ImmuCell Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. ImmuCell develops, manufactures and sells animal-health products for dairy and beef cattle. First Defense, for newborn-calf immunity, is its principal product; Mast Out, a treatment for subclinical mastitis, remains in development and requires FDA approval.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Product sales | $2.986 million | $3.101 million | Down 4% |
| Gross margin | $1.758 million; 59% of sales | $1.851 million; 60% | Down $93,000 |
| Operating income | $699,000 | $820,000 | Down 15% |
| Income before taxes | $676,000 | $815,000 | Down 17% |
| Net income | $452,000 | $479,000 | Down 6% |
| Diluted earnings per share | $0.11 | $0.15 | Lower; weighted-average diluted shares rose to 3.944 million from 3.144 million |
| Operating cash flow | $(87,000) | $1.402 million | Decline largely reflected the $702,000 increase in receivables |
Gross margin was approximately 58.8% versus 59.7%; operating margin was approximately 23.4% versus 26.4%. Management attributed the lower diluted EPS principally to increased shares outstanding following the February equity offering.
Financial position, liquidity and financing
- At March 31, cash and cash equivalents were $4.561 million; short- and long-term investments totaled $6.439 million. Combined cash and investments were approximately $11.000 million, up 69% from year-end 2015.
- Current assets were $13.248 million and current liabilities $890,000, giving working capital of approximately $12.358 million. Total assets were $20.382 million and stockholders’ equity $16.323 million.
- Bank debt was approximately $3.117 million net of debt issuance costs. The company had an unused $500,000 line of credit and entered into additional construction-loan facilities totaling approximately $4.5 million; none was drawn at quarter-end. Existing debt is secured by substantially all assets, and the company reported compliance with applicable covenants.
- Financing cash flow included $5.900 million of gross public-offering proceeds, or approximately $5.313 million net after offering costs. The company issued 1,123,810 shares at $5.25 per share.
- Investing cash outflow was $2.168 million, including purchases of investments, $311,000 of property and equipment, and $368,000 paid toward acquired business assets.
Material changes and management commentary
- Q1 sales fell 4% year over year, despite domestic sales increasing 5%; international sales declined 47%. The prior-year quarter was the company’s then-highest first-quarter sales level. First Defense represented 92% of Q1 2016 product sales, and sales of that line decreased 8% year over year.
- Management cited a March 31 order backlog of approximately $1.660 million, up from $1.284 million a year earlier, and said recent demand exceeded production capacity. Capacity investments increased liquid-processing capacity by 50% and freeze-drying capacity by 100%; management expects the expansion to help fulfill backlog and demand.
- In January, the company acquired DAY 1 Technology assets for approximately $534,000, including inventory, equipment and intellectual property related to a gel delivery format and private-label products. Approximately $368,000 was paid at closing; remaining consideration is contingent on technology transfer and includes royalties. The acquired products represented 4% of Q1 sales.
- The company is preparing a commercial-scale pharmaceutical-grade Nisin facility for Mast Out, with an estimated total cost of $17.5 million. Management said remaining costs are expected to be funded through financing, existing cash and operating cash generated during 2016–2018. It hoped to complete the building shell by year-end 2016; if construction and equipment are completed by year-end 2017, it could submit the commercial-scale CMC section to FDA in 2018 and potentially achieve FDA approval in 2019. These are contingent expectations, not assured outcomes.
- The Mast Out human-food-safety section was expected to be completed around mid-2017 following regulatory demands and review delays. Other technical sections had received FDA completion letters, but the CMC section and final administrative submission remained outstanding.
- Management expected the First Defense sales-growth and profitability trends to continue. Its stated full-year gross-margin objective was above 50%; its 2016 budget objective was to spend up to 18% of product sales on sales and marketing. The filing does not provide numerical revenue or earnings guidance.
Risks, contingencies and other notable items
- First Defense sales are highly concentrated: two distributors accounted for 58% of Q1 sales and 55% of trade receivables at March 31. First Defense dependence, customer concentration, seasonal demand, dairy and beef market conditions, and production constraints could affect results.
- Mast Out commercialization depends on FDA approval, successful construction and financing of the facility, manufacturing scale-up, and market acceptance. Cost overruns, delays, or regulatory outcomes could materially affect the plan. The company also noted potential cheese-culture interference from milk of treated cows, although it cited a risk assessment concluding the risk is negligible when used according to labeling.
- Other disclosed risks include competition from larger animal-health companies, supply and raw-material availability, product liability, intellectual-property protection, and the possibility of losing customers if backlog delays persist. No legal proceedings or material recorded indemnification liabilities were reported.
- Management said the operating-cash-flow decline was principally due to quarter-end shipment timing and receivables, with no anticipated collection concerns. Receivables increased by $702,000 during the quarter.
Important facts for investors to verify
- Whether the company converts its $1.660 million backlog into sales and resolves capacity constraints without losing customers.
- Actual spending, funding availability, construction milestones and potential cost overruns for the estimated $17.5 million Mast Out facility.
- Progress and timing of FDA review, particularly the human-food-safety and CMC sections, and whether the indicated 2019 approval scenario remains feasible.
- Receivable collections and operating cash flow after the quarter-end shipment timing effects.
- Sales trends, gross margins and distributor concentration, including the effects of lower international sales and the equity offering’s dilution.