ImmuCell Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited.
Business context
ImmuCell develops and sells animal-health products for dairy and beef cattle. Its First Defense product line, which provides immediate immunity to newborn calves, generated 96% of sales in the first half of 2018. The company is also developing a Nisin-based mastitis treatment and has invested about $21 million in a commercial-scale production facility.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Product sales | $3.015 million | $1.750 million | $5.896 million | $5.294 million |
| Gross margin | $1.487 million; 49% | $0.921 million; 53% | $2.847 million; 48% | $3.073 million; 58% |
| Operating income (loss) | ($0.193 million) | ($0.265 million) | ($0.372 million) | $0.653 million |
| Net income (loss) | ($0.798 million) | ($0.218 million) | ($1.019 million) | $0.366 million |
| Basic loss per share | ($0.15) | ($0.05) | ($0.19) | — |
Q2 sales rose 72%; first-half sales rose 11%. First-half operating results declined mainly because product development expenses increased to $1.345 million from $0.727 million and gross margin fell. Q2 net loss included a non-cash tax charge associated with a valuation allowance against deferred tax assets.
For the six months, operating cash flow was $0.271 million, versus $1.100 million a year earlier; capital-expenditure cash outflow was $1.715 million, versus $8.617 million. Cash and equivalents were $2.515 million at June 30, down from $3.799 million at year-end. Working capital was $4.453 million. The company must maintain at least $2.0 million of unrestricted cash, cash equivalents and short-term investments under its debt covenant.
Bank debt was approximately $9.24 million outstanding before unamortized debt issuance costs; about $0.426 million remained available under a facility. The $0.5 million line of credit was undrawn. The company reported compliance with its financial covenants. Six-month interest expense was $0.202 million, up from $0.083 million.
Material changes and unusual items
- First-half sales growth reflected stronger U.S. sales; international sales declined 17%. Q2 domestic and international sales both increased year over year.
- Gross margin fell year over year for the first half. Management cited lower-than-normal biological yields, higher unit costs and early production costs for Tri-Shield. About $132,000 of manufacturing labor and materials was charged to product development in Q2.
- In Q2, the company recorded a $563,252 non-cash valuation allowance against deferred tax assets after three consecutive quarters of losses and expectations of further losses. Management said it would reassess the allowance quarterly.
- Management identified a material weakness in controls over review of the income-tax provision, especially the deferred-tax-asset valuation allowance. Disclosure controls and internal control over financial reporting were reported ineffective as of June 30; remediation was not yet established.
Outlook, commentary and risks
- Management said available capital was sufficient to fund operations for at least 12 months from the filing date. It anticipated about $125,000 in remaining Nisin-facility spending after June 30, with most of the investment substantially complete.
- Tri-Shield supply remained constrained. The June 30 order backlog was about $327,000; management expected similar product availability in Q3 and production with sales value of about $650,000 in Q4 2018. It anticipated adequate supply to support a domestic relaunch in the first half of 2019, subject to production improvements.
- For the Nisin mastitis product, management expected an initial phased CMC filing in late Q3 or early Q4 2018, a further submission around mid-2019, and possible FDA approval in late 2019 or the first half of 2020. Timing depends on FDA review, commercial-scale production and other regulatory requirements; approval is not assured.
- Management estimated 2018 book depreciation of about $1.583 million and cautioned it could contribute to losses. It stated a goal of approximately 50% gross margin before related depreciation after new-product launches, not a guaranteed result.
- Key risks include biological-yield and production constraints, dependence on First Defense sales and a small number of distributors, variable-rate debt and rising interest rates, dairy-market conditions, regulatory delays, competition, and reliance on third-party suppliers. Failure to obtain Nisin approval by December 17, 2019 could trigger a $100,000 contract termination fee.
- After quarter-end, the company agreed to sell non-core diagnostic assets for $700,000: $250,000 was received upfront and $450,000 was due in two payments in the second half of 2019. The agreement also included a potential $125,000 product order for Q1 2019.
Most important facts for investors to verify
- Whether First Defense production yields recover, Tri-Shield supply improves, and backlog converts to shipped sales without further customer or margin deterioration.
- Progress and timing of the Nisin CMC submissions, FDA review, commercial-scale production and required approvals.
- Cash headroom above the $2.0 million covenant minimum, debt service requirements and compliance with all loan covenants.
- Whether the tax-control material weakness is remediated and whether the deferred-tax valuation allowance changes.
- Actual depreciation, product-development spending, gross margins and operating cash generation compared with management’s expectations.