ImmuCell Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. ImmuCell develops and sells animal-health products for dairy and beef industries. Its established product First Defense generated most sales; Mast Out, a proposed mastitis treatment, remained in development and subject to FDA approval.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Product sales | $1.247 million, up 16% from $1.078 million | $2.803 million, up 17% from $2.389 million |
| Gross margin | $695,000; 56% of sales, versus 57% | $1.563 million; 56% of sales, versus 57% |
| Operating loss | $433,000, versus $48,000 | $450,000, versus $122,000 |
| Net loss | $258,000, or $0.09 per share, versus $6,000, or approximately $0.00 per share | $281,000, or $0.09 per share, versus $60,000, or $0.02 per share |
Product-development expense rose 102% to $673,000 in Q2 and 55% to $1.145 million for the half, principally reflecting Mast Out manufacturing-process development and First Defense rotavirus studies. Sales and marketing expense increased 114% to $232,000 in Q2 and 57% to $436,000 for the half, as the company expanded commercial investment. Administrative expense declined 1% for Q2 and 7% for the half.
For the six months, operating cash flow was positive $26,000, versus a $275,000 outflow in 2010. Investing activities used $1.110 million, including $1.692 million of short-term investment purchases; financing provided $576,000, including $600,000 of new debt. Cash and equivalents fell $508,000 to $891,000, while short-term investments increased to $4.184 million. Combined cash, equivalents and short-term investments were $5.075 million, up $449,000 from year-end.
Financial position and liquidity
At June 30, total assets were $11.289 million and stockholders’ equity was $9.045 million. Bank debt totaled $1.524 million ($169,000 current and $1.356 million long-term), secured by substantially all assets. The company reported $6.527 million of working capital and said it had sufficient resources for working capital and operations for at least 12 months. A debt covenant requires at least $1 million of otherwise unrestricted cash, equivalents and short-term investments; the company reported compliance with all applicable covenants at quarter-end.
Management said approximately $6 million of additional partner funding would be needed for planned Mast Out development, manufacturing scale-up and preparations for full-scale batches. Commercial-batch production and launch would require further significant capital. The company had approximately $159,000 remaining under its existing capital-expenditure authorization.
Business developments, outlook and risks
- Core animal-health sales, excluding bulk diagnostic reagents, increased 32% in Q2 and 24% for the first half. First Defense sales increased 37% in Q2 and 28% for the half. Management attributed growth in part to added marketing efforts and collaboration with AgriLabs. International sales declined 29% in Q2 but increased 10% for the half. A bulk-reagent sale that benefited Q2 2010 did not recur in Q2 2011 and was expected in Q4 2011.
- Gross margin remained above the company’s approximately 50% annual objective, but management cited variable biological yields, higher raw-material costs and product mix as sources of fluctuation. The company planned to keep 2011 product-selling expenses below 20% of sales.
- For Mast Out, FDA accepted pivotal residue data and assigned zero milk-discard and zero meat-withhold periods, subject to completion of analytical-method work. The Effectiveness submission received an incomplete letter requesting additional information and clarification; no additional clinical studies were required. The company expected a revised submission in Q3 2011. Target Animal Safety and initial Chemistry, Manufacturing and Controls submissions were also expected in Q3 2011, with FDA responses anticipated in Q1 2012.
- Management was seeking a strategic partner to fund remaining Mast Out development and commercialization. Discussions were underway, but success and timing were uncertain. Subject to acceptable partner funding and timely FDA reviews, management said sales could potentially begin by the end of 2012. FDA approval was not assured, and the timing of launch depended on regulatory outcomes and funding.
- Management expected higher product-development expense in 2011 overall, but said limiting internally funded Mast Out spending could support a return to positive operating income in the second half of 2011. It did not provide a precise profitability forecast. Results remain exposed to product-development costs, dairy-sector economics and competition, regulatory delays, reliance on First Defense, and concentration among a small number of distributors. Two distributors accounted for 53% of first-half sales and 50% of receivables at June 30.
- A commitment of approximately $614,000 to Lonza for Mast Out manufacturing data was about 95% complete at June 30; the balance was expected upon completion in Q3 2011. The filing also disclosed a related-party distributor controlled by a director; affiliated companies purchased approximately $139,000 of products in the first half.
Important facts for investors to verify
- Whether ImmuCell secures acceptable partner funding for Mast Out and how much of the projected development and launch costs the company must fund itself.
- Progress and FDA responses for the outstanding Mast Out technical sections, including the revised Effectiveness and initial CMC submissions.
- Whether First Defense sales growth continues and gross margin holds near management’s approximately 50% objective amid input-cost and product-mix changes.
- Cash, short-term investments, debt-covenant compliance and funding needs as development spending and contractual commitments evolve.
- Distributor concentration and exposure to dairy and beef industry conditions, including feed costs and demand for calf-health products.