ImmuCell Corporation — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2021. ImmuCell develops and sells animal-health products for dairy and beef cattle. The First Defense product line, for preventing scours in calves, generated 98% of product sales. The company is also developing Re-Tain, a Nisin-based treatment for subclinical mastitis in lactating dairy cows.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Product sales | $5.15 million | $3.72 million | $13.80 million | $11.60 million |
| Gross margin | $2.42 million (47%) | $1.72 million (46%) | $6.10 million (44%) | $5.24 million (45%) |
| Operating income (loss) | $271,000 | $(252,000) | $112,000 | $(746,000) |
| Net income (loss) | $148,000 | $(323,000) | $(152,000) | $(1.21 million) |
| Basic and diluted EPS | $0.02 | $(0.04) | $(0.02) | $(0.17) |
- Q3 sales rose 38% year over year; nine-month sales rose 19%. Domestic sales accounted for 88% of nine-month revenue; international sales were 12%.
- Nine-month operating cash flow was $366,000, down from $1.16 million. Cash used in investing was $894,000, including $1.90 million of capital expenditures; financing provided $4.07 million, principally reflecting $4.23 million of net proceeds from an April equity offering.
- Cash and cash equivalents were $10.50 million at September 30, 2021, compared with $6.95 million at year-end 2020; short-term investments were zero, versus $996,000. Net working capital was $13.91 million.
- Debt obligations were $9.33 million, including current maturities; operating lease liabilities totaled $1.16 million. The company also had $900,000 of subordinated Maine Technology Institute loans. Bank debt carries a fixed 3.50% rate; the $1.0 million bank line of credit was undrawn.
Material changes versus the prior comparable period
- Higher sales and gross margin drove Q3 results from an operating loss and net loss in 2020 to operating and net income in 2021. For the first nine months, the net loss narrowed substantially, although the company remained loss-making.
- Nine-month gross margin dollars increased 16%, but gross margin as a share of sales decreased to 44% from 45%. Management said quarterly margin improved from 39% in Q1 to 47% in Q3 as production increased and fixed costs were spread over greater output.
- Cash increased following the equity raise, while receivables and inventory also rose. Inventory increased $574,000 from year-end, mostly work-in-process; management attributed this to building production capacity and addressing the order backlog.
- Two distributors represented 74% of nine-month sales and 75% of receivables at September 30, highlighting customer concentration.
Outlook, commentary, and risks
- Management expected full-year 2021 sales to exceed 2020 sales if fourth-quarter production and sales met plan. It stated that existing cash and expected product-sale gross margin should fund planned operations and capital expenditures for at least 12 months from filing.
- First Defense backlog was just over $1 million at September 30, down from $3.1 million at March 31. The company estimated capacity at approximately $23 million in annual sales value by Q4 2021 and $30 million or more by Q3 2022; these estimates depend on biological yields, product mix, prices, and execution of expansion projects.
- Re-Tain’s FDA review remained a key uncertainty: the FDA issued an incomplete letter on the company’s second-phase Drug Substance and Drug Product submission in Q3. Management anticipated resubmission in Q4 2021 and said a Q3 2022 launch could be possible if approved. Four of five principal technical sections had been completed; FDA approval was not assured.
- Management expected installation of in-house Re-Tain formulation and aseptic-filling equipment to begin in early 2022, with the facility expected to be operational around mid-2022 and FDA approval anticipated in the second half of 2023, subject to review and validation timing. Norbrook contract supply covered orders placed through 2021, with deliveries into the first half of 2022; the company was discussing an extension.
- COVID-related supply-chain disruption, rising input and labor costs, shortages, and difficulty obtaining timely supplies could constrain output, increase costs, or delay customer deliveries. Management warned that backlog could lead to lost customers and that distributor ordering patterns could cause unusually variable quarterly sales.
- GSB waived the minimum 1.35 debt-service-coverage covenant for 2021 after the equity offering. Future covenant compliance is not assured. Management estimated interest expense of approximately $317,000 in 2021, $287,000 in 2022, and $258,000 in 2023.
- Other risks include dependence on First Defense and a small number of distributors, biological production variability, Re-Tain regulatory and market-acceptance risk, competition, dairy and beef market volatility, and reliance on key employees and third-party suppliers. The filing reported no material subsequent events through November 15, 2021 and no known material pending or threatened legal proceedings.
Important facts for investors to verify
- Whether First Defense capacity expansions were completed on schedule, and whether production sustainably reduces the backlog without sacrificing gross margin.
- The FDA’s response to the anticipated Re-Tain resubmission, the product’s eventual approval and launch timing, and the availability of contract and in-house manufacturing supply.
- Whether rising supply, labor, and production costs affect gross margins, and whether management’s anticipated margin improvement is achieved.
- Whether cash generation, capital spending, and debt service remain consistent with management’s stated liquidity outlook and future covenant requirements.
- Changes in sales and receivables concentration among the two major distributors, and any evidence of customer losses or shifting order patterns.