ImmuCell Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. ImmuCell develops and sells animal-health products for dairy and beef cattle. Its principal product line is First Defense; Re-Tain, a mastitis treatment, remained in development.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Product sales | $4.41 million | $2.88 million; up 53% |
| Gross margin | $2.20 million; 50% of sales | $1.36 million; 47% of sales |
| Operating income (loss) | $265,000 | ($178,000) |
| Net income (loss) | $145,000; $0.03 per diluted share | ($221,000); ($0.04) per diluted share |
| Operating cash flow | $677,000 | $250,000 |
| Capital expenditures paid | $194,000 | $1.21 million |
Sales growth reflected strength in First Defense, which accounted for 94% of product sales. First Defense sales rose 49%; U.S. sales increased 46% and international sales 75%. Gross margin improved, though management says newer gel formats cost more to produce and currently earn lower margins. Product development expense rose 56% to $910,000, largely reflecting work on Re-Tain and increased depreciation.
At March 31, cash and cash equivalents were $10.58 million, versus $2.52 million at December 31, 2018. Net working capital was $12.64 million. Total liabilities were $10.23 million, including approximately $9.06 million of bank debt; the $500,000 line-of-credit balance at year-end was repaid during the quarter. The company must maintain at least $2 million of otherwise unrestricted cash under a debt covenant and reported covenant compliance. Equity increased to $30.25 million, in part due to a March public offering of 1,636,364 shares that raised $8.30 million net; shares outstanding increased approximately 29% from December 31.
Outlook, material developments and risks
- Management believes cash and anticipated gross margin from product sales will fund operations for at least 12 months from the filing date. The company reported a return to quarterly profitability after five consecutive quarterly losses, but expects depreciation—preliminarily estimated at about $2.3 million for 2019—to weigh on results and may contribute to a full-year loss.
- First Defense demand, particularly for Tri-Shield, exceeded available supply. Production improvements were expected to support a significant increase in finished product availability in the second half of 2019. Management projected Tri-Shield sales capacity of about $1.5 million per quarter by Q3 2019. A preliminary approximately $3 million expansion plan aims to increase First Defense liquid-processing capacity by 100% and freeze-drying capacity by 50%; completion was expected in the second half of 2020. Estimates were internal and not based on supplier bids.
- Re-Tain’s FDA approval timeline slipped: management did not expect approval by its original December 2019 goal and anticipated approval no earlier than the second half of 2020. Norbrook, the contracted provider for formulation, aseptic filling and packaging, may be able to terminate in December 2019 if approval has not been obtained; a $100,000 termination fee may apply. Negotiations to extend or amend the contract were unresolved. Alternative manufacturing could delay commercial sales to at least 2021 with another contractor or at least 2022 if performed in-house. Building in-house capability was preliminarily estimated at about $4 million.
- Key risks include dependence on First Defense and a small number of customers, production and biological-yield constraints, regulatory and manufacturing delays for Re-Tain, reliance on third-party suppliers, variable-rate debt, and weak dairy-industry economics. First Defense represented 94% of sales; two distributors represented 69% of quarterly sales and 71% of receivables. Management also cited low milk prices and financial pressure on customers.
- Other items: the company had $276,000 of First Defense orders at quarter-end that it said were delayed for timing, not inventory shortages, and expected to ship in the next quarter. A final $134,000 sale of the non-core Isolate product occurred in Q1. The company disclosed that $10.33 million of cash balances exceeded FDIC limits and was not invested in U.S.-government-backed securities. No material reportable subsequent events were disclosed through May 13, 2019.
Most important facts for investors to verify
- Whether Tri-Shield production improvements delivered the projected second-half 2019 supply and sales ramp, and whether the proposed capacity expansion stayed within cost and timing estimates.
- FDA review progress for Re-Tain, the status and termination terms of the Norbrook agreement, and the cost and timing of any alternative manufacturing plan.
- Whether operating cash generation can support debt service, the $2 million cash covenant and planned capital investment without further equity issuance.
- Whether customer and receivables concentration, First Defense dependence, and dairy-market conditions affected sales, collections or margins.
- Whether the full valuation allowance on deferred tax assets remains appropriate as profitability develops, and whether reported quarterly profitability translates into sustained operating cash generation.