ImmuCell Corporation — FY2015 Form 10-K
Business context and reporting period. This summary covers the fiscal year ended December 31, 2015. ImmuCell develops and sells animal-health products for the dairy and beef industries. Its lead product, First Defense, provides antibodies to newborn calves; Mast Out, a Nisin-based treatment for subclinical mastitis, remained in development and had not received FDA approval.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Product sales | $10.229 million | $7.597 million |
| Gross margin | $6.251 million; 61% of sales | $4.449 million; 59% of sales |
| Operating income (loss) | $2.122 million | ($206,000) |
| Net income (loss) | $1.213 million; $0.38 diluted per share | ($167,000); ($0.06) per share |
| Cash from operations | $2.900 million | $302,000 |
| Capital expenditures | $2.719 million | $1.536 million |
| Cash, cash equivalents and investments | $6.524 million | $3.835 million |
| Net working capital | $7.056 million | $4.460 million |
| Bank debt at year-end | $3.227 million | Approximately $896,000 |
| Total assets / stockholders’ equity | $14.601 million / $10.614 million | $11.052 million / $9.258 million |
Interest expense was $80,000 in 2015, versus $58,000 in 2014. The company reported no cash dividends. Its existing bank debt is secured by substantially all assets; the company reported compliance with its financial covenants at December 31, 2015. A $500,000 line of credit was unused at year-end.
Material changes and operating trends
- Sales grew 35% year over year. First Defense and related product extensions represented 92.8% of product sales, up from 91.6% in 2014.
- Domestic sales increased 33% and international sales increased 42%. International sales were approximately 16% of total sales, with most international business in Canada.
- Two distributors accounted for 62% of sales in 2015; 52% of trade receivables were due from those distributors. The largest customer represented 42% of sales.
- Product development expense fell 43% to $1.235 million, mainly because the 2014 investment in a small-scale Mast Out development facility had been substantially completed. Sales and marketing expense increased 22% to $1.607 million; administrative expense rose 11% to $1.286 million.
- Year-end order backlog was approximately $381,000, compared with none in 2014. Management said demand for First Defense exceeded production capacity and available inventory. Capacity investments increased liquid processing capacity by 50% and freeze-drying capacity by 100%; the latter was completed in the first quarter of 2016.
- Class III milk prices declined 29% in 2015, from an average $22.34 to $15.80 per hundredweight; the milk-to-feed ratio fell 16%, from 2.54 to 2.12. Management cited market volatility as a risk to customers’ finances and demand.
Outlook, funding, risks and unusual items
- Mast Out development and timing: FDA approval is required before U.S. sales. The FDA had completed environmental impact, target animal safety and effectiveness technical sections. Human Food Safety completion was anticipated around mid-2017, subject to regulatory review and transfer of the residue-testing method to a government laboratory. The Chemistry, Manufacturing and Controls section depends on commercial-scale manufacturing data. Management indicated possible commercial-scale submission in late 2017 or 2018 and identified late 2018 or 2019 as a possible approval timeframe; timing and approval are uncertain.
- Manufacturing investment and financing: The planned commercial-scale Nisin facility was estimated to cost approximately $17.5 million. In February 2016, the company raised $5.323 million net from an offering of 1,123,810 shares. It also signed a revised TD Bank commitment letter for up to $4.5 million in construction financing, subject to customary conditions and covenants. Management expected remaining project costs to be funded from existing cash and operating cash flow, but warned of possible cost overruns, delays or funding shortfalls.
- Other product development: The USDA concurred in 2015 that First Defense could receive bovine rotavirus disease claims; the company was working on remaining licensing objectives and said a 2017 launch could be possible. In January 2016, it acquired assets and know-how for a tube-delivery format and related products for approximately $534,000.
- Key risks: Dependence on First Defense and concentrated distributors; production constraints and potential lost sales; larger competitors; volatile dairy and beef economics; raw-material and contract-manufacturer dependence; and the regulatory, manufacturing, market-acceptance and financing uncertainties surrounding Mast Out. The company also noted that Mast Out’s zero milk-discard proposition could pose a risk to some cultured dairy processes, although its risk assessment found interference negligible when used according to label.
- Other notable items: The effective tax rate was 41% in 2015, including a $109,000 impact from a state tax-rate change; the company used approximately $1.7 million of net operating loss carryforwards. Auditor Baker Newman & Noyes said it would not propose for the 2016 audit; the company reported no accounting disagreements or reportable events and was seeking a successor auditor. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether First Defense capacity expansion clears the backlog and supports continued sales growth without eroding gross margin.
- Actual construction cost, schedule, financing terms and covenant impact for the planned Mast Out manufacturing facility.
- Progress and FDA review outcomes for the remaining Mast Out technical sections, including the commercial-scale manufacturing data and zero milk-discard claim.
- Whether the projected Mast Out market opportunity and adoption assumptions are achieved; those estimates are management projections, not reported results.
- Customer concentration, receivable collection and the effect of distributor consolidation or dairy-market weakness.
- Appointment of a successor auditor and its review of subsequent reporting periods.
- Post-year-end share issuance and dilution: the February 2016 offering increased shares outstanding; the filing reported 4,178,844 shares outstanding at March 17, 2016.