Biomerica, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2014 (fiscal 2014 third quarter). The filing was signed April 14, 2014. Biomerica develops, manufactures, and sells medical diagnostic products worldwide.
Financial results
| Metric | Three months ended Feb. 28, 2014 | Prior-year quarter | Nine months ended Feb. 28, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1.493 million | $1.417 million | $3.441 million | $5.002 million |
| Gross profit | $579 thousand | $445 thousand | $1.094 million | $1.947 million |
| Gross margin | 38.8% | 31.4% | 31.8% | 38.9% |
| Operating income (loss) | $33 thousand | $(63) thousand | $(389) thousand | $496 thousand |
| Net income (loss) | $27 thousand | $(36) thousand | $(385) thousand | $493 thousand |
| Basic and diluted EPS | $0.00 | $(0.01) | $(0.05) | $0.07 |
- Cash flow: Nine-month operating cash outflow was $853 thousand, versus $1.496 million provided in the prior-year period. Investing cash outflow was $117 thousand, primarily equipment purchases. Financing provided $167 thousand, including stock-option proceeds and stock-sale proceeds.
- Liquidity: Cash was $1.666 million at February 28, 2014, down from $2.470 million at May 31, 2013. Working capital was $4.517 million, compared with $4.693 million. Current liabilities were $543 thousand.
- Debt and credit: No line-of-credit balance was outstanding at February 28, 2014. In March 2014, the company renewed a secured $250 thousand credit line bearing interest at 2% plus the specified prime rate. The filing reports no other material borrowings.
- Balance sheet: Total assets were $6.271 million and shareholders’ equity was $5.728 million. Inventory increased to $1.938 million from $1.571 million; accounts receivable increased to $1.172 million from $872 thousand.
Changes and management commentary
- Quarterly sales rose 5.4% year over year, which management attributed principally to increased U.S. sales. China sales were below the prior-year quarter but improved against the first and second quarters of fiscal 2014.
- Nine-month sales fell 31.2%, mainly because of lower Asia sales following a restructuring of the China distribution channel. Management anticipated that sales volume through that channel would increase, while warning that the restructuring was negatively affecting near-term sales.
- Quarterly gross margin improved to 38.8% from 31.4%, attributed to product mix, lower wages, and less scrap. Nine-month margin declined to 31.8% from 38.9%, primarily due to lower sales volume.
- Nine-month operating expenses increased modestly: selling, general and administrative expense rose 1.7%, and research and development expense rose 4.0%. The filing cites higher trade-show and commission costs for SG&A and outside services for R&D.
- The company completed a 400,000-share restricted-stock sale at $1.25 per share under an agreement, for total proceeds of $500 thousand. The remaining 200,000 shares were sold in January 2014; the filing’s cash-flow statement reports $150 thousand of cash proceeds for the nine-month period and separately discloses $100 thousand of regulatory approval fees paid in exchange for an amount due under the stock-purchase agreement.
Risks, contingencies, and other items
- Customer concentration is notable: one customer represented 32.1% of gross accounts receivable at February 28, 2014; one foreign customer accounted for 43.4% of quarterly sales and 15.3% of nine-month sales.
- Risks cited include distributor dependence, international-market conditions, competition and margin pressure, raw-material availability, regulatory approvals and compliance, product claims or recalls, shipment disruptions, and fluctuations in quarterly results. Management identifies raising needed capital and sustained product demand among forward-looking uncertainties.
- The company reported no legal proceedings and no off-balance-sheet arrangements. It stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
- Subsequent events included exercise of options for 30,000 shares in March 2014 and a March 18 grant of options for 126,000 shares at $0.71 per share.
- No specific revenue or earnings guidance was provided. Management’s outlook was limited to its expectation of increasing sales volume through the restructured China distribution channel; interim results were stated not necessarily to indicate full-year results.
Important facts for investors to verify
- Whether China’s distribution-channel restructuring leads to the anticipated recovery, and the resulting effect on Asia sales and overall margins.
- Customer and distributor concentration, especially the large receivable exposure and major foreign customer’s contribution to sales.
- Cash consumption and working-capital trends, including the continued build in inventory and receivables.
- The terms, availability, and practical liquidity value of the renewed secured credit line, and whether additional capital may be needed.
- The stock-sale proceeds and the accounting and cash-flow treatment of the regulatory approval fees associated with the purchase agreement.