ImmuCell Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. ImmuCell develops and sells animal-health products, primarily First Defense products for newborn cattle; it is also developing Re-Tain, a treatment for subclinical mastitis.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Product sales | $2.97 million | $2.15 million | $10.09 million | $8.05 million |
| Gross margin | $1.45 million; 49% | $0.95 million; 44% | $4.90 million; 49% | $3.80 million; 47% |
| Operating loss | $0.43 million | $0.15 million | $0.71 million | $0.52 million |
| Net loss | $0.50 million; $0.07/share | $0.25 million; $0.05/share | $0.99 million; $0.15/share | $1.27 million; $0.23/share |
- Q3 sales rose 38%; nine-month sales increased 25%. Growth was principally domestic and came mainly from First Defense, which represented 96% of nine-month sales. Management attributed much of the growth to Tri-Shield First Defense.
- Nine-month operating cash flow was positive $280,000, versus cash used of $235,000 in 2018. Capital expenditures were $700,000, down from $1.93 million as the major Re-Tain production facility investment neared completion.
- At September 30, cash and short-term investments totaled $9.55 million, including $7.20 million of short-term certificates of deposit. Net working capital was $11.40 million. A debt covenant requires at least $2 million of qualifying liquid assets.
- Bank debt was approximately $8.63 million net of debt issue costs; the $500,000 line of credit had been repaid and was undrawn. The company reported covenant compliance. Total assets were $38.85 million and stockholders’ equity was $29.19 million.
- In March 2019, the company raised $8.30 million net through a public stock offering. Shares outstanding increased approximately 29% from year-end 2018 to September 30, 2019.
Changes, outlook and material risks
- Q3 losses widened year over year despite higher sales and improved gross margin. Management cited substantial non-cash depreciation and stock-based compensation; nine-month depreciation increased to $1.69 million from $0.94 million. The company cautioned that facility depreciation may contribute to losses until sales grow sufficiently.
- Nine-month net loss improved from 2018, when a $563,000 non-cash deferred-tax valuation allowance was recorded. The 2018 comparison also included a $700,000 gain on sale of water-diagnostic assets; no comparable gain was recorded in 2019. The final $200,000 sale payment was due in Q4 2019.
- Management said available cash, investments and anticipated product gross margin should fund operations for at least 12 months from the filing date. It intends to explore refinancing a roughly $452,000 balloon payment due in Q3 2020. The line of credit was extended through May 31, 2020, subject to bank extension thereafter.
- The company plans approximately $3 million to expand First Defense production capacity, targeting a rise in annual sales-value capacity from about $18 million to $27 million; completion was expected by mid-2020. It also plans approximately $4 million for an in-house Re-Tain formulation and aseptic-filling facility, expected to be operational in 2022. These are estimates, not guarantees. A new 10-year lease beginning November 15, 2019 carries approximately $1.3 million in total lease liability over its initial term.
- Re-Tain still required FDA approval. Four of five technical sections had been completed; the FDA issued an incomplete letter on the first phased CMC submission in Q3 2019. Management expected to submit the second phased package around Q3 2020, with a response potentially around Q1 2021, while noting further FDA requests could extend the timeline. An FDA pre-approval inspection identified Form 483 deficiencies at the Drug Substance facility; management expected to address them by year-end 2019.
- Norbrook is contracted to provide Re-Tain formulation and filling for orders placed through 2021, with deliveries extending into early 2022. Production capacity, FDA review and inspections, expansion costs and timing, variable-rate debt, and reliance on third parties remain significant execution risks.
- Customer and product concentration is high: two distributors accounted for 69% of nine-month sales and 64% of receivables at September 30. First Defense accounted for 96% of nine-month sales. Management also cited competition, biological production yields, dairy-industry economics and market acceptance risks.
Important facts for investors to verify
- Progress and timing of FDA review, resolution of inspection deficiencies, and the projected Re-Tain submission and approval schedule.
- Actual cost, completion timing and production impact of the First Defense expansion and planned Re-Tain facility.
- Cash available after the $2 million covenant requirement, refinancing plans for the 2020 balloon payment, and covenant compliance.
- Whether sales growth, gross margins and production yields can be sustained, particularly given distributor and First Defense concentration.
- Collection of the remaining $200,000 asset-sale payment and the financial obligations associated with the new lease and other commitments.