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, 2009.
Business Overview: Biomerica is a smaller reporting company engaged in the development and sale of medical diagnostic tests. The company operates internationally with significant sales in Europe and Asia.

Key Financial Metrics

Debt & Liquidity:

• Line of Credit: Established a $400,000 line of credit with Union Bank of California on February 13, 2009. Outstanding balance: $2,175 (fees charged to line).
• Equipment Loans: Total outstanding equipment loans (short and long-term) approx. $131,613.
• Shareholder Loan: Fully repaid during the period ($95,936).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.2% for the nine-month period and 10.7% for the quarter, driven primarily by increased sales to foreign distributors.
• Profitability Decline: Net income for the nine months dropped significantly to $314,540 from $1,012,588 in the prior year. This decrease is largely attributed to the absence of a non-recurring gain of approximately $697,125 in the prior year from the sale of a marketable security.
• Cost Structure: Cost of sales as a percentage of sales increased to 58.2% for the nine months (from 56.1%) due to higher wages and royalties. However, for the quarter, cost of sales decreased to 50.9% due to the sale of higher margin products and capitalization of labor/overhead.
• Cash Flow: Operating cash flow turned negative, using $220,040 compared to providing $365,595 in the prior year. This was due to increases in accounts receivable and inventory levels.

Outlook, Risks, and Unusual Items

• Unusual Items: The prior year's net income included a one-time gain from the sale of a marketable security carried at zero value. Current period "Other Income" of $34,540 is significantly lower than the prior year's $697,125.
• Capital Resources: The company secured a $133,000 business loan (disbursed March 5, 2009) to refinance a previous fixed asset loan. A $400,000 line of credit is available but requires a zero-balance period of 30 consecutive days annually.
• Strategic Developments:
  • Incorporated subsidiaries in Mexico (Biomerica de Mexico) and Germany (Biomerica Europe GmbH) to expand operations.
  • Received CE approval for a kidney disease self-test (urinary microalbumin) on April 7, 2009.
  • Entered an asset purchase agreement for technology related to medical diagnostic tests.
• Risks:
  • Stock Incentive Plan: The 2008 Stock Incentive Plan was not approved by stockholders at the annual meeting.
  • Market Risks: Susceptibility to macroeconomic downturns, raw material availability, and regulatory delays.
  • Inventory: Inventory reserves for obsolescence are based on management forecasts; actual demand may differ.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 10.7% quarterly sales growth driven by foreign distributors.
• One-Time Gains: Confirm that the significant drop in net income is primarily due to the absence of the prior year's non-recurring security sale gain.
• Cash Burn: Monitor the negative operating cash flow ($220k used) and the company's ability to manage working capital (increased receivables and inventory).
• Debt Covenants: Review the terms of the new $400k line of credit, specifically the requirement to maintain a zero balance for 30 consecutive days.
• Equity Dilution: Note the failure of the 2008 Stock Incentive Plan and the subsequent granting of options to officers/directors in March 2009.