ImmuCell Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. ImmuCell develops and sells animal-health products for the dairy and beef industries. Its leading product line is First Defense, used to help prevent scours in newborn calves; Mast Out, a treatment for mastitis, remained in development.
Financial results and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Product sales | $3.101 million | $2.082 million |
| Gross margin | $1.851 million; 60% of sales | $1.150 million; 55% of sales |
| Operating income | $820,000 | $13,000 |
| Income before taxes | $815,000 | $1,000 |
| Net income (loss) | $479,000 | $(13,000) |
| Diluted earnings (loss) per share | $0.15 | $(0.00) |
| Cash provided by operating activities | $1.402 million | $305,000 |
Sales rose 49% year over year, led by First Defense and related products, whose sales increased 62% and represented 96% of total product sales. Domestic sales grew 57%; international sales grew 19%. Gross margin improved with higher sales and product mix. Sales and marketing expense rose 36% to $389,000; product development expense fell 44% to $331,000; administrative expense increased 21% to $311,000. The effective tax rate was 41% in Q1 2015; the filing attributes the much higher 2014 rate to very low pretax income.
At March 31, 2015, cash and cash equivalents were $2.470 million, short-term investments were $1.740 million, and long-term investments were nil, for total cash and investments of $4.210 million. Working capital was approximately $5.031 million. Total assets were $11.230 million and stockholders’ equity was $9.743 million. Bank debt totaled approximately $847,000, including $115,000 current; the $500,000 revolving credit line was unused. The company reported compliance with its debt covenants. Operating cash flow included cash inflows from lower receivables and inventory. Investing cash flow included $988,000 of property and equipment purchases; cash increased $1.620 million during the quarter.
Changes, outlook, and material developments
- Product sales and profitability rebounded strongly compared with Q1 2014. Management called Q1 2015 its most profitable quarter since Q1 2003.
- Sales demand exceeded production capacity, leaving an approximately $1.284 million order backlog at quarter-end. Inventory declined to $579,000 from $946,000 at year-end 2014.
- Management expected Q2 2015 sales to be approximately 15%–20% below Q2 2014 as inventory was rebuilt, while expecting positive year-to-date sales growth for 2015. The filing says capacity expansion may not be fully completed until Q1 2016. A separate board authorization allowed up to approximately $1.575 million for equipment and other capital expenditures, largely to increase First Defense processing and freeze-drying capacity.
- For Mast Out, management described FDA approval and test marketing in 2017 as possible, but timing is uncertain. Human Food Safety review was then anticipated around mid-2016; the company aimed to submit the Chemistry, Manufacturing and Controls section in Q4 2015. Concerns about contract manufacturer Norbrook’s readiness could require alternative arrangements, additional facility work, and at least a one-year delay. A commercial-scale Drug Substance facility was estimated at approximately $13 million, which the company said it could not fund without some combination of debt, equity, or a partner.
- The company reported positive results from a pivotal study of a First Defense extension targeting rotavirus and had submitted results to USDA; management said licensure and launch could be possible in 2016. In April 2015, it also entered an exclusive option agreement for University of Massachusetts Amherst bacteriocin technology.
- Two distributors represented 69% of Q1 sales; Animal Health International represented 42% and MWI Veterinary Supply 26%. MWI had been acquired by AmerisourceBergen, and Patterson announced in May 2015 its intent to acquire Animal Health International.
- Other risks include reliance on First Defense, seasonality and volatile dairy economics, competition, raw-material and manufacturing constraints, regulatory approval uncertainty, and dependence on key employees. The company disclosed approximately $834,000 of commitments, principally for inventory production and other obligations. No legal proceedings were reported.
Investor facts to verify
- Whether production increases reduce the backlog and support the stated sales outlook, given the forecast Q2 decline and low inventory.
- Whether growth and improved gross margin persist, and how much results depend on First Defense and two distributors.
- Progress, cost, funding, and revised timing for Mast Out’s FDA reviews and manufacturing plan, including resolution of Norbrook concerns.
- Whether the rotavirus product receives USDA approval and meets the anticipated 2016 launch timing.
- Cash and investment levels, capital spending, debt repayments, covenant compliance, and the company’s ability to finance planned expansion and development.