ImmuCell Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. ImmuCell develops and sells animal-health products for dairy and beef cattle, principally the First Defense product line, and is developing a Nisin-based mastitis treatment.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Product sales | $2.88 million | $3.54 million |
| Gross profit / margin | $1.36 million / 47% | $2.15 million / 61% |
| Operating income (loss) | $(178,000) | $918,000 |
| Net income (loss) | $(221,000); $(0.04) per share | $584,000; $0.12 per diluted share |
| Net cash from operating activities | $250,000 | $1.26 million |
| Capital expenditures | $1.21 million | $4.93 million |
At March 31, cash and cash equivalents were $3.06 million, working capital was approximately $4.99 million, and total assets were $33.63 million. Bank debt was approximately $9.19 million, net of debt issuance costs; no amount was drawn on the separate $500,000 line of credit. A bank covenant requires at least $2.0 million of qualifying cash, cash equivalents and short-term investments. The company reported compliance with its covenants.
Material changes and operating performance
- Sales fell 19% year over year. Domestic sales declined 7%; international sales declined 62%. First Defense represented 97% of sales, compared with 92% a year earlier.
- Management attributed lower shipments and higher unit costs mainly to production constraints and biological-yield variability, including difficulty scaling production of the new Tri-Shield product. Gross margin contracted to 47% from 61%.
- Product development expense increased 72% to $583,000, primarily as the company invested in regulatory approval and launch work for new products. Other expenses, net, rose to $92,000 from $30,000, largely reflecting higher interest expense.
- Order backlog was approximately $1.245 million at quarter-end: about $344,000 for Tri-Shield and $901,000 for other First Defense formats. Management expected to fulfill the Tri-Shield backlog over the following nine months and the other-format backlog during Q2. By May 11, the latter backlog had fallen approximately 41%, to about $536,000.
Outlook, commentary and risks
- Management said it had sufficient capital to continue operations for at least 12 months from the filing date. Cash declined by $738,000 during the quarter, with operating cash inflows offset by investment in the Nisin facility.
- The Nisin facility was estimated to cost approximately $21 million; about $20.5 million had been incurred by March 31, with roughly $550,000 expected to be paid afterward. Equipment installation and qualification were expected to finish in Q2 2018. Management anticipated initial phased CMC regulatory submission around mid-2018 and a possible product approval in late 2019 to early 2020, subject to FDA review and requests.
- Management expected Tri-Shield availability to remain constrained in Q2 and Q3, with production capacity equivalent to approximately $500,000–$750,000 of sales by or during Q4 2018. It reported early positive production-process results in Q2; these are forward-looking statements, not reported Q1 results.
- Management estimated 2018 depreciation expense at approximately $2 million and cautioned that increased non-cash depreciation could contribute to a full-year net loss. It also estimated 2018 interest expense at approximately $441,000 if remaining equipment-loan funds were drawn, using an assumed 4.5% rate.
- Principal risks include production yields and supply constraints, customer concentration (two distributors accounted for 58% of Q1 sales), reliance on First Defense, regulatory approval and commercialization risks for Nisin, variable-rate debt, and exposure to dairy and beef market conditions. A $100,000 termination fee could apply under a contract if Nisin approval is not achieved by the end of 2019.
Most important facts for investors to verify
- Whether the company cleared the First Defense backlog and achieved the planned production and yield improvements.
- Whether Tri-Shield supply, sales and customer acceptance progressed as management expected.
- Progress on Nisin facility qualification, FDA submissions and approval timing, including contract status with key manufacturing providers.
- Cash available above the $2.0 million covenant minimum, debt service and covenant compliance as capital spending and depreciation increase.
- Whether gross margin and operating cash generation recover from Q1 levels, and how distributor concentration and weaker international sales develop.