ImmuCell Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016. ImmuCell develops and sells animal-health products for the dairy and beef industries. Its First Defense product line represented 92% of quarterly product sales.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Product sales | $3.544 million | $2.986 million; up 19% |
| Gross margin | $2.152 million; 61% of sales | $1.758 million; 59% of sales |
| Operating expenses | $1.234 million | $1.059 million |
| Operating income | $918,209 | $698,964 |
| Net income | $584,242 | $452,448 |
| Diluted earnings per share | $0.12 | $0.11 |
| Cash from operations | $1.252 million | Used $87,241 |
Cash and short-term investments totaled $7.230 million at quarter-end, down $3.394 million from December 31, 2016. Net working capital was $9.150 million. Capital spending was $4.933 million, principally for the Nisin production facility. Total assets were $25.334 million and stockholders’ equity was $20.368 million.
Bank debt was approximately $3.3 million at March 31, 2017; the company reported compliance with applicable covenants. The amended construction credit facilities provide up to approximately $6.5 million, with no amounts drawn as of March 31. The $500,000 line of credit was unused. The company also had $343,000 temporarily held in escrow, excluded from reported cash.
Changes and operating developments
- Quarterly sales reached a record, with international sales up 168% and domestic sales up 3% year over year. Management attributed much of the increase to international growth and improved ability to meet demand after prior capacity constraints.
- Gross margin increased to 61% from 59%; management cited sales mix and manufacturing yields as factors, while noting higher raw-material, labor, and compliance costs.
- Sales and marketing expense rose 23% to $514,475; administrative expense rose 13% to $379,633; product development expense rose 12% to $339,616. Management’s 2017 budget objective is to keep sales and marketing spending at up to 18% of sales.
- The company discontinued production and sale of its Nisin-based topical wipes in Q1, citing limited growth potential, low profitability, and use of production and storage capacity. It reported a net gain of approximately $7,000 from related asset disposals.
- Quarterly operating cash flow improved from a use of cash to positive generation, while cash and investments declined mainly amid construction spending. The company remained profitable for an eleventh consecutive quarter.
Outlook, risks, and contingencies
- The Nisin facility for Mast Out is estimated to cost approximately $20 million. About $7.315 million had been incurred by March 31, of which $6.468 million had been paid; approximately $11.245 million of the remaining expected spend was committed. Most remaining spending was expected by September 30, 2017. Management expected to fund costs exceeding cash and investments with available debt facilities.
- Management said construction was on schedule and within budget, with completion planned for Q4 2017 and equipment installation and qualification by Q1 2018. It anticipated U.S. regulatory approval in 2019, subject to successful manufacturing validation, FDA reviews and inspections, and completion of remaining submissions. The Human Food Safety section was anticipated to be completed in Q1 2018; Chemistry, Manufacturing and Controls remained on the critical path.
- Management believes cash, investments, operating gross margin, and available borrowing are adequate for working capital and planned capital spending for at least the next twelve months, but warned that funding would not leave a large cash surplus. Cost overruns, delays, borrowing availability, regulatory outcomes, and Mast Out’s eventual market acceptance could affect liquidity and results.
- Other key risks include reliance on First Defense and a small number of distributors, volatile dairy and beef economics, competition, product and regulatory risks, and dependence on suppliers and contract manufacturers. Two distributors accounted for 66% of Q1 sales; Patterson and AmerisourceBergen represented 40% and 26%, respectively.
- Commitments include a potential $100,000 termination fee under a Mast Out supplier agreement if the product is not commercialized by the end of 2019. The company also disclosed a Baylor license milestone payment of $150,000 upon approval and royalties tied to sales. It reported no known product-liability claims and no material pending or threatened legal proceedings.
- The filing reported no material changes in market risk exposure, effective disclosure controls, and no material change in internal control over financial reporting during the quarter. No dividends or share repurchases are anticipated for the foreseeable future.
Important facts for investors to verify
- Actual Nisin facility cost, remaining commitments, construction and equipment qualification milestones, and expected borrowing needs.
- Progress and timing of the Mast Out regulatory sections, validation batches, FDA inspections, and the stated 2019 approval outlook.
- Whether First Defense sales growth and international demand persist, given customer concentration and dependence on that product line.
- Facility funding and liquidity after construction spending, including actual credit-facility availability, covenant compliance, and release of escrowed funds.
- Whether gross margins remain above management’s stated objective of 55% as input, labor, and compliance costs change.