ImmuCell Corporation — Q3 2016 Form 10-Q
Business context and reporting period. ImmuCell develops, manufactures and sells animal-health products for the dairy and beef industries. This unaudited report covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. First Defense, for preventing scours in newborn calves, remained the core product line. The company is also developing Mast Out, a Nisin-based mastitis treatment.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Product sales | $1.968 million | $2.472 million | $7.330 million | $7.534 million |
| Gross margin | $1.205 million (61%) | $1.612 million (65%) | $4.202 million (57%) | $4.593 million (61%) |
| Operating income | $50,467 | $626,850 | $770,895 | $1.661 million |
| Net income | $34,870 | $351,292 | $478,163 | $924,432 |
| Diluted earnings per share | $0.01 | $0.11 | $0.11 | $0.29 |
- Q3 sales fell about 20% year over year; nine-month sales declined about 3%. Nine-month net income fell about 48%.
- Nine-month operating cash flow was $48,142, down from $2.070 million. Inventory increased $896,189 from year-end, and prepaid expenses and other current assets rose $436,763.
- Capital expenditures were $1.795 million in the first nine months. Cash and cash equivalents were $4.408 million at September 30; short-term investments were $5.199 million. Cash and investments totaled $9.607 million, excluding about $343,000 temporarily held in escrow.
- Working capital was $11.690 million. Bank debt was approximately $3.126 million outstanding; the balance sheet reports $3.045 million net of debt issuance costs. The $500,000 line of credit was unused, and the company reported compliance with debt covenants.
- Total assets were $20.578 million and stockholders’ equity was $16.408 million at September 30. Shares outstanding increased substantially following equity financing; 4,847,390 shares were outstanding at November 8.
Material changes and notable items
- Sales declines reflected the disruption from a prolonged First Defense order backlog, distributor restocking, renewed competition and lower international shipments, which management attributed partly to allocation of scarce product. The backlog was cleared by September 30; trailing 12-month sales rose 3% to $10.025 million.
- First Defense accounted for 93% of product sales in the first nine months. Two distributors represented 59% of sales, and together held 56% of trade receivables at September 30.
- Operating expenses rose to $3.431 million for the first nine months, from $2.933 million, including higher sales and marketing, administrative and product-development spending. Interest expense also increased.
- In January, the company acquired certain DAY 1 Technology assets for approximately $532,000, including gel-delivery know-how and related products.
- In February, a public offering raised approximately $5.313 million net. After quarter-end, an October private placement raised approximately $3.164 million net; these proceeds are not included in September 30 cash and equity balances.
Outlook, management commentary and risks
- Management said it did not expect sales growth in Q4 2016, citing distributor inventory reset and comparison with a 2015 period when a competitor had limited supply. It expected the profitability trend to continue, while acknowledging that weaker sales or production shortfalls could reduce profits or cause an operating loss.
- The company began construction of a commercial-scale Nisin facility for Mast Out. Estimated total investment is approximately $20 million, with about $19.349 million still required after September 30. Management expects most spending during the nine months ending June 30, 2017, and plans construction completion in Q3 2017, equipment qualification by Q1 2018, and possible FDA approval in 2019. These are plans, not assurances.
- Funding is expected from existing cash and investments, operating cash generation, approximately $4.5 million in undrawn construction-loan facilities, and potentially additional debt for which the company had no binding commitment. Construction cost overruns, delays and financing shortfalls are risks. A roughly $5 million construction-management contract was signed; the reported capital-expenditure commitment was about $417,000.
- Mast Out requires FDA approval. Three technical sections were complete; the Human Food Safety section was expected to be completed around mid-2017, while the Chemistry, Manufacturing and Controls section remained on the critical path. FDA review, manufacturing validation and inspections could delay or prevent commercialization. Portland’s tax-increment financing package remained subject to state approval.
- The company reported that the FDA closed its Q3 2016 facility inspection after it responded to five observations. It remains exposed to regulatory compliance risk. Other material risks include reliance on First Defense, customer and supplier concentration, competition, raw-material availability, volatile dairy and beef economics, product-development uncertainty, and potential dilution from equity financings.
- At year-end, the company expected to close its rented Minnesota facility and consolidate production in Portland, eliminating four positions. Management cited potential operating efficiencies.
Important facts for investors to verify
- Whether post-backlog demand and First Defense sales recover, and whether customer ordering patterns normalize.
- Progress against Mast Out construction, total project cost, funding availability, regulatory milestones and the projected 2019 approval timeline.
- Gross-margin trends, operating cash generation, inventory levels and the company’s ability to fund planned investment without further financing.
- Customer concentration, competitive conditions and the effects of dairy and beef market prices on demand.
- Impact of the October private placement, subsequent share count and potential further dilution; also confirm status of the Portland tax incentives and FDA inspection follow-up.