ImmuCell Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results. ImmuCell develops and sells animal-health products, principally First Defense for preventing scours in newborn calves, and is developing Re-Tain, a treatment for subclinical mastitis.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Product sales | $4.11 million | $4.91 million |
| Gross margin | $1.60 million; 39% of sales | $2.24 million; 46% of sales |
| Operating loss | $375,000 | Operating income of $197,000 |
| Net loss | $441,000; $0.06 per share | $122,000; $0.02 per share |
| Cash from operating activities | Use of $624,000 | Source of $857,000 |
- Sales declined 16%; domestic sales fell 18% and international sales fell 5%. First Defense represented 98% of sales.
- Operating expenses were $1.98 million, down from $2.04 million. Product development expense rose 6% to $1.03 million; sales and marketing and administrative expenses declined.
- Cash and cash equivalents were $6.81 million at quarter-end, versus $6.95 million at December 31, 2020. Short-term investments fell from $996,000 to zero. Net working capital was $9.71 million.
- Total debt obligations, net of current portion and issuance costs as presented on the balance sheet, were approximately $9.31 million; $768,000 was current. Bank facilities generally carry fixed interest rates of 3.50%. The $1.0 million line of credit was undrawn. Operating lease liabilities totaled $1.21 million.
- Capital expenditures were $349,000. Cash used in operations reflected increased accounts receivable and inventory-related cash use, as well as the higher net loss.
Changes, outlook and material developments
- Gross margin fell by $634,000 year over year. Management cited lower sales, higher component and service costs, production-yield variability, and costs incurred ahead of expanded capacity. It said approximately $287,000 of identified first-quarter costs and yield decreases contributed to the lower margin; management’s longer-term objective is gross margin near 50% before related depreciation and amortization.
- Orders not fulfilled because of limited inventory formed an estimated $3.1 million backlog at March 31, 2021, up from $1.8 million at December 31, 2020. Management cautioned that customers can cancel orders and that unmet demand may not translate into future sales.
- The company expected its First Defense capacity expansion, intended to raise estimated annual sales-dollar capacity from approximately $16.5 million to $23 million, to come online in Q2 2021. Management expected to work through backlog, meet demand and build inventory, and projected 2021 sales above 2020; it said the timing and scale of recovery were difficult to estimate. These are forward-looking statements, not guaranteed results.
- Management stated that cash, anticipated product margins and proceeds from an April 2021 equity offering were expected to fund operations and urgent working-capital and capital needs for at least 12 months from filing. The April 14 offering raised approximately $4.25 million gross through issuance of 515,156 shares.
- The company did not expect to meet its 1.35 minimum debt-service coverage covenant for 2021 based on its projections. After the subsequent equity raise, the bank agreed to waive the annual requirement for 2021. Future covenant compliance or further waivers are not assured.
- Re-Tain remained subject to FDA review. The company submitted the second-phase Chemistry, Manufacturing and Controls materials in Q1 2021 and anticipated an FDA response in Q3 2021. Management described possible approval timing as ranging from Q4 2021 in an optimistic scenario to no earlier than Q2 2022 assuming two FDA reviews. It also planned an in-house formulation and aseptic-filling facility, expected to be operational in 2022, with regulatory approval anticipated in late 2022 or Q2 2023.
- COVID-19-related supply shortages, price increases, transportation and labor constraints, production delays, and volatility in dairy and beef markets remained risks. Sales were highly concentrated: two customers accounted for 78% of Q1 sales, and those customers represented 79% of receivables at March 31.
- Q1 2020 included unusual refinancing-related costs, including a $165,000 interest-rate-swap termination fee and a $95,000 debt-issuance-cost write-off. Their absence, along with lower interest expense, reduced other expenses in Q1 2021. The Q1 2021 period included a $10,000 gain on disposal of fixed assets.
Important facts for investors to verify
- Whether expanded production capacity came online as planned, backlog was fulfilled, and customer cancellations or customer losses affected subsequent sales.
- Whether gross margin and production yields improved as management anticipated, particularly amid higher input costs and product-mix changes.
- FDA review progress and approval timing for Re-Tain, and the timing, cost and regulatory approval of the company’s in-house filling facility.
- The terms and continuing effect of the 2021 debt-covenant waiver, future covenant compliance, and cash available after planned capital spending and debt service.
- Customer and supplier concentration, COVID-19-related supply constraints, and the company’s ability to fund its growth plans without further dilutive financing.