ImmuCell Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 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 and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Product sales | $4.91 million | $4.41 million |
| Gross profit / gross margin | $2.24 million / 45.5% | $2.20 million / 49.9% |
| Operating income | $197,000 | $265,000 |
| Net income (loss) | ($122,000) | $145,000 |
| Basic and diluted EPS | ($0.02) | $0.03 |
| Cash from operations | $857,000 | $677,000 |
| Capital expenditures | $1.25 million | $194,000 |
At March 31, cash and cash equivalents were $6.51 million, short-term investments $494,000, and restricted cash $1.40 million. The restricted funds are held in escrow under the new bank financing, reducing cash available for operations. Current assets were $10.95 million and current liabilities $1.86 million. Bank debt was approximately $8.56 million; the company also reported $1.31 million in operating lease liabilities. Its $1 million revolving credit facility had no balance outstanding.
Material changes versus the prior-year quarter
- Sales increased 11%, led by U.S. sales, which rose 15%; international sales declined 13%. First Defense represented 98% of sales, up from 94%.
- Gross profit rose slightly, but gross margin fell to 45.5% from 49.9%, reflecting product mix and production costs. Management said newer gel formats cost more to produce, while generating higher gross profit dollars per unit.
- Operating income declined and the company moved to a net loss, primarily as other expenses rose to $334,000 from $112,000. Interest expense included a $95,000 write-off of debt issuance costs and a $165,000 payment to terminate interest-rate swaps in connection with refinancing.
- The company refinanced its bank debt on March 11: $8.6 million in fixed-rate loans at 3.50%, replacing prior facilities and avoiding their pending balloon payments. It also established an unused $1 million line of credit. The loans are secured by substantially all assets and subject to financial covenants.
- Operating cash flow improved year over year, but capital spending increased substantially. Inventory declined to $1.60 million from $2.52 million, while receivables increased to $1.88 million from $1.64 million.
Outlook, commentary, and risks
- Management said existing resources and anticipated product gross margin should fund operations for at least 12 months from the filing date. It projected 2020 interest expense of approximately $321,000, excluding the refinancing-related write-off and swap termination payment; 2019 interest expense was $432,000.
- First Defense demand exceeded production: the company reported a backlog of approximately $1.4 million at quarter-end. It expected to complete a roughly $3.5 million capacity expansion by the end of Q2 2020, targeting annual production capacity of approximately $27 million, versus approximately $18 million currently. These are management estimates, not guaranteed sales or output.
- COVID-19 created uncertainty over customer demand, supply availability, labor, and production. Management warned that dairy and beef market disruption could reduce sales and gross margin. The company received $937,700 under the federal Paycheck Protection Program in April 2020; management estimated approximately $100,000 might need repayment, but forgiveness rules and eligibility were uncertain, with potential exposure up to the full amount.
- Re-Tain remained subject to FDA approval. Four of five principal technical sections had been completed; the second-phase manufacturing and product submission was targeted before year-end 2020. Management described possible approval in 2021, subject to FDA review, responses, and facility inspections. The planned in-house formulation and aseptic-filling facility was expected to be operational in 2022, with FDA approval targeted for Q4 2022.
- Key risks include dependence on First Defense and a small number of distributors, production constraints and biological yields, customer concentration, COVID-related market and operating disruption, Re-Tain approval and commercialization uncertainty, reliance on third-party suppliers and manufacturer Norbrook, capital-project cost or timing overruns, debt covenants, and the company’s full valuation allowance against deferred tax assets.
- The filing reports no material pending or threatened legal proceedings and no impairment charges. Management stated disclosure controls and internal control over financial reporting were effective as of March 31, 2020.
Important facts for investors to verify
- Whether the First Defense capacity expansion was completed on schedule and whether output can clear the reported backlog without disrupting supply.
- Subsequent sales, gross margins, inventory levels, and effects of COVID-19 on dairy and beef customers and distributors.
- PPP forgiveness eligibility and the final amount, if any, repayable.
- Progress and FDA feedback on the Re-Tain submissions, inspections, approval timing, and interim Norbrook supply arrangements.
- Debt-covenant compliance, escrow-release conditions, and funding available for the planned capital projects.
- Whether the company’s customer concentration and deferred-tax valuation allowance change materially.