Biomerica, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2014; the filing compares results with the fiscal year ended May 31, 2013. It does not provide a clear standalone fourth-quarter financial result.
Business context
Biomerica develops, manufactures, and markets diagnostic test kits for clinical laboratories and point-of-care settings, including tests related to diabetes, gastrointestinal conditions, and food intolerances. Sales are international, with Europe and Asia representing the largest reported markets. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $5.120 million | $6.473 million |
| Gross profit | $1.669 million | $2.428 million |
| Gross margin | 32.6% | 37.5% |
| Operating income (loss) | $(446,594) | $514,008 |
| Net income (loss) | $(215,660) | $536,957 |
| Cash from (used in) operations | $(862,273) | $1.394 million |
| Cash and cash equivalents at year-end | $1.509 million | $2.470 million |
| Working capital at year-end | $4.357 million | $4.693 million |
Cost of sales fell to $3.451 million from $4.045 million, but rose as a share of revenue to 67.4% from 62.5%; management attributed the higher unit cost partly to lower sales spreading fixed labor and overhead across fewer units. SG&A was $1.526 million, up from $1.455 million, and R&D was $590,000, up from $459,000. The company recorded a $211,000 income tax benefit in FY2014, including deferred tax effects; it released its remaining valuation allowance based on management’s expectation that deferred tax assets would be realized.
Operating cash flow turned negative, with management citing the net loss, increased receivables and inventory, and payment of accrued compensation. Investing cash use was $283,000, including $146,000 for licenses and product registration fees. Financing provided $185,000. The company had no balance drawn on its $250,000 asset-secured bank line at year-end; the line carried interest at prime plus 2% and was scheduled to expire March 12, 2015.
Material changes and unusual items
- Revenue declined 20.9%, primarily following a change in the China distribution channel after termination of a distributor that represented 29.7% of FY2013 sales. The replacement distributor represented 23.4% of FY2014 sales; management said it expected sales to increase, but they had not returned to prior levels.
- Geographic sales shifted: Asia revenue fell to $1.300 million from $2.770 million, while U.S. revenue increased to $1.256 million from $822,000. Europe revenue was $2.450 million, compared with $2.840 million.
- Backlog increased to approximately $376,000 from $83,000. Two customers represented 60.5% of gross accounts receivable at year-end.
- The company sold 200,000 shares to its new China distributor/investor for $250,000 in total consideration: $150,000 in cash and $100,000 in product-registration-related intangible costs. It also received $35,275 from option exercises.
- Management reported a $8,300 credit to royalty expense in FY2014 from correction of an over-accrual.
Outlook, risks, and controls
No quantified revenue or earnings guidance is provided. Management said it was developing a gastrointestinal-market test and increased R&D spending partly to assess the feasibility of FDA clearance. The filing highlights distributor dependence, regulatory clearance and certification, foreign-market exposure, competition, product liability, raw-material availability and cost, manufacturing in Mexico, and access to future financing as risks. The company reported no pending legal proceedings at May 31, 2014, while noting that ordinary-course claims could affect future results if resolved adversely.
Management concluded that disclosure controls and internal control over financial reporting were effective as of May 31, 2014. The independent auditor opined that the financial statements fairly presented the company’s financial position and results under U.S. GAAP; the auditor did not attest to internal-control effectiveness. The company reported no off-balance-sheet arrangements.
Investor verification priorities
- Confirm whether the replacement China distributor’s sales have recovered and assess the continuing impact of customer and distributor concentration.
- Review collection of receivables and inventory needs, given the FY2014 operating cash outflow and increased balances.
- Assess whether gross margins can recover as revenue grows and whether the gastrointestinal product can reach market and obtain required clearances.
- Examine the assumptions supporting realization of deferred tax assets, including net operating loss and tax-credit carryforwards.
- Verify the status and renewal of the secured credit line, and the company’s liquidity needs and financing options.