ImmuCell Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The company develops and sells animal-health products, principally First Defense products for newborn cattle, and is developing Re-Tain for subclinical mastitis. The financial statements are unaudited.
Financial performance
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Product sales | $2.71 million | $3.01 million | $7.12 million | $5.90 million |
| Gross margin | $1.25 million; 46% | $1.49 million; 49% | $3.45 million; 48% | $2.85 million; 48% |
| Operating loss | $547,000 | $193,000 | $282,000 | $372,000 |
| Net loss | $627,000; $0.09 per share | $798,000; $0.15 per share | $483,000; $0.08 per share | $1.02 million; $0.19 per share |
Second-quarter sales declined 10%, while first-half sales increased 21%. Management cautioned that the second-quarter comparison is affected by a roughly $901,000 Dual-Force order backlog from first-quarter 2018 that shipped in the second quarter of 2018. First-half growth was led by domestic sales, up 23%; international sales rose 8%. First Defense represented 96% of first-half sales. Second-quarter sales were affected by a 61% decrease in international sales.
Second-quarter gross margin percentage declined to 46% from 49%; the six-month rate was essentially unchanged at 48%. Management cited the greater production cost of newer gel formats and variable biological yields. It aims for gross margin, before related depreciation and amortization, of about 50% over time. Higher depreciation from the completed Re-Tain production facility contributed to operating losses; management estimated 2019 book depreciation at about $2.3 million and expected it to contribute to a full-year net loss.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $1.30 million and short-term investments were $8.68 million, totaling $9.97 million, versus $2.52 million in cash and no short-term investments at December 31, 2018. Net working capital was $12.34 million.
- Operating cash flow for the first half was $347,000, compared with $271,000 a year earlier. Capital expenditures were $300,000, down from $1.72 million, reflecting completion of the major Re-Tain production-facility investment.
- Bank debt was approximately $8.85 million, including $848,000 current and $8.00 million long-term; no line-of-credit balance remained. Debt principal payments were $429,000 during the first half. The company must maintain at least $2 million of qualifying liquid assets under its bank covenant and reported compliance at quarter-end.
- A March 2019 stock offering generated $8.30 million net proceeds and increased outstanding shares by about 29% from year-end. Management said available capital and anticipated product-sale gross margin should fund operations for at least twelve months from the filing date.
- A roughly $452,000 balloon payment on the first mortgage is due in the third quarter of 2020; management intends to explore refinancing. Most bank debt is variable-rate, although swaps hedge portions of two loans.
Outlook, commentary and risks
- First Defense capacity: Management expected improved Tri-Shield supply in the second half of 2019 and approximately $1.5 million of Tri-Shield sales value per quarter beginning in the third quarter. A planned approximately $3 million expansion is intended to increase liquid-processing capacity by 100% and freeze-drying capacity by 50%, raising estimated annual production capacity from approximately $18 million to $27 million around mid-2020. These are estimates, not guaranteed output or sales.
- Re-Tain regulatory and manufacturing timeline: Four of five FDA technical sections were complete. The final Chemistry, Manufacturing and Controls section remained in progress; the company said the next Drug Product submission was on the critical path and anticipated FDA approval during 2021, later than its original December 2019 objective. The contract manufacturer may be entitled to terminate if approval is not obtained by December 2019, potentially triggering a $100,000 fee. The company was negotiating an extension, seeking another contractor, and planning an approximately $4 million in-house formulation and filling facility targeted to operate in 2022.
- Other investment and commitments: The board authorized approximately $7.35 million for routine capital spending and the two manufacturing projects. Management noted the project estimates were preliminary and not based on supplier bids. At June 30, commitments included $884,000 for inventory, $165,000 for capital expenditures and $227,000 for other obligations.
- Concentration and operating risks: First Defense dominates sales, and two large distributors represented 69% of first-half sales and 76% of receivables. Biological yield, production constraints, dairy-industry economics, competition, regulatory delays and dependence on specialized suppliers could affect sales, margins and liquidity. The company also reported a full valuation allowance against net deferred tax assets.
- The filing reported no material legal proceedings known to the company, no material reportable subsequent events through August 12, 2019, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether Tri-Shield production and quarterly sales progress as management projected, and whether the planned capacity expansion meets its cost and timing targets.
- FDA review progress for Re-Tain, the timing and acceptance of remaining submissions, and the status of the contract-manufacturing extension or alternatives.
- Actual project bids, cash requirements and funding available for the First Defense and Re-Tain expansions, including the effects on covenant-compliant liquidity.
- Sales and receivable exposure to major distributors, First Defense concentration, and trends in international sales and gross margin.
- Debt refinancing plans for the 2020 balloon payment, variable-rate exposure, and continued compliance with the $2 million liquidity covenant.