ImmuCell Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. ImmuCell develops and sells animal-health products for dairy and beef cattle. Its First Defense product line provides immediate immunity to newborn calves; the company is also developing a Nisin-based mastitis treatment and expanding manufacturing capacity.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Product sales | $2.005 million | $1.968 million | $7.298 million | $7.330 million |
| Gross margin | $936,000 (47%) | $1.205 million (61%) | $4.009 million (55%) | $4.202 million (57%) |
| Operating income (loss) | $(482,000) | $50,000 | $170,000 | $771,000 |
| Net income (loss) | $(339,000), or $(0.07) per share | $35,000, or $0.01 per share | $27,000, or $0.01 per diluted share | $478,000, or $0.11 per diluted share |
- For the nine months, operating cash flow was $845,000, versus $150,000 a year earlier. Q3 operating cash flow was negative $251,000, versus negative $16,000.
- Capital spending on property, plant and equipment was $13.079 million for the nine months. Net cash used in investing activities was $7.593 million; financing activities provided $3.903 million, including $3.024 million of debt proceeds and $1.037 million of net private-placement proceeds.
- At September 30, cash and cash equivalents were $2.305 million, with no short-term investments, compared with cash and investments totaling $10.624 million at year-end 2016. Working capital was $2.691 million, down from $12.289 million.
- Total bank debt, net of issuance costs, was approximately $5.872 million, including $145,000 current debt; the $500,000 line of credit was undrawn. The company reported compliance with applicable debt covenants. Total assets were $30.290 million and stockholders’ equity was $20.954 million.
Material changes versus the prior comparable period
- Q3 sales rose 2%, while nine-month sales declined less than 1%. Nine-month domestic sales decreased 3% and international sales increased 14%. Management attributed some quarterly international sales variation to order timing.
- Q3 gross margin fell to 47% from 61%, primarily due to lower production yields and a scheduled reduction in output. Management said process improvements were expected to support better yields in Q4. Nine-month gross margin decreased to $4.009 million from $4.202 million.
- Nine-month product-development expense rose 32% to $1.312 million, principally reflecting investment in the mastitis program and costs related to initial Tri-Shield production batches. Operating expenses increased 12% to $3.839 million.
- Property, plant and equipment, net, increased to $23.543 million from $9.846 million at year-end 2016, largely reflecting construction of the Nisin production facility. Cash and investments were used to fund this project; bank debt and equity financing also supported investment and operations.
Outlook, risks, contingencies and unusual items
- The estimated Nisin facility cost was approximately $20.803 million. About $17.106 million had been incurred by September 30, with approximately $6.234 million estimated to be paid afterward; management expected most remaining spending in Q4 2017. Equipment installation had begun, with qualification expected by year-end. Management anticipated placing the facility in service by Q2 2018, subject to completion and qualification.
- Management expected available cash, product-sale gross margin and borrowing capacity to fund operations and capital requirements for at least 12 months. It also cautioned that cash reserves were below normal and rebuilding them depended on positive cash flow during the first-quarter peak selling season. Depreciation after the Nisin facility enters service could cause operating losses until sales increase sufficiently.
- The mastitis product requires FDA approval. Management described a potential approval and launch timeline by the end of 2019, contingent on commercial-scale validation, CMC submissions, FDA review and inspections; timing and approval are uncertain. The company estimated the product’s market potential could grow from $5.8 million in year one to $36.1 million in year five, but cautioned that actual uptake could differ materially.
- On November 13, 2017, the filing date, the company announced USDA regulatory approval of First Defense Tri-Shield, a trivalent calf-scours preventative. This was a subsequent event, not a result included in the quarter’s financial statements.
- Key risks include reliance on First Defense (94% of nine-month sales), customer and receivables concentration (two distributors represented 65% of nine-month sales and 73% of receivables), variable-rate debt, project cost or schedule overruns, regulatory and commercialization uncertainty, and dependence on key suppliers and contractors. The Nisin project had $4.516 million of remaining costs committed as of September 30.
- Other commitments include a potential $100,000 termination fee if the mastitis product is not commercialized by the end of 2019, and a $150,000 milestone payment plus royalties upon specified Tri-Shield approval and sales milestones. The filing reported no material pending or threatened legal proceedings and no recorded liability for indemnification obligations.
Important facts for investors to verify
- Whether Q4 production yields and margins recovered as management expected, and whether the stated Q4 sales growth occurred.
- Actual remaining Nisin facility costs, funding availability, completion and qualification timing, and resulting cash and debt levels.
- Tri-Shield’s launch, sales contribution and any associated licensing or royalty obligations following approval.
- Progress and timing of mastitis-product validation, FDA submissions and review, and whether the end-2019 target remains achievable.
- Continuing sales and receivables concentration, customer ordering patterns, and the company’s ability to maintain positive cash flow and debt-covenant compliance.