ImmuCell Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The unaudited company develops and sells animal-health products for the dairy and beef industries, including First Defense, and is developing Mast Out. Filed November 13, 2013.
Financial results and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Product sales | $1.235 million; up 15% year over year | $4.448 million; up 12% |
| Gross margin | $616,000; 49.9% of sales, versus 58% in 2012 | $2.453 million; 55%, versus 58% |
| Operating income (loss) | $(160,000), versus $(86,000) | $190,000, versus $233,000 |
| Net income (loss) | $57,000, or $0.02 per diluted share; versus a $64,000 loss, or $(0.02) per share | $268,000, or $0.09 per diluted share; versus $106,000, or $0.03 per share |
| Cash from operations | Not reported for the quarter | $1.015 million, versus $181,000 |
For the nine months, operating expenses were $2.263 million, including $829,000 of product development, $726,000 of sales and marketing, and $708,000 of administrative expense. Q3 gross margin was pressured by reduced production while critical process equipment was repaired or replaced.
At September 30, cash and cash equivalents were $2.935 million and short-term investments were $2.738 million, totaling $5.673 million, up $760,000 from year-end 2012. Working capital was $7.177 million. Total assets were $11.066 million; stockholders’ equity was $9.511 million. Bank debt totaled $1.133 million, down from approximately $1.268 million at year-end. The company reported covenant compliance; a covenant requiring at least $1 million in unrestricted cash was removed during Q3. The $500,000 line of credit was available and extended through May 31, 2014.
Changes versus the prior comparable period
- Nine-month sales growth was led by domestic sales, up approximately 16%; international sales declined approximately 5%. First Defense sales rose 14% for the nine-month period. Sales of Wipe Out Dairy Wipes declined 11%, but aggregate sales of all wipes increased 16%, including new Preva pet wipes sales.
- Nine-month net income increased to $268,000 from $106,000. Management attributed improved year-to-date performance largely to higher First Defense gross margin, while the Q3 and nine-month results also included a $250,000 Mast Out option fee recognized as revenue.
- Nine-month operating cash flow increased to $1.015 million from $181,000. Capital expenditures were $120,000 versus $250,000; debt principal repayments were $135,000.
- Product development expense rose 21% year to date. The company also wrote off approximately $48,000 of capitalized Mast Out development costs after a prospective partner declined to license the product.
Outlook, commentary, and risks
Management expects approximately $1.5 million of spending on equipment and facility modifications to produce Nisin active pharmaceutical ingredient for Mast Out. It expects to expense most of this investment over Q4 2013 and the first half of 2014, and anticipates a Q4 net loss that could result in a full-year 2013 loss. Management expects breakeven or profitability after the investment is completed, currently anticipated in the first half of 2014. It said existing cash, ongoing product gross margin, and debt financing should fund operations for at least 12 months.
The plan is to produce validation batches and submit the Mast Out Chemistry, Manufacturing and Controls section to the FDA in the second half of 2014. The FDA’s laboratory method transfer for the Human Food Safety section is delayed until the first half of 2014; management now expects that section’s completion letter in early 2015. The company said test marketing could be possible by the end of 2015, subject to regulatory progress and approval. FDA approval is not assured.
- A prospective licensee withdrew after due diligence; ImmuCell suspended active partner pursuit for the time being and chose to continue Mast Out development independently. The prospective partner had judged commercialization not cost-effective in its view.
- Results depend substantially on First Defense: two distributors accounted for 53% of nine-month sales and 51% of trade receivables at September 30. Animal Health International represented 38% of nine-month sales; MWI Veterinary Supply represented 15%. MWI’s acquisition of IVESCO closed November 1, 2013; the filing provides adjusted concentration estimates if the acquisition had applied during the reported periods.
- Management cited seasonal and market sensitivity, raw-material costs and biological yields, product mix, dairy and beef industry economics, competition, and regulatory and manufacturing risks. It also noted uncertainty around Mast Out’s market size, production costs, financing for larger-scale manufacturing, and potential effects on cultured dairy products.
- The Q1 2013 FDA facility inspection was described as very favorable, with a few minor observations addressed. The company remained subject to cGMP and regulatory compliance risks. No legal proceedings were reported; disclosure controls were assessed as effective, with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether First Defense growth continues and whether gross margin recovers from Q3’s 49.9%, given production interruptions, product mix, yields, and input costs.
- Actual timing, total cost, and funding of the $1.5 million Nisin API investment, and whether it supports the planned 2014 CMC submission.
- FDA progress on the Human Food Safety and CMC sections, and any changes to the projected Mast Out approval and test-marketing timeline.
- Whether Mast Out can be commercialized profitably without a partner, including scale-up costs, market acceptance, and the implications of zero milk-discard claims.
- Exposure to major distributors and the impact of MWI’s acquisition of IVESCO on customer concentration and receivables.
- Whether cash, investments, operating cash flow, debt repayment requirements, and bank covenant terms remain consistent with management’s stated funding outlook.