BMRA

Business Context and Reporting Period

Company: Biomerica, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended November 30, 2008 (Fiscal Year 2009).
Business Overview: Biomerica develops and manufactures diagnostic products. The company operates globally with significant sales in Europe and Asia. It is classified as a smaller reporting company.

Key Financial Metrics

Note: Operating gain for the six months was $39,988, while the quarter ended Nov 30, 2008, showed an operating loss of $107,270.

Material Changes vs. Prior Period

• Revenue: Six-month sales decreased 2.2% to $2.31M compared to the prior year, driven by lower sales of the EZ Detect product in Q1. However, the current quarter saw a 9.1% increase in sales due to higher orders from foreign distributors.
• Cost of Sales & Margins: Cost of sales as a percentage of revenue increased significantly from 53.9% to 62.6% for the six months (and 52.7% to 70.3% for the quarter). This was caused by inventory write-offs for slow-moving goods, fixed costs relative to sales volume, and product mix changes.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased 4.3% for the six months, primarily due to reduced bad debt expense. R&D expenses decreased 9.2% for the six months but increased 18.9% in the quarter due to higher material and travel costs.
• Other Income: Other income dropped drastically from $707,754 in the prior year to $18,999 for the six months ended Nov 30, 2008. The prior year figure included a non-recurring gain from the sale of a marketable security.
• Cash Flow: Operating activities used $84,472 in cash for the six months, a reversal from the $185,130 provided by operations in the prior year. Financing activities used $88,447, largely due to the repayment of a $95,936 shareholder loan.

Outlook, Risks, and Unusual Items

• Subsequent Events: On December 2, 2008, the company signed a $25,000 custom manufacturing agreement with a large diagnostics company. On December 3, 2008, shareholders re-elected all directors but rejected the proposed 2008 Stock Incentive Plan.
• Expansion: The company incorporated entities in Mexico (June 2008) and Germany (November 2008) to facilitate future manufacturing and distribution.
• Inventory Risk: Management noted that inventory is stated at the lower of cost or market. If demand falls below forecasts, the realizable value of inventory could be substantially less than reported.
• Risk Factors: Key risks include macroeconomic downturns, dependence on international distributors, raw material availability, regulatory delays, and competition from larger entities. The company also faces potential litigation regarding product harm claims.
• Capital Resources: The company maintains a positive working capital position of approximately $3.46M and cash of $1.79M. Management does not anticipate immediate capital raising needs but notes the difficulty in predicting future taxable income for deferred tax asset realization.

Investor Verification Checklist

• Inventory Valuation: Verify the adequacy of the $40,779 reserve for obsolete inventory given the sharp decline in gross margins.
• Revenue Concentration: Confirm the stability of foreign distributor relationships, as Europe and Asia accounted for the majority of sales.
• Stock Incentive Plan: Assess the impact of the shareholder rejection of the 2008 Stock Incentive Plan on future employee retention and compensation costs.
• Deferred Tax Assets: Review the $170,000 deferred tax asset release and the company's ability to generate sufficient future taxable income to utilize these assets.
• Custom Manufacturing: Monitor the execution and payment collection of the new $25,000 custom manufacturing contract signed in December 2008.