Biomerica, Inc. — Form 10-Q Summary
Business context and period: Biomerica develops, manufactures, and markets diagnostic products, including tests focused on gastrointestinal conditions, food intolerances, diabetes, and esoteric testing. This report covers the three months ended August 31, 2017, the first quarter of fiscal 2018, and compares results with the three months ended August 31, 2016.
Financial results
| Metric | Quarter ended Aug. 31, 2017 | Quarter ended Aug. 31, 2016 |
|---|---|---|
| Net sales | $1,444,483 | $1,410,110 |
| Gross profit | $514,571 | $576,962 |
| Gross margin | 35.6% | 40.9% |
| Operating expenses | $740,599 | $642,594 |
| Operating loss | $(226,028) | $(65,632) |
| Net loss | $(207,059) | $(55,417) |
| Net loss per share, basic and diluted | $(0.02) | $(0.01) |
| Cash used in operating activities | $(124,714) | $(71,932) |
- Liquidity: Cash and cash equivalents were $1,080,988 at August 31, 2017, down from $1,225,462 at May 31, 2017. Working capital was $3,544,530, compared with $3,681,485. Current assets were $4,171,249 and current liabilities were $626,719, giving a current ratio of approximately 6.7.
- Cash flow: Investing activities used $19,974, primarily for property and equipment purchases. Financing activities provided $1,038 from an option exercise. Cash decreased by $144,474 during the quarter.
- Debt: The balance sheet reports current liabilities but no borrowings or other debt balance. The filing does not provide a separate debt figure.
- Other balance-sheet items: Total assets were $4,913,381 and shareholders’ equity was $4,286,662 at August 31, 2017. Inventory was $1,791,508, including approximately $35,000 of obsolescence reserves.
Material changes and management commentary
- Sales increased $34,373, or 2.4%. Management attributed the increase mainly to approximately $104,000 of higher sales in Asia and South America, partly offset by approximately $60,000 of lower sales in the United States and Europe.
- Cost of sales rose to 64.4% of sales from 59.1%. Management cited increased wages and higher inventory costs; gross profit consequently declined despite modest sales growth.
- Selling, general and administrative expense increased 8.0% to $452,014, attributed to trade-show, CE mark, and outside-services costs.
- Research and development expense rose 28.7% to $288,585, reflecting higher materials, legal, regulatory, and wage costs for development and approval of gastroenterology products.
- The company reported no income-tax provision in either period. A valuation allowance was maintained against deferred tax assets.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identifies risks including the need to raise capital, maintaining Nasdaq listing requirements, demand and margin variability, competition, raw-material availability, regulatory approvals and compliance, international distributor relationships, customer and receivable concentration, and potential product claims or recalls.
- Some products have not been submitted for FDA or equivalent regulatory clearance, although they may be sold in certain foreign markets without such approval.
- One customer represented approximately 41.8% of quarterly consolidated sales; one customer represented 50.5% of gross accounts receivable at quarter-end. This concentration creates exposure if a major customer reduces purchases or delays payment.
- No legal proceedings or off-balance-sheet arrangements were reported. The filing states that disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting was identified.
- Subsequent to quarter-end, the company agreed with the University of Southern California to obtain clinical samples for future product trials, with work expected to begin in October 2017. On October 12, 2017, its BioEurope subsidiary signed a three-year distribution agreement for certain products in Mexico, with minimum purchase requirements.
Important facts for investors to verify
- Whether the higher cost-of-sales ratio and increased operating expenses are temporary or will continue to pressure margins.
- How the company plans to fund ongoing operating cash use and product development, given its cash balance and management’s stated capital-raising risk.
- The durability of sales from the major customer and the collection status of concentrated receivables.
- Regulatory status, development costs, and commercialization prospects for products under development, including the gastroenterology products.
- The expected sales contribution and minimum-purchase terms of the Mexico distribution agreement, and the costs and milestones associated with the USC clinical-sample work.