Biomerica, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 29, 2016, compared with the periods ended February 28, 2015. The filing is for fiscal 2016’s third quarter, despite the request metadata labeling it “2015 Q3.” Financial statements are unaudited.
Business context and results
Biomerica develops, manufactures, and markets diagnostic test products sold to clinical laboratories and point-of-care markets worldwide. Its consolidated statements include German and Mexican subsidiaries; the Mexican subsidiary had not begun operations.
- Revenue: Third-quarter sales were $1.362 million, up 4.8% year over year. Nine-month sales were $3.814 million, up 10.0%, reflecting growth in Asia partly offset by lower European sales.
- Profitability: Third-quarter gross profit fell to $345,000 from $459,000; gross margin declined to 25.3% from 35.3%. Management attributed the margin decline to product mix and higher-than-usual regulatory costs. Nine-month gross profit was $1.178 million versus $1.076 million, with gross margin essentially flat at 30.9% versus 31.0%.
- Operating costs and earnings: Third-quarter operating expenses were $614,000, and operating loss was $269,000 versus $136,000 a year earlier. Net loss was $135,000 versus $117,000. For nine months, operating loss improved to $555,000 from $610,000; net loss narrowed to $274,000 from $574,000. The nine-month comparison includes a $254,000 income tax benefit, versus $17,000 in the prior period.
- Cash flow: Nine-month operating cash use was $195,000, improved from $319,000. Investing used $71,000, mainly for property and equipment; financing provided $38,000 from option exercises. Cash decreased $229,000 to $859,000.
- Liquidity and balance sheet: Working capital was $3.494 million, down from $3.868 million at May 31, 2015. Current assets were $3.981 million and current liabilities $487,000. Total liabilities were $487,000; the filing reports no outstanding debt. The former $250,000 line of credit had expired.
- Other metrics: Inventory was $2.100 million, versus $2.027 million at May 31, 2015. Deferred tax assets rose to $998,000 from $744,000. Common shares outstanding were 7,659,339 at February 29, 2016.
Material changes, outlook, and risks
- Management reported higher sales in the quarter, mainly from domestic sales and new Middle East accounts; nine-month growth was driven primarily by Asia. Europe sales declined.
- SG&A increased 4.5% for the quarter and 3.3% for nine months, primarily from outside services and stock-option expense. R&D increased modestly, related to new products, regulatory approvals, and patent preparation.
- The company was developing a gastroenterology product and had filed patent applications. U.S. regulatory approval was under consideration; management warned that pursuing it could involve substantial costs. No financial guidance was provided.
- In July 2015, the board approved an investment-banker agreement to seek up to $3.0 million through restricted common-stock sales; the filing does not report proceeds from this proposed financing.
- The Irvine facility lease was extended through August 31, 2021, with rent of $21,000 per month beginning September 2016 and scheduled annual increases.
- Risks include margin and product-mix volatility, dependence on distributors and concentrated customer receivables, international and manufacturing exposure, raw-material and shipping constraints, competition, regulatory costs or delays, and the need to raise capital. Management identified no off-balance-sheet arrangements or legal proceedings and assessed disclosure controls as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the proposed equity financing was completed, on what terms, and with what dilution.
- Cash runway and funding needs, given continuing operating cash use and the expired credit line.
- Whether third-quarter margin pressure persists and whether the reported sales growth is sustainable by geography and distributor.
- Potential costs, regulatory path, and commercial prospects for the gastroenterology product.
- The basis and sustainability of the $254,000 nine-month income tax benefit and the increase in deferred tax assets.