Biomerica, Inc. — Form 10-Q Summary
Business context and period. Biomerica develops, manufactures, and sells diagnostic products for clinical laboratories and point-of-care settings. This unaudited report covers the three months ended August 31, 2013, the first quarter of fiscal 2014, compared with the same quarter of fiscal 2013.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $1,013,739 | $1,701,949 |
| Gross profit / margin | $260,291 / 25.7% | $732,261 / 43.0% |
| Operating expenses | $434,059 | $420,110 |
| Operating income (loss) | $(173,768) | $312,151 |
| Net income (loss) | $(167,714) | $291,640 |
| Operating cash flow | $(376,271) | $330,405 |
- Sales fell approximately 40.4%. Gross margin contracted as cost of sales rose to 74.3% of revenue from 57.0%, primarily because lower production and sales left fixed costs spread over fewer units.
- At August 31, cash and cash equivalents were $2.09 million, down from $2.47 million at May 31. Working capital was $4.57 million, versus $4.79 million. Total assets were $6.21 million and shareholders’ equity was $5.67 million.
- Cash used in operations reflected the net loss and a $213,509 increase in inventory. Investing activities used $8,731; financing activities provided $760. Cash ended the quarter at $2.09 million.
- Current liabilities totaled $536,504. The company reported no balance on its $400,000 secured line of credit at quarter-end; the filing does not report other outstanding debt.
- Basic and diluted loss per share was $0.02. The company recorded no income tax provision for the quarter.
Material changes versus the comparable period
- Management attributed the sales decline mainly to restructuring the China distribution channel, which it said was negatively affecting near-term sales. Asia revenue fell to approximately $136,000 from $902,000; Europe revenue increased to $604,000 from $508,000.
- Lower sales and fixed production costs drove the sharp decline in gross profit and the shift from operating and net income to losses.
- Selling, general and administrative expense increased 3.2% to $342,802. Research and development expense increased to $91,257, principally for gastroenterology product development and improvements.
Outlook, risks, and other notable items
- Management expects the China distribution strategy to yield higher sales and margins in the future, but provided no quantified forecast or timing. Management stated that the company expected to generate profits in fiscal 2014; interim results are not necessarily indicative of full-year results.
- Risks cited include demand and operating-result fluctuations, distributor and customer concentration, margin pressure and competition, raw-material availability, regulatory requirements and approvals, international and macroeconomic conditions, shipping disruptions, product claims or recalls, and the ability to raise needed capital.
- The company received approximately $4,700 in dividends from an investment in a European distributor. Its approximately 6% investment in a Polish distributor remained carried at cost, with no impairment identified.
- The filing reports no legal proceedings, off-balance-sheet arrangements, or defaults upon senior securities. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
- The company had removed its deferred-tax-asset valuation allowance in May 2013 based on its assessment that realization was more likely than not. Deferred tax assets totaled $229,000 at August 31.
Important facts for investors to verify
- How quickly the China distribution restructuring may restore sales, and whether expected future margin improvement is supported by subsequent results.
- Whether inventory growth and weaker operating cash flow are temporary; inventory increased to $1.79 million from $1.57 million during the quarter.
- The line-of-credit maturity is inconsistent within the filing: Note 5 says February 24, 2014, while MD&A says February 24, 2013. Confirm the current facility terms and status.
- Research and development expense is stated as $91,257 versus $87,980 in the financial statements, but MD&A gives the prior-year figure as $87,890. Confirm the correct comparative amount.
- Shares outstanding were 7,276,714 at August 31 and 7,279,214 as of October 15; verify subsequent share issuance and potential dilution from outstanding options.