BMRA

Business Context and Reporting Period

Company: Biomerica, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine and three months ended February 28, 2010
Business Overview: Biomerica manufactures and sells clinical laboratory products. The company is classified as a smaller reporting company and trades on the OTC-Bulletin Board.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Nine-month sales decreased slightly by 0.3% ($10,448) compared to the prior year, driven by lower foreign sales in the first half. However, the most recent quarter saw a 4.1% increase in sales due to rising foreign demand for clinical laboratory products.
• Cost of Sales: Cost of sales as a percentage of revenue increased significantly. For the nine months, it rose from 58.2% to 69.9%. This was attributed to higher rent (including overlapping costs from a facility move), inventory scrap/reserves, increased wages, and reduced inventory levels affecting overhead application.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased by 5.3% for the nine months and 15.8% for the quarter, primarily due to reduced personnel and health insurance costs, partially offset by moving expenses. Research and development (R&D) expenses increased 32.2% for the nine months due to new product development costs.
• Profitability: The company reported a net loss of $164,147 for the nine-month period, compared to a net income of $314,540 in the prior year. The most recent quarter returned to profitability with net income of $133,625.
• Cash Flow: Net cash used in operating activities was $232,872 for the nine months, an increase from $220,040 in the prior year. Investing activities consumed $210,178, largely due to $295,619 in purchases of property and equipment for the new location.

Outlook, Risks, and Unusual Items

• Capital Resources: The company maintains a $400,000 line of credit with Union Bank at 4.25% interest, renewed in February 2010. Management believes current cash and working capital are sufficient for operations.
• Subsequent Events: On March 8, 2010, Biomerica entered into a two-year manufacturing agreement with Ivax Diagnostics Corp. to market and sell certain products in specified countries.
• Stock Incentive Plan: The 2009 Stock Incentive Plan was voted on at the December 2009 annual meeting but was not approved by a plurality of votes.
• Risk Factors: Key risks include macroeconomic downturns, dependence on international distributors, raw material availability, regulatory compliance costs, and competition from larger entities. The company notes that quarterly results may vary significantly.
• Unusual Items: The financial results were impacted by a facility move, which caused overlapping rent expenses and reduced work-in-process inventory levels, negatively affecting gross margins.

Investor Verification Checklist

• Margin Compression: Verify the sustainability of the 69.9% cost of sales ratio and the impact of the facility move on future overhead allocation.
• Inventory Valuation: Review the $87,000 reserve for obsolete inventory and management's assumptions regarding future demand for existing stock.
• Foreign Sales Concentration: Assess the reliance on foreign markets (Europe and Asia accounted for the majority of sales) and potential currency or geopolitical risks.
• Capital Expenditures: Confirm the return on the $295,619 invested in property and equipment for the new location.
• Stock Plan Status: Monitor the status of the 2009 Stock Incentive Plan, which failed shareholder approval, and its impact on employee retention and compensation.