ImmuCell Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 30, 2021. ImmuCell develops and sells animal-health products for dairy and beef cattle. Its principal commercial product is First Defense, which helps prevent scours in newborn calves. Re-Tain, a treatment under development for subclinical mastitis in dairy cows, had not received FDA approval and generated no sales.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Product sales | $15.34 million | $13.72 million |
| Gross margin | $6.86 million; 45% of sales | $6.74 million; 49% of sales |
| Product development expenses | $4.35 million | $3.69 million |
| Net operating loss | $1.38 million | $954,000 |
| Net loss | $1.02 million; $0.14 per share | $1.30 million; $0.19 per share |
| Cash from operating activities | $1.32 million | $234,000 |
| Capital expenditures | $4.07 million | $1.39 million |
- Sales increased 12%, with First Defense accounting for 98% of 2020 product sales. Domestic and international sales rose 12% and 11%, respectively.
- Gross-margin dollars increased 2%, but the margin rate fell four percentage points. Management cited a more complex, lower-margin product mix, biological yield variability, higher labor and raw-material costs, and costs incurred ahead of added production capacity.
- At year-end, cash and cash equivalents were $6.95 million, short-term investments $1.00 million, and net working capital $9.95 million. Cash plus short-term investments totaled $7.95 million, down from $8.77 million a year earlier.
- Total assets were $40.35 million and stockholders’ equity was $28.27 million. Debt obligations were approximately $9.5 million; bank borrowings were generally fixed at 3.5%, while a $500,000 Maine Technology Institute loan is interest-free initially and begins scheduled payments in late 2022. Required principal repayments were approximately $769,000 in 2021.
- Operating cash flow improved, but was below capital spending. Management stated that cash and expected product-sale gross margin should fund operations and urgent requirements for at least 12 months from filing.
Material changes and unusual items
- Year-end orders backlogged were approximately $1.8 million, and finished-goods inventory was only $23,000. Sales were equivalent to about 93% of estimated annual First Defense capacity of $16.5 million.
- First Defense market share increased: the company estimated its share of calf-level scours-prevention products at 41%, versus 36% in 2019. Sales were increasingly weighted toward Tri-Shield, a more complex product format.
- The company refinanced debt in 2020 and released $1.4 million previously held in escrow after a mortgage prepayment. It also received $937,700 under the Paycheck Protection Program; forgiveness was recognized as other income, materially reducing the reported pretax and net loss.
- Common shares outstanding were about 7.22 million at year-end, compared with 7.21 million a year earlier. The 2019 comparison includes an equity offering; no public offering proceeds were recorded in 2020.
Outlook, commentary and risks
- Management expected First Defense capacity to increase to about $23 million in annual sales value after the expansion planned for completion in the second quarter of 2021. A further capacity increase toward $30 million was anticipated for the second half of 2022, subject to additional equipment and execution.
- Management expected 2021 sales to exceed 2020 sales if expanded capacity came online and production and sales proceeded as planned. It also projected first-quarter 2021 sales about 16% below the prior-year quarter because of short supply. Backlog orders could be cancelled, and lost customers may not return.
- Re-Tain’s final major regulatory work was the CMC submission, first submitted in phases in 2019 and 2021. Management described potential U.S. approval timing as ranging from the fourth quarter of 2021 to the second quarter of 2022, depending on FDA review and facility inspections; approval and timing were uncertain. Four of five major technical sections had been completed.
- The company planned roughly $4 million to bring Re-Tain formulation and aseptic filling in-house, with operations expected in 2022 and FDA facility approval potentially in late 2022 or the second quarter of 2023. Interim supply depended on contractor Norbrook.
- Key risks include possible failure to meet the bank’s 1.35 minimum debt-service coverage covenant in 2021 and the need to agree on a solution with the lender; concentrated sales and receivables with two distributors; production, yield and supply constraints; Re-Tain regulatory, commercialization and manufacturing risks; and COVID-19-related uncertainty affecting customers, employees and supply chains.
- Milk prices were volatile during the pandemic, although the 2020 Class III average was $18.16 per hundredweight. Dairy and beef producer economics could affect demand for the company’s products.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor gave an unqualified opinion on the financial statements and identified inventory valuation as a critical audit matter. The auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the production expansion achieved planned capacity and cleared the backlog, and how much demand or customer retention was affected by shortages.
- Progress, FDA review outcomes and inspection timing for Re-Tain, along with the costs and timing of in-house formulation and filling.
- Compliance with debt covenants, any lender waiver or amendment, and liquidity after planned capital spending and debt service.
- Whether gross-margin recovery and sales growth can offset product-development, depreciation and commercialization costs without additional financing or dilution.
- The valuation and realizability of inventory given biological yield variability, and the continuing concentration of sales and receivables among two distributors.