ImmuCell Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 13, 2018. ImmuCell develops and sells animal-health products, principally First Defense products for newborn calves, and is developing a Nisin-based mastitis treatment.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Product sales | $2.154 million | $2.005 million | $8.049 million | $7.298 million |
| Gross margin | $951,000 (44%) | $936,000 (47%) | $3.798 million (47%) | $4.009 million (55%) |
| Operating income (loss) | $(149,000) | $(482,000) | $(521,000) | $170,000 |
| Net income (loss) | $(250,000) | $(339,000) | $(1.269 million) | $27,000 |
| Loss per share, basic and diluted | $(0.05) | $(0.07) | $(0.23) | $0.01 |
- Q3 sales rose 7%; nine-month sales rose 10%. First Defense represented 98% of Q3 sales and 97% of nine-month sales.
- Nine-month product development expense increased 72% to $2.254 million; sales and marketing expense rose 10% to $1.502 million.
- Nine-month interest expense increased to $312,000 from $137,000, reflecting higher debt and variable rates. Management estimated full-year 2018 interest expense of approximately $407,000, assuming a 4.5% rate.
- A $700,000 gain on sale of water-diagnostic assets supported operating results. The company received $250,000 at closing; additional $250,000 and $200,000 payments were due in Q3 and Q4 2019, respectively.
Cash flow, liquidity and debt
- Nine-month operating cash flow was a $235,000 use, versus $845,000 provided in 2017. Investing cash use was $1.695 million, including $1.931 million of property and equipment purchases; financing provided $525,000.
- Cash declined to $2.393 million from $3.799 million at December 31, 2017. Working capital was $4.291 million, down from $5.443 million.
- Bank debt was approximately $9.477 million net of issuance costs ($842,637 current and $8.635 million long-term). The $500,000 line of credit was undrawn. Debt is secured by substantially all assets; several facilities carry variable rates.
- A debt covenant requires at least $2 million of unrestricted cash, cash equivalents and short-term investments. The filing states the company was in compliance at September 30, 2018 and was negotiating with its bank to return to an income-statement-based covenant.
- Management believes available capital is sufficient for at least 12 months from filing. It also noted that the approximately $21 million Nisin-facility investment is substantially complete and depreciation has begun.
Material changes, outlook and risks
- Gross margin fell year to date, principally due to lower biological yields, higher per-unit costs in legacy products, and costly initial Tri-Shield production. Management aims to restore gross margin before related depreciation to approximately 50% after new-product launches.
- Production shortfalls caused backlogs. The company reported approximately $301,000 of Tri-Shield orders at quarter-end, while cautioning that this was not a meaningful measure of demand because it was limiting orders. Q3 Tri-Shield sales were approximately $252,000; management expected approximately $500,000 available for sale in Q4 2018 and anticipated adequate inventory for relaunch around mid-2019.
- For the Nisin mastitis product, four of five FDA technical sections had been completed, including Human Food Safety in Q3. Management anticipated an initial Chemistry, Manufacturing and Controls submission before year-end 2018, a further submission around mid-2019, and possible FDA approval in late 2019 or the first half of 2020, subject to review and requests. The company received a U.S. patent covering aspects of its pharmaceutical-grade Nisin manufacturing process and Canadian approval for Tri-Shield.
- Reported losses reflect elevated development costs, startup costs and noncash depreciation, as well as a full valuation allowance against deferred tax assets. The allowance reached $878,977 in Q3; management expects additional losses for some period before returning to profitability.
- Key risks include product-yield and supply constraints, regulatory delays, reliance on the First Defense line, competition, financially pressured dairy customers, variable-rate debt, and concentration in two distributors. Those distributors accounted for 65% of nine-month sales and 83% of receivables at September 30.
- The company disclosed a material weakness in tax-provision and deferred-tax-valuation-allowance review controls. Disclosure controls and internal control over financial reporting were deemed ineffective at quarter-end; remediation was underway but not yet established.
- Norbrook may terminate its Nisin drug-product manufacturing agreement if approval is not achieved by December 17, 2019; a $100,000 termination fee could apply. The company was negotiating an extension and evaluating alternatives.
Important facts for investors to verify
- Whether production yields and Tri-Shield supply improve as planned, and whether the reported backlog converts into sales.
- Progress and timing of Nisin CMC submissions, FDA review, inspections and potential approval; also the status of the Norbrook agreement.
- Cash generation, covenant headroom and compliance as operating losses, capital needs and debt service continue.
- Whether gross margins recover despite manufacturing costs, depreciation and competitive pricing pressures.
- Remediation of the material weakness and the assumptions supporting the deferred-tax valuation allowance.
- Collection of the deferred consideration from the $700,000 asset sale and continued exposure to major distributors.