ImmuCell Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. ImmuCell develops and sells animal-health products for the dairy and beef industries, principally First Defense products, and is developing a Nisin-based treatment for subclinical mastitis.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Product sales | $1.750 million | $2.376 million | $5.294 million | $5.362 million |
| Gross margin | $921,000; 53% of sales | $1.240 million; 52% | $3.073 million; 58% | $2.997 million; 56% |
| Operating income (loss) | $(265,000) | $21,000 | $653,000 | $720,000 |
| Net income (loss) | $(218,000); $(0.05) per diluted share | $(9,000); approximately $(0.00) per diluted share | $366,000; $0.07 per diluted share | $443,000; $0.11 per diluted share |
| Net cash from operations | Not presented by quarter | $1.096 million | $166,000 |
At June 30, cash, cash equivalents and short-term investments totaled $4.337 million, down from $10.624 million at December 31, 2016. Net working capital was $3.786 million. Total assets were $28.062 million, including $19.710 million of net property, plant and equipment. Total liabilities were $7.866 million and stockholders’ equity was $20.196 million.
Bank debt was approximately $4.2 million, including a fully drawn $500,000 line of credit; the filing reports $3.723 million of debt excluding that line. The company had up to approximately $6.0 million of additional borrowing capacity under its facilities, subject to restrictions and covenants. Management reported compliance with applicable covenants at quarter-end.
Operating cash flow improved year over year, while investing cash outflow was $3.609 million, including $8.617 million of property and equipment purchases partly offset by investment maturities. The company reported $13.148 million incurred on its Nisin facility project through June 30, of which $10.129 million had been paid. Estimated total project cost was approximately $20.163 million.
Changes versus comparable periods
- Q2 product sales fell 26% year over year; management attributed the decline partly to strong Q1 2017 sales and distributor stocking patterns, and partly to unusually high Q2 2016 shipments as a prior backlog was cleared. Six-month sales declined 1%.
- Q2 gross margin dollars declined 26% with lower sales, while gross margin percentage edged up to 53% from 52%. For the first half, gross margin dollars increased 3% and the percentage rose to 58% from 56%.
- Q2 operating results moved from $21,000 of income to a $265,000 loss; first-half operating income declined by $68,000. First-half operating expenses increased $143,000, exceeding the $76,000 increase in gross margin.
- First-half operating cash flow rose to $1.096 million from $166,000, while capital investment increased substantially, primarily reflecting construction of the Nisin production facility.
Outlook, commentary and risks
- Management expected positive product-sales growth for both the six- and twelve-month periods ending December 31, 2017 compared with the corresponding prior-year periods. It also stated that cash and investments, product-sale cash generation, available debt and the subsequent equity financing were expected to fund working capital, capital expenditures and operations for at least twelve months.
- The Nisin facility was estimated to cost approximately $20.2 million, with most remaining expenditures expected after June 30, 2017. Equipment installation began in Q3 2017; management anticipated installation and qualification by year-end, CMC submissions to the FDA beginning in 2018, and a potential U.S. launch in the second half of 2019. Approval and timing are uncertain.
- Management anticipated a First Defense Tri-Shield launch around year-end 2017, subject to completing regulatory and manufacturing requirements. It planned to add a regional sales manager using proceeds from a subsequent stock issuance.
- Key risks include dependence on First Defense, which represented 95% of Q2 sales and 93% of first-half sales; customer concentration, with Patterson and AmerisourceBergen accounting for 61% of Q2 sales and 65% of first-half sales; exposure to volatile dairy and beef economics; competition; regulatory approval and manufacturing execution; and facility cost overruns or delays. Much of the company’s debt bears variable interest rates.
- The company discontinued its Nisin-based topical wipes in Q1 2017, citing limited growth potential, low profitability and use of production and storage capacity; it recorded a net gain of approximately $7,000 in connection with the discontinuation.
- After quarter-end, on July 27, 2017, the company issued 200,000 shares at $5.25 per share, raising approximately $1.026 million net. The filing also reports a July extension of its Plas-Pak syringe supply agreement through January 1, 2024.
Investor verification priorities
- Track quarterly sales, distributor inventory and order patterns, especially given the sharp Q2 year-over-year decline and high distributor concentration.
- Verify Nisin facility spending against the $20.2 million estimate, remaining commitments, borrowing availability and covenant compliance.
- Monitor equipment installation, qualification, FDA CMC and human-food-safety review milestones, and the assumptions underlying the proposed 2019 launch.
- Confirm progress toward First Defense Tri-Shield regulatory approval and launch, and whether the sales-team expansion supports growth without materially increasing operating losses.
- Assess liquidity and dilution after the July equity issuance, alongside variable-rate debt exposure and the company’s reliance on First Defense sales.