ImmuCell Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; 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 | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Product sales | $2.966 million | $2.710 million | $7.876 million | $7.120 million |
| Gross margin | $1.283 million (43%) | $1.249 million (46%) | $3.519 million (45%) | $3.450 million (48%) |
| Operating loss | $(691,000) | $(547,000) | $(494,000) | $(282,000) |
| Net loss | $(766,000), or $(0.11) per share | $(627,000), or $(0.09) per share | $(888,000), or $(0.12) per share | $(483,000), or $(0.08) per share |
For the first half, operating cash flow was $1.827 million, compared with $347,000 in 2019; capital expenditures were $2.315 million versus $300,000. Cash, cash equivalents and short-term investments totaled $8.195 million at June 30, 2020, with a further $1.401 million held as restricted cash in escrow. Management reported working capital of $8.947 million.
Total debt obligations were approximately $9.858 million, including current and long-term portions. The company refinanced bank debt in March with $8.6 million of fixed-rate loans at 3.50% and a $1 million undrawn line of credit. It also had a $937,700 PPP loan and a $500,000 subordinated Maine Technology Institute loan. The bank requires $1.4 million in escrow, limiting funds available for operations.
Changes versus prior-year periods
- Sales grew 9% in Q2 and 11% in the first half. First Defense sales rose 10% and 14%, respectively, but the overall gross-margin percentage declined as production costs and product mix pressured margins.
- First-half operating and net losses widened. Product-development expense increased 19% to $2.061 million, primarily reflecting continued development investment.
- Operating cash flow improved, while capital spending rose substantially as the company expanded First Defense capacity and invested in Re-Tain manufacturing.
- First-half other expense increased to $408,000 from $177,000, including a $95,000 write-off of debt issuance costs and a $165,000 payment to terminate interest-rate swaps during the first quarter. Q2 interest expense was lower year over year; management estimated 2020 interest expense of about $322,000 excluding those refinancing items.
Outlook, commentary and risks
- Management said available liquidity and anticipated product-sale gross margin should fund operations and capital needs for at least 12 months from the filing date. No formal revenue or earnings guidance was provided.
- First Defense order backlog was approximately $945,000 at June 30, down from $1.4 million at March 31. The company plans to increase annual production capacity from approximately $18 million to $27 million; it reported the leased-facility renovations complete and expected remaining installation work to finish in Q3 and Q4 2020.
- Re-Tain still required FDA review and approval. The company expected to submit its second-phase manufacturing and product materials before the end of 2020, with a potential approval path in 2021 if review proceeds as expected. Its own formulation and aseptic-filling facility was expected to be operational in 2022 and subject to FDA approval. Timing and approval are uncertain.
- The company applied in Q3 2020 for forgiveness of the PPP loan, using eligible payroll expenses. Management believed full forgiveness was likely, but no forgiveness income had been recognized by June 30; forgiveness depends on bank and government certification. If not forgiven, the loan bears 1% interest.
- COVID-19 created uncertainty around customer demand, access to supplies and labor, and production continuity. Management noted volatile dairy-market conditions and cautioned that sales could decline more than seasonally. The filing also identifies biological production yields, capacity expansion, regulatory approvals, third-party manufacturing and supplier dependence, customer concentration, competition, and debt covenants as material risks.
- Revenue is highly concentrated: First Defense represented 98% of first-half sales, and two distributors accounted for 69% of sales in both first-half 2020 and 2019. The company reported that it had sufficient liquidity for at least 12 months, but continuing losses and planned capital investment remain relevant.
Most important facts for investors to verify
- Whether the PPP loan was forgiven, and when any forgiveness was formally certified and recognized.
- Whether First Defense capacity expansion was completed on schedule and increased output enough to meet demand and reduce backlogs.
- Re-Tain’s FDA submission, inspection and approval progress, and the timing and cost of its in-house manufacturing facility.
- Whether sales growth can translate into improved gross margins, positive operating results and sustainable operating cash flow.
- Compliance with debt-service covenants, potential release of escrowed cash, and the company’s ability to fund remaining capital commitments.
- Continued dependence on First Defense and a small number of distributors, including any changes in customer demand or receivable exposure.