Biomerica, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2014. Biomerica develops, manufactures, and sells diagnostic products to clinical laboratories and point-of-care markets. The interim financial statements are unaudited.
Financial results
| Metric | Three months ended Nov. 30, 2014 | Prior-year quarter | Six months ended Nov. 30, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1.134 million | $0.935 million | $2.168 million | $1.949 million |
| Gross profit / margin | $307,243 / 27.1% | $255,644 / 27.3% | $617,154 / 28.5% | $515,935 / 26.5% |
| Operating expenses | $557,108 | $503,146 | $1.091 million | $937,206 |
| Operating loss | ($249,865) | ($247,502) | ($473,976) | ($421,271) |
| Net loss | ($238,028) | ($243,357) | ($457,296) | ($411,072) |
| Net loss per share | ($0.03) | ($0.03) | ($0.06) | ($0.06) |
For the six-month period, operating cash flow was positive $183,996, versus cash used of $740,148 a year earlier. Investing activities used $20,890; financing activities provided $3,495. Cash increased by $164,923 to $1.674 million.
At November 30, 2014, working capital was $3,999,555, down from $4,357,330 at May 31, 2014. Current assets were $4.467 million and current liabilities $466,991. Total assets were $5.928 million and shareholders’ equity $5.461 million. The filing reports no drawn borrowings; a $250,000 secured bank line of credit was available but unused. No income tax provision was recorded for the six months; the company disclosed a valuation allowance of approximately $180,000.
Changes and management commentary
- Quarterly sales rose 21.3% year over year; six-month sales increased 11.3%. Management attributed the growth primarily to higher sales in Europe and the Middle East. Europe remained the largest reported sales region.
- Six-month gross margin improved to 28.5% from 26.5%, which management attributed to higher sales without a corresponding increase in fixed expenses. Quarterly gross margin edged down to 27.1% from 27.3%; management cited differences in costs capitalized into inventory.
- Research and development expense increased 65.7% for the six months, to $377,794, mainly for new-product research, regulatory approvals, and patent applications. Selling, general and administrative expense was nearly flat.
- Management reported increased dividend income from its investment in a Polish distributor. Receivables declined from $1.448 million at May 31 to $563,910, while inventory increased from $1.766 million to $1.990 million.
Outlook, risks, and other items
The filing provides no numerical revenue or earnings guidance. The company was developing a gastroenterology product and had filed patent applications; additional patent costs were expected. U.S. regulatory approval was under consideration and, if pursued, could entail substantial costs. Management cautioned that results may fluctuate and identified risks including capital needs, product demand, competition and margins, raw-material availability, regulatory requirements, international distributor relationships, foreign operations, customer and distributor concentration, and collections from large customers. The company reported no legal proceedings or off-balance-sheet arrangements. Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth, particularly in Europe and the Middle East, is sustainable and adequately diversified across customers and distributors.
- Whether increased R&D spending and the gastroenterology product lead to marketable products, and the potential cost and timing of any U.S. regulatory pathway.
- Whether inventory growth and the reduction in accounts receivable reflect normal business timing, and whether receivables and inventory reserves remain adequate.
- Future cash generation and capital requirements, including the company’s ability to use its unused secured credit line if needed.
- The eventual effect of adopting the new revenue-recognition standard; management had not yet determined the impact.