ImmuCell Corporation — Q2 2021 Form 10-Q
Business context and reporting period. ImmuCell develops and sells animal-health products for dairy and beef cattle. Its First Defense product line prevents scours in newborn calves; Re-Tain, a treatment for subclinical mastitis in lactating dairy cows, remained in development pending FDA approval. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the same 2020 periods.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Product sales | $4.542 million | $2.966 million | $8.649 million | $7.876 million |
| Gross margin | $2.074 million (46%) | $1.283 million (43%) | $3.677 million (43%) | $3.519 million (45%) |
| Operating income (loss) | $216,000 | $(691,000) | $(159,000) | $(494,000) |
| Net income (loss) | $141,000 ($0.02/share) | $(766,000) ($(0.11)/share) | $(300,000) ($(0.04)/share) | $(888,000) ($(0.12)/share) |
| Operating cash flow | Not presented quarterly | $107,000 | $1.827 million |
- At June 30, cash and cash equivalents were $10.701 million; short-term investments were zero. Working capital was approximately $13.5 million, versus $9.9 million at December 31, 2020.
- Total liabilities were $11.461 million, including $9.123 million of debt obligations and $1.185 million of operating lease liabilities. Bank notes bear fixed interest of 3.50%; the $1.0 million revolving credit line was undrawn.
- Cash increased $3.751 million in the first half, principally reflecting $4.233 million net proceeds from an April common-stock offering. Capital expenditures were $1.229 million and debt principal repayments were $381,000.
Changes versus the prior comparable periods
- Q2 sales rose 53% year over year, with domestic sales up 55% and international sales up 40%. First Defense represented 98% of Q2 sales. Six-month sales increased 10%.
- Q2 gross margin increased $791,000 and improved to 46% of sales, helping the company move from a quarterly operating and net loss to income. For the first half, gross margin dollars rose 4%, but margin percentage declined from 45% to 43%.
- Six-month operating cash flow fell from $1.827 million to $107,000, primarily reflecting cash absorbed by inventory and receivables, partly offset by the smaller net loss.
- Six-month other expenses declined to $141,000 from $408,000, largely because 2020 included a $165,000 interest-rate-swap termination fee and a $95,000 debt issuance cost write-off.
- The April offering raised approximately $4.250 million gross and $4.233 million net, issuing 515,156 shares. Shares outstanding at June 30 were 7.742 million, up about 7% from year-end.
Outlook, commentary, and risks
- Management expected 2021 sales to exceed 2020 sales if production and sales proceed as planned. It anticipated above-normal quarterly sales fluctuations as distributors replenish stock and the company works through order backlogs.
- Backlog declined from approximately $3.1 million at March 31 to $1.9 million at June 30; management aimed to clear it in the second half of 2021. The company cautioned that customers could cancel orders or switch to alternatives.
- Management said expanded capacity was coming online, but key equipment qualification and implementation had been delayed. It expected the second liquid-processing line to be completed in Q4 2021 and planned a further capacity project targeting approximately $30 million or more in annual First Defense sales capacity by Q3 2022.
- Management expected gross margin to exceed 46% as added capacity was utilized; its longer-term goal was approximately 50% before related depreciation and amortization. Cost inflation, labor and supply constraints, product mix, and variable biological yields could impede improvement.
- Re-Tain’s FDA review remained a major uncertainty. The company had filed the second-phase chemistry, manufacturing, and controls submission in Q1 2021 and expected an FDA response in Q3 2021. Management described a possible limited launch in Q4 2021 if first-round approval occurred, but a second review could push full launch to Q2 2022. The filing also anticipated FDA approval of the company’s own formulation and aseptic-filling facility in Q4 2022 or Q2 2023.
- Management believed cash, cash equivalents, and anticipated product gross margin would fund working capital, capital expenditures, and operations for at least 12 months from the filing date. It said approximately $7.6 million of June cash was allocated to expansion projects and inventory build.
- GSB waived the 1.35 minimum debt-service-coverage covenant for 2021; management did not expect to meet it otherwise. There is no assurance of meeting the covenant in later years or obtaining another waiver. A further $400,000 MTI loan was received in July 2021; it is unsecured, subordinated, and carries no interest until July 2023.
- Key risks include COVID-related supply and labor disruptions, rising input costs, dependence on First Defense and a few distributors, production shortfalls and customer attrition, Re-Tain regulatory and market-acceptance uncertainty, reliance on contract manufacturing and syringe suppliers, and volatility in dairy and beef economics. The filing reported no material pending legal proceedings and no material subsequent events other than the MTI loan.
Important facts for investors to verify
- Whether production expansion and equipment approvals were completed on schedule, and whether the $1.9 million backlog was cleared without significant customer losses or cancellations.
- Whether actual 2021 sales exceeded 2020, and whether gross margins improved as management anticipated despite input-cost inflation and product mix.
- The timing and outcome of FDA review for Re-Tain, and progress toward approval and readiness of the in-house drug-product facility.
- Cash use against the approximately $7.6 million project and inventory allocation, operating cash generation, and the company’s stated 12-month liquidity outlook.
- Debt-service capacity after the 2021 covenant waiver, upcoming principal and interest requirements, and the terms and use of the July 2021 MTI loan.
- Customer and product concentration: two distributors accounted for 74% of first-half 2021 sales, and First Defense accounted for 98% of sales.