ImmuCell Corporation — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2016. ImmuCell develops and sells animal-health products for dairy and beef cattle. First Defense, its immediate-immunity product line, generated 92% of first-half product sales; the company is also developing Mast Out, a proposed mastitis treatment.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Product sales | $2.376 million, up 21% year over year | $5.362 million, up 6% |
| Gross margin | $1.240 million; 52% of sales, versus 58% | $2.997 million; 56% of sales, versus 59% |
| Operating income | $21,000, versus $214,000 | $720,000, versus $1.034 million |
| Net income (loss) | $(9,000), versus $94,000 | $443,000, versus $573,000 |
| Diluted earnings (loss) per share | $(0.00), versus $0.03 | $0.11, versus $0.18 |
Cash flow and liquidity: First-half operating cash flow was $166,000, down from $1.518 million. Investing activities used $3.291 million, including $691,000 for property and equipment, $368,000 for acquired business assets, and net purchases of investments. Financing provided $5.203 million, principally reflecting $5.313 million in net proceeds from a February public offering. Cash and equivalents were $3.651 million at June 30; cash, cash equivalents, and investments totaled $10.834 million. Working capital was approximately $11.933 million.
Debt and capital: Bank debt was approximately $3.160 million, of which $129,507 was current. The company had not drawn on new construction facilities totaling approximately $4.5 million or its available $500,000 line of credit. The February offering raised approximately $5.313 million net and increased shares outstanding by about 1.124 million. Stockholders’ equity was $16.307 million.
Material changes and management commentary
- Quarterly sales growth was driven chiefly by First Defense; its sales rose 24% year over year for the quarter. For the first half, domestic sales increased 11%, while international sales declined 21%, which management attributed mainly to allocating limited supply.
- Production-capacity investments helped reduce the order backlog to about $365,000 at June 30, from $1.660 million at March 31. Management said expanded liquid-processing and freeze-drying capacity began benefiting output in Q2.
- Despite higher sales, gross-margin percentage declined, reflecting production yields, raw-material and labor costs, cGMP-related costs, and product mix. Sales and marketing and product-development expenses also increased; the latter included recruiting and relocation costs.
- Other expenses rose, with first-half interest expense increasing to $78,000 from $26,000. Management reported eight consecutive quarters of positive operating income, although Q2 2016 recorded a small net loss.
Outlook, risks and contingencies
- Management said available resources were sufficient for working capital and operations for at least 12 months. Its stated objective was to keep full-year gross margin above 50% and 2016 sales and marketing expense at or below 18% of sales.
- The planned commercial-scale pharmaceutical-grade Nisin facility for Mast Out is estimated to cost $17.5 million. Management anticipated completing the building shell by year-end 2016 and expected to fund remaining costs with equity proceeds, bank borrowings, available cash, and operating cash through 2018. It disclosed a possible CMC submission in 2018 and potential FDA approval in 2019, subject to construction, review, and other requirements.
- Mast Out’s Human Food Safety technical section was anticipated to be completed around mid-2017; FDA approval is not assured. The company had received completion letters for three technical sections, but the CMC section remained on the critical path.
- Management said expanded rotavirus claims for First Defense could support a trivalent product launch in 2017, subject to completing USDA licensing requirements.
- Key risks include dependence on First Defense and a small number of distributors, supply and production constraints, volatile dairy and beef economics, competition, regulatory and product-development uncertainty, and potential cost overruns or delays in the Mast Out facility. Two distributors accounted for 59% of first-half sales and 59% of trade receivables at June 30.
- The company had committed approximately $863,000 to capital expenditures, $588,000 to inventory production, and $199,000 to other obligations. A $100,000 termination fee could apply if Mast Out is not commercialized on time under certain contractor arrangements. No material litigation or reportable subsequent events were disclosed.
Important facts for investors to verify
- Whether First Defense demand, production capacity, and gross margins support continued profitable growth; also monitor backlog and distributor concentration.
- Actual facility spending and financing needs versus the $17.5 million Mast Out estimate, including whether planned construction and regulatory timelines remain achievable.
- Progress on Mast Out FDA technical sections and First Defense’s expanded USDA claims; neither commercial outcome is assured.
- Cash generation and liquidity as capital spending rises, and compliance with bank covenants and the terms of secured debt facilities.
- The effect of the 2016 equity offering and future financing on dilution, alongside the company’s stated expectation not to pay dividends or repurchase shares in the foreseeable future.