ImmuCell Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. ImmuCell develops and sells animal-health products, principally First Defense for preventing scours in newborn calves, and is developing Re-Tain for subclinical mastitis in dairy cows.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Product sales | $3.72 million | $2.97 million | $11.60 million | $10.09 million |
| Gross margin | $1.72 million | $1.45 million | $5.24 million | $4.90 million |
| Gross margin as % of sales | 46% | 49% | 45% | 49% |
| Operating loss | $252,000 | $430,000 | $746,000 | $711,000 |
| Net loss | $323,000 ($0.04/share) | $503,000 ($0.07/share) | $1.21 million ($0.17/share) | $985,000 ($0.15/share) |
Q3 sales rose 25% year over year; nine-month sales rose 15%. Growth was led by First Defense, which represented 98% of nine-month sales. Gross-margin dollars increased, but margin percentage declined, which management attributed to higher production costs and less favorable yields during capacity expansion, as well as the greater cost of newer gel formats. Nine-month other expenses, net, increased to $480,000 from $242,000, including refinancing-related debt-cost write-offs and swap termination costs.
For the nine months, operating cash flow was positive $1.16 million, versus $280,000 a year earlier. Capital expenditures were $3.79 million, versus $700,000. Cash, cash equivalents and short-term investments totaled $5.91 million at September 30; another $1.40 million was restricted in bank escrow, for total cash, investments and restricted cash of $7.31 million. Total debt obligations on the balance sheet were $9.72 million, including current and long-term portions. The new bank loans bear fixed interest of 3.5%; the company also had a $937,700 PPP loan and a $500,000 Maine Technology Institute loan outstanding at quarter-end. The $1.0 million bank line of credit was undrawn.
Financial position and material changes
At September 30, 2020, total assets were $39.99 million, total liabilities $11.97 million, and stockholders’ equity $28.02 million. Net working capital was $8.14 million, down 24% from December 31, 2019. Cash and short-term investments declined from $8.77 million at year-end; property, plant and equipment increased to $27.18 million as the company invested in production capacity and Re-Tain facilities. The company refinanced prior bank debt in March 2020, extending repayment schedules and replacing the prior facilities with fixed-rate loans, but the refinancing requires $1.4 million to remain in escrow subject to covenant and collateral conditions.
Outlook, commentary and risks
- Management believed available liquidity and anticipated product-sale gross margin would fund operations and planned spending for at least 12 months from the filing date. It also noted that access to the escrowed funds could affect planned investment spending. The company reported compliance with debt covenants; its debt-service coverage ratio was 1.88 for the 12 months ended September 30, against a 1.35 minimum.
- First Defense capacity expansion was expected to raise annual production capacity from approximately $16–$17 million to approximately $23 million, with benefits expected from Q2 2021. Management reported a $130,000 order backlog at September 30, down from $945,000 at June 30, but anticipated possible intermittent short-term backlogs into Q2 2021 as output and demand scale.
- Re-Tain required FDA approval before sales. Management expected to submit the second-stage Drug Substance/Drug Product materials before the end of 2020 and anticipated a possible launch in Q3 2021 if the FDA approved on the first review; further FDA review could push approval to no earlier than Q1 2022. FDA facility inspection and approval remained necessary. The company was investing approximately $4 million in its own formulation and aseptic-filling capability, targeted to become operational in 2022.
- The filing reports that, after quarter-end, the bank notified the company that the $937,700 PPP loan had been fully forgiven. The forgiveness was expected to be recognized as other income in Q4 2020; it was not included in September 30 results.
- COVID-19, milk-price volatility, potential supply or labor interruptions, biological variability in yields, regulatory timing, and dependence on third-party suppliers were identified as risks. Sales are concentrated: two distributors accounted for 71% of Q3 sales and 70% of nine-month sales. Management also highlighted dependence on First Defense, which accounted for 98% of nine-month sales, and competition from larger companies.
Key investor verification points
- Confirm the timing and outcome of the remaining FDA review and inspections for Re-Tain, and progress toward commercialization.
- Track First Defense capacity expansion, realized production yields, backlog, and whether gross-margin percentage improves as output grows.
- Verify PPP forgiveness recognition and the status of the $1.4 million escrow, debt covenants, and scheduled debt service.
- Monitor customer and product concentration, distributor receivables, and the effects of COVID-19 and dairy/beef market conditions on demand.
- Assess whether remaining capital commitments for First Defense expansion and Re-Tain manufacturing can be funded without materially constraining liquidity.