ImmuCell Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited quarterly results. ImmuCell develops, manufactures and sells animal-health products for the dairy and beef industries; its lead product is First Defense, a calf-scours preventive. Mast Out, a treatment for subclinical mastitis, remained in development and was not approved for sale.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Product sales | $9.544 million | $10.229 million |
| Gross margin | $5.421 million; 57% of sales | $6.251 million; 61% of sales |
| Operating income | $890,000 | $2.122 million |
| Income before taxes | $758,000 | $2.064 million |
| Net income | $508,000 | $1.213 million |
| Diluted earnings per share | $0.12 | $0.38 |
| Cash from operating activities | $(324,000) | $2.900 million |
| Capital expenditures | $3.586 million | $2.719 million |
- At year-end, cash and investments totaled $10.624 million, net working capital was $12.289 million, total assets were $24.697 million and stockholders’ equity was $19.722 million.
- Bank debt was approximately $3.012 million, including current and long-term debt. A separate $500,000 line of credit was undrawn at year-end. Existing debt facilities are secured by substantially all company assets and subject to financial covenants; the company reported compliance at December 31, 2016.
- Operating cash flow declined to negative $324,000, principally amid inventory growth and other working-capital uses. Inventory rose to $2.127 million from $870,000.
Changes versus the prior comparable period
- Annual sales decreased 7% (about $685,000); domestic sales fell 4% and international sales fell 23%. First Defense sales, approximately 93% of product sales, also declined 7%.
- Management attributed the sales decline in part to a competing product returning to the market and weaker dairy and beef industry conditions. Earlier production constraints and order backlogs eased after capacity investments; the company reported no backlog at year-end.
- Gross margin fell by $830,000 and the gross-margin rate declined four percentage points. Sales and marketing expenses rose 14% to $1.831 million, administrative expenses rose 13% to $1.455 million, while product development spending was nearly flat at $1.244 million. Interest expense increased to $162,000 from $84,000.
- Fourth-quarter sales were $2.214 million versus $2.694 million in Q4 2015; net income was $30,000 versus $289,000.
- Two 2016 common-stock transactions raised net proceeds of approximately $8.5 million. Shares outstanding increased about 59% year over year to 4.847 million at December 31, 2016.
Outlook, significant developments and risks
- Mast Out investment and timetable: The company estimated a total cost of approximately $20 million for its commercial-scale Nisin production facility, including $3.28 million incurred in 2016 and $16.72 million estimated to complete. It expected most remaining spending during the nine months ending September 30, 2017. Construction was described as on schedule and within budget, with completion targeted for Q3 2017 and equipment installation and qualification for Q1 2018. Management anticipated potential FDA approval in 2019; timing and approval are uncertain.
- As of March 20, 2017, the company had not drawn on the new facilities, which had been amended in Q1 2017 to provide up to approximately $6.5 million. Management expected to begin drawing in Q2 2017 and stated that cash, investments, operating cash flow and available borrowing were expected to support operations for at least 12 months. Funding the plant depends on those resources and successful project execution.
- For Mast Out, the FDA had completed the Environmental Impact, Target Animal Safety and Effectiveness technical sections. Human Food Safety completion was anticipated in the second half of 2017, subject to transfer of the residue-testing method. The Chemistry, Manufacturing and Controls section remained the critical path and had not yet been submitted. Management’s U.S. sales estimates—approximately $5.8 million in the first year and $36.1 million by the fifth year after launch—are projections based on stated assumptions, not guaranteed results.
- Management’s stated gross-margin objective was to remain above 55%; the 2016 rate was 57%. Its 2017 budgetary objective was to spend up to 18% of product sales on sales and marketing. The company also targeted a First Defense Tri-Shield launch with expanded rotavirus claims in the second half of 2017, subject to remaining USDA licensing work.
- The topical wipes product line was discontinued in Q1 2017 because of limited growth potential and minimal profit contribution. Minnesota gel-product manufacturing was consolidated into Portland; the company expected lower labor and overhead costs. The FDA closed its 2016 inspection after the company responded to five observations.
- Material risks include reliance on First Defense for 93% of sales; customer concentration, with two distributors accounting for 60% of sales and 64% of year-end receivables; FDA/USDA approval and manufacturing-scale-up risks; plant cost, schedule and financing risks; competition from larger animal-health companies; and volatility in dairy and beef markets. Mast Out also carries market-acceptance and potential cultured-dairy-product interference risks. The company noted a $100,000 termination fee under a contractor agreement if Mast Out is not commercialized by the end of 2019.
- The company reported no material pending legal proceedings. RSM US LLP issued an unqualified opinion on the 2016 financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control.
Important facts for investors to verify
- Whether construction, equipment qualification, validation batches and FDA review for the Nisin facility and Mast Out remain on schedule and within budget, and how remaining costs are financed.
- Whether First Defense sales, production capacity, inventory and gross margin recover or remain pressured by competition and customer demand.
- Actual utilization, terms and covenant headroom of the amended debt facilities, including the effect of variable-rate borrowing and future debt service.
- Progress on the Human Food Safety and CMC submissions for Mast Out, and USDA approval and launch timing for First Defense Tri-Shield.
- Whether distributor concentration, international sales weakness, and the dairy and beef market environment materially affect revenue, collections or liquidity.