Biomerica, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Fiscal quarter and six months ended November 30, 2016. Biomerica develops, manufactures, and markets medical diagnostic products for clinical laboratories and point-of-care markets. Interim financial statements are unaudited.
Financial performance
| Metric | Three months ended Nov. 30, 2016 | Prior-year quarter | Six months ended Nov. 30, 2016 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1.432 million | $1.165 million | $2.842 million | $2.452 million |
| Gross profit / margin | $557,000 / 38.9% | $412,000 / 35.4% | $1.134 million / 39.9% | $833,000 / 34.0% |
| Operating expenses | $776,000 | $622,000 | $1.419 million | $1.119 million |
| Operating loss | ($220,000) | ($210,000) | ($285,000) | ($286,000) |
| Net loss | ($203,000) | ($67,000) | ($259,000) | ($139,000) |
| Basic and diluted loss per share | ($0.02) | ($0.01) | ($0.03) | ($0.02) |
For the six-month period, operating cash outflow was $308,000, compared with $425,000 in the prior year. Investing used $26,000; option exercises provided $57,000. Cash declined $278,000 from May 31 to $1.611 million. At November 30, working capital was $4.206 million, with current assets of $4.772 million and current liabilities of $567,000. Total liabilities shown were current liabilities; the filing reports no debt balance.
Total assets were $5.585 million and shareholders’ equity was $5.019 million. No revenue or operating-profit guidance was provided.
Changes and management commentary
- Revenue increased 22.9% for the quarter and 15.9% for six months, primarily from higher Asian sales; management said this was partly offset by lower sales in Europe and the United States.
- Cost of sales fell as a share of revenue, which management attributed mainly to relatively constant wages against higher sales volume.
- Six-month selling, general and administrative expenses rose 22.2%, attributed to Nasdaq uplisting fees, higher commissions, wages, outside services, and a larger doubtful-account allowance. Research and development expense rose 35.3% as the company worked on new products, regulatory approvals, patent applications, and existing products.
- Management expects significant spending on gastroenterology product development, patents, and U.S. regulatory approvals to continue. In December 2016, the company entered a clinical-trial agreement with a major U.S. university for a gastrointestinal product.
Liquidity, risks, and notable items
- One customer represented approximately 45% of six-month sales and owed approximately $709,000 at November 30; approximately $298,000 was paid in December. Customer and distributor concentration, and collection of large receivables, are stated risks.
- The company’s Board authorized pursuit of an S-3 shelf registration; management said it did not intend to sell securities immediately if the registration became effective. The filing identifies difficulty raising capital as a risk.
- After quarter-end, options to purchase 157,625 shares were exercised for approximately $68,500. During the six months, 130,875 options were exercised for approximately $57,000.
- The prior-year six-month net loss included a $129,000 income tax benefit; there was no income tax benefit in the current period. This contributes to the year-over-year increase in reported net loss despite a nearly unchanged six-month operating loss.
- Risks include regulatory approval delays or changes, raw-material supply interruptions, competition and margin pressure, product acceptance, key-personnel retention, macroeconomic conditions, and potential product claims or recalls. The filing reports no legal proceedings and no off-balance-sheet arrangements.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the large customer’s balance was collected in full and whether the company remains highly dependent on that customer or a small number of distributors.
- Whether revenue growth, particularly in Asia, is sustained and translates into improved operating results and cash generation.
- Progress, cost, and timing of the gastrointestinal clinical trial, patent work, and regulatory approvals.
- Cash runway and financing needs given continued operating losses, planned development spending, and the potential S-3 registration.
- Changes in receivable quality, inventory reserves, and gross margins as sales and product mix evolve.