ImmuCell Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; fourth-quarter comparisons are against the quarter ended December 31, 2017. ImmuCell develops and sells animal-health products for dairy and beef cattle. Its business is heavily reliant on First Defense, a calf-scours prevention product line; Re-Tain, a mastitis treatment, remained in development and was not yet approved for sale.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Product sales | $10.99 million | $10.43 million |
| Gross margin | $5.19 million; 47% of sales | $5.22 million; 50% of sales |
| Operating loss | $1.45 million | $243,000 |
| Net loss | $2.32 million; $0.42 per share | $168,000; $0.03 per share |
| Cash from operating activities | $(373,000) | $1.18 million |
- Fourth-quarter sales were $2.94 million, down 6% year over year. Gross margin was $1.40 million, or 48% of sales, compared with $1.21 million and 39% in Q4 2017. The quarterly operating loss was $926,000 and net loss was $1.05 million, versus a $413,000 operating loss and $195,000 net loss in Q4 2017.
- FY 2018 sales increased 5%. Domestic sales rose 11% to $9.56 million, while international sales fell 21% to $1.43 million. First Defense accounted for 97% of annual product sales.
- Product development expenses rose 72% to $3.52 million, largely for Re-Tain. Higher development expense, increased cost of goods sold and greater depreciation contributed to the larger operating loss. A $700,000 gain from selling water-diagnostic assets partly offset operating costs.
- At year-end, cash was $2.52 million, down $1.28 million; working capital was $3.86 million. Total assets were $32.73 million and stockholders’ equity was $21.74 million. Capital expenditures were $2.03 million, following $17.76 million in 2017, when the Nisin facility build-out was largely completed.
- Debt included approximately $9.4 million outstanding under five bank facilities and $500,000 drawn on a line of credit. The bank covenant required at least $2 million of otherwise unrestricted cash, cash equivalents and short-term investments; the company reported covenant compliance at year-end. Approximately $7.08 million of debt was at variable rates without interest-rate swaps.
Material changes, outlook and key risks
- The company recorded a full valuation allowance against net deferred tax assets in 2018, citing sustained losses and expected further losses. The allowance was non-cash; income-tax expense for the year was $462,000.
- First Defense sales grew 9% for the year, but production constraints limited shipments of new Tri-Shield and contributed to customer disruption and lost sales. Management expected increased Tri-Shield supply in 2019, projecting about $795,000 of sales in Q1 and production capacity valued at $1–$1.5 million per quarter by Q3. These are forward-looking estimates, not guarantees.
- Re-Tain had FDA completion letters for four of five principal technical sections; the Chemistry, Manufacturing and Controls section remained outstanding. The company stated that its original December 2019 approval target would not be met and identified the Drug Product submission and a successful facility inspection as critical steps. The filing discussed possible approval in the first half of 2020, but delays remained possible.
- Norbrook, the contracted provider for final formulation and aseptic filling, may have a right to terminate its agreement in December 2019 if approval has not been received, potentially triggering a $100,000 fee. Negotiations to extend or amend the agreement had not been resolved. Alternative third-party manufacturing could push commercial sales to at least 2021; an in-house solution, preliminarily estimated at about $4 million, could delay sales until at least 2022 and constrain future production capacity.
- Management stated it had sufficient capital for at least 12 months from the filing date. It also described goals of growing annual product sales to about $20 million and, after Re-Tain’s launch, exceeding $30 million within five years. These objectives depend on product acceptance, regulatory approval, manufacturing capacity and financing.
- Other material risks include dependence on First Defense and two distributors, weaker dairy economics and lower milk prices, variable-rate debt and covenant restrictions, biological-yield and product-quality variability, and potential need for additional capital. Management reported that a material weakness in tax-provision controls identified earlier in 2018 had been remediated by year-end; management concluded internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- Progress and timing of FDA review of Re-Tain’s remaining manufacturing submissions, facility inspection and final approval.
- Whether ImmuCell secures continued Norbrook services or qualifies an alternative, and the resulting launch timing, costs and production capacity.
- Whether First Defense and Tri-Shield production meets demand, with sustainable yields, quality and gross margins.
- Cash runway after operating cash outflow, planned investments and debt service; compliance with the $2 million minimum-cash covenant and exposure to variable interest rates.
- Customer and distributor concentration, the impact of continued weakness in dairy markets, and collection of the remaining $450,000 due from the asset sale.