IMMUCELL CORP quarterly report, Q3 FY2022

ImmuCell Corporation — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Unaudited. ImmuCell develops and sells animal-health products; nearly all current revenue comes from First Defense, a calf-scours prevention product. Re-Tain, a treatment for subclinical mastitis, remains in development and requires FDA approval before sales.

Financial performance and position

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Product sales	$4.80 million	$5.15 million	$14.66 million	$13.80 million
Gross margin	$1.85 million; 38%	$2.42 million; 47%	$6.66 million; 45%	$6.10 million; 44%
Operating income (loss)	($617,000)	$271,000	($665,000)	$112,000
Net income (loss)	($655,000); ($0.08) per share	$148,000; $0.02 per share	($826,000); ($0.11) per share	($152,000); ($0.02) per share

• Q3 sales fell 7% year over year, while nine-month sales rose 6%. Domestic sales grew 10% year to date; international sales fell 19%. First Defense represented 99% of nine-month sales.
• Operating expenses increased 22% in the nine-month period to $7.32 million, driven by product development, sales and marketing, and administrative costs. Product development expense was $3.44 million, largely related to Re-Tain.
• Q3 gross margin was reduced by production contamination and scrapped product. Management reported an approximately $412,000 total impact, with roughly half recorded in Q3 and half in Q4; without the Q3 contamination charge, management estimated Q3 gross margin at about 43%.
• Nine-month operating cash flow was negative $246,000, compared with positive $366,000 a year earlier. Capital expenditures were $2.49 million, primarily for manufacturing expansion. Cash declined $1.36 million from year-end to $8.83 million.
• At September 30, cash was $8.83 million, current assets $16.43 million, current liabilities $2.71 million, and net working capital $13.72 million. Inventory increased to $5.32 million from $3.09 million at year-end.
• Debt obligations were $10.48 million, including $998,000 current; the $1 million revolving line was undrawn. Most debt has fixed rates; the company also has operating lease liabilities of $2.25 million. Nine-month debt proceeds were $2.0 million and principal repayments were $649,000.

Material changes and notable items

• Management restated its Q1 and Q2 2022 reports after identifying approximately $222,000 of deferred compensation expense for earned, unused paid time off. The correction increased administrative expense and accrued expenses, with no cash impact. It reduced Q1 reported net income and changed the first-half result from reported net income to a net loss.
• Management identified two unremediated material weaknesses in internal control over financial reporting: failure to accrue the deferred compensation and failure to properly account for an extended lease. The lease error would have understated the right-of-use asset and lease liability by about $1.2 million if not detected before filing. Management said disclosure controls were effective, but ICFR was not effective as of September 30, 2022.
• The company extended its lease at 175 Industrial Way and committed to lease an adjacent 15,400-square-foot building for 20 years, with commencement anticipated in 2023. It expects the new space to support production, warehouse capacity, and expansion.
• Two distributors accounted for 73% of nine-month sales; 73% of receivables were due from those two customers at quarter-end. Customer concentration is a significant exposure.

Outlook, management commentary, and risks

• Management stated that cash and expected gross margin from ongoing sales should fund planned working capital, capital expenditures, and operations for at least 12 months from filing. It had earmarked about $5.7 million of September cash for projects and near-term capital spending.
• Management’s production-capacity targets were approximately $30 million or more in annual First Defense sales value after an expansion delayed into Q4 2022, about $35 million by year-end 2022, and approximately $47 million during the second half of 2024. These are capacity estimates, not sales guidance, and depend on yields, product mix, and pricing. Additional planned projects and routine capital spending remain subject to cost and execution risk.
• First Defense backlog declined from about $2.4 million at December 31, 2021 to $205,000 at September 30, 2022. Following contamination-related inventory losses, management said backlog could reach about $900,000 at year-end. It cautioned that quarterly sales may fluctuate as the business emerges from backlog.
• For Re-Tain, the FDA issued an incomplete letter on the second CMC submission in Q3. Management expected a third submission by the end of Q1 2023, with a six-month FDA review; it said commercial sales could begin about nine months after submission if the required completion letter is obtained. Approval and launch timing are uncertain. The filing gives differing estimates for FDA approval of the planned in-house drug-product facility, generally around 2024.
• Management described a controlled Re-Tain launch, projecting approximately $1 million of sales in the first market year and about twice that in the second, while emphasizing that actual results could differ materially. These are high-level projections, not assured guidance.
• Key risks include FDA approval and inspection delays; supply shortages, inflation, labor constraints, and production variability; contamination and margin pressure; reliance on a limited number of suppliers and distributors; potential loss of customers from past and future backlogs; debt service and covenant compliance; and uncertainty over Re-Tain market adoption. Management reduced the 2022 minimum debt-service coverage covenant to 1.0 and said it might otherwise fail the prior requirement.

Most important facts for investors to verify

• Progress on remediation of both material weaknesses, and whether subsequent filings show the controls operating effectively.
• Whether the approximately $412,000 contamination-related charge and projected year-end backlog were recorded and resolved as described, and whether gross margins recover.
• Timing and outcome of the third Re-Tain CMC submission, FDA pre-approval re-inspection, NADA review, and approval of the company’s in-house formulation and filling facility.
• Actual capital spending, production capacity and yields versus targets, and whether cash remains sufficient alongside debt repayments and inventory requirements.
• Sales and receivables concentration among the two major distributors, and the company’s ability to sustain demand and diversify customers and products.