabilities | $18,815 | $14,481 | | Total Stockholders' Equity | $24,993 | $30,380 | Statement of Operations Summary (Year ended Dec 31, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Product Sales | $17,472 | $18,568 | | Gross Margin | $3,869 | $7,649 | | Net Operating Loss | $(5,748) | $(2,299) | | Net Loss | $(5,775) | $(2,494) | Statement of Cash Flows Summary (Year ended Dec 31, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used for operating activities | $(4,674) | $(1,544) | | Net cash used for investing activities | $(1,890) | $(3,964) | | Net cash provided by financing activities | $1,751 | $1,114 | | Net decrease in cash | $(4,813) | $(4,394) | - The independent auditor, Wipfli LLP, identified the 'Valuation of Inventory' as a Critical Audit Matter due to the complexity and judgment required in determining its cost[327][328] Controls and Procedures Management concluded disclosure controls were effective as of year-end 2023, after remediating a material weakness related to inventory capitalization during the year - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[231] - A material weakness related to capitalizing depreciation into inventory was identified in Q2 2023 and remediated in Q3 2023[235] - Management concluded that internal controls over financial reporting were effective as of December 31, 2023[235] Part III Directors, Executive Officers and Corporate Governance The company separates the CEO and independent Board Chair roles, maintains three independent board committees, and has adopted a Code of Business Conduct - The company maintains a separate President/CEO (Michael F. Brigham) and an independent, non-executive Chair of the Board (Dr. David S. Tomsche)[240] - The Board has three standing committees: Audit, Compensation and Stock Option, and Nominating, each composed of independent directors[242] - All directors and executive officers were compliant with Section 16(a) beneficial ownership reporting requirements for fiscal year 2023[268] Executive Compensation Executive compensation includes base salary, bonuses, and stock options, with CEO Michael F. Brigham's total 2023 compensation being $395,235 2023 Summary Compensation Table | Name and Principal Position | Year | Salary | Bonus | All Other Comp. | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Michael F. Brigham, President & CEO | 2023 | $355,267 | $0 | $39,968 | $395,235 | | Bobbi Jo Brockmann, VP Sales & Mktg | 2023 | $268,846 | $25,000 | $29,675 | $323,521 | | Elizabeth L. Williams, VP Mfg Ops | 2023 | $264,173 | $25,000 | $22,899 | $312,072 | - Non-employee directors received an annual cash fee of $28,000 in 2023, plus additional fees for committee service and the Board Chair role[272] - The company has an Amended and Restated Separation and Deferred Compensation Agreement with CEO Michael F. Brigham, which includes provisions for payment of unused paid time off and up to $300,000 in deferred compensation upon separation[287] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The Pessin family (15.3%) and Jonathan E. Rothschild (6.6%) are the largest beneficial owners, with all directors and officers as a group owning 6.6% Security Ownership of Major Holders (as of April 15, 2024) | Name of Beneficial Owner | Shares Beneficially Owned | Percent of Stock | | :--- | :--- | :--- | | Sandra F., Norman H. and Brian L. Pessin | 1,182,720 | 15.3% | | Jonathan E. Rothschild | 514,003 | 6.6% | | Directors and executive officers as a group (8 persons) | 524,148 | 6.6% | - As of December 31, 2023, 618,500 shares were to be issued upon exercise of outstanding options, and 202,000 shares remained available for future issuance under equity compensation plans[297] Certain Relationships and Related Transactions, and Director Independence The company discloses a related party transaction with a distributor controlled by the Board Chair, and all non-employee directors are considered independent - A company controlled by Board Chair David S. Tomsche, Leedstone Inc., is a distributor of ImmuCell's products and purchased $231,405 worth of products in 2023[298] - All directors are independent under NASDAQ rules except for company employees Michael F. Brigham and Bobbi Jo Brockmann[300] Principal Accountant Fees and Services The company paid its auditor, Wipfli LLP, a total of $140,550 in 2023, primarily for audit services, all of which were pre-approved by the Audit Committee Accountant Fees | | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $140,000 | $130,000 | | Audit-Related Fees | $550 | $19,000 | | Total | $140,550 | $149,000 | - The Audit Committee pre-approves all auditing and permitted non-audit services performed by the Independent Registered Public Accounting Firm[306] Part IV Exhibits and Financial Statement Schedules This section lists all filed exhibits, including corporate governance documents, material debt and lease agreements, and executive compensation plans - Lists key corporate governance documents, including the Certificate of Incorporation (3.1-3.6) and Bylaws (3.7)[316] - Includes material contracts such as the Rights Agreement (4.1), various debt agreements with Gorham Savings Bank and Maine Technology Institute (10.17-10.35), and lease agreements (10.14-10.16)[316][317][318][320] - Contains management compensation plans and agreements, including stock option plans (10.3, 10.5) and executive incentive and separation agreements (10.8-10.11)[316][318]