Biomerica, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2015; fiscal year ended May 31. The company develops, manufactures, and sells medical diagnostic products through clinical laboratories and point-of-care channels worldwide.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Three months ended Nov. 30, 2014 | Six months ended Nov. 30, 2015 | Six months ended Nov. 30, 2014 |
|---|---|---|---|---|
| Net sales | $1.165 million | $1.134 million | $2.452 million | $2.168 million |
| Gross profit | $412,041 | $307,243 | $833,462 | $617,154 |
| Gross margin | 35.4% | 27.1% | 34.0% | 28.5% |
| Operating expenses | $621,815 | $557,108 | $1.119 million | $1.091 million |
| Operating loss | $(209,774) | $(249,865) | $(286,007) | $(473,976) |
| Net loss | $(66,768) | $(238,028) | $(139,103) | $(457,296) |
| Net loss per share, basic and diluted | $(0.01) | $(0.03) | $(0.02) | $(0.06) |
Six-month sales increased 13.1%; second-quarter sales increased 2.8%. Management attributed the six-month growth primarily to higher Asian sales, partly offset by lower European sales due to order timing and weaker demand. Sales by region for the six months were approximately $852,000 in Asia versus $118,000 a year earlier, and $1.092 million in Europe versus $1.444 million.
Gross margin improved year over year in both periods. Management cited more costs capitalized into inventory and higher sales volume helping absorb fixed costs. Research and development expense rose 26.4% in the quarter, primarily for new products, regulatory approvals, and patent work; six-month R&D expense increased 2.8%. Selling, general and administrative expense rose 4.4% for the quarter and 2.5% for six months, including trade-show, annual-meeting, and CE-mark regulatory costs.
Cash, liquidity, and balance sheet
At November 30, 2015, cash and cash equivalents were $642,978, down from $1.088 million at May 31, 2015. Working capital was $3.689 million, compared with $3.868 million. Current assets were $4.158 million and current liabilities $469,087. Total assets were $5.942 million, and shareholders’ equity was $5.473 million. The balance sheet lists no debt balance; the filing does not provide a separate debt discussion.
Cash used in operating activities was $425,042 for the six months, versus $183,996 provided in the prior-year period. Uses included a $214,238 increase in inventories and a $63,233 reduction in accounts payable and accrued expenses. Investing activities used $29,219, mainly for property and equipment; financing activities provided $10,298 from option exercises. Cash declined by $445,329 overall. Management reported that significant receivables were collected in December and cash was approximately $1.081 million at month-end.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results and identified demand, operating fluctuations, capital raising, competition, raw-material availability, regulation, and economic conditions as uncertainties.
- The company is developing a gastroenterology-market product; patent applications have been filed. It is evaluating possible U.S. regulatory approval, which management said could involve substantial costs if pursued.
- The board approved an agreement with an investment banker to raise up to $3.0 million through restricted common stock. The filing does not state that the offering had been completed.
- A November 30 lease amendment extended the Irvine facility lease through August 31, 2021. Rent for the extension starts at $21,000 per month from September 2016, with scheduled annual increases.
- The six-month results include a $129,000 income tax benefit related to an increase in deferred tax assets. The filing reports no legal proceedings and no 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 during the quarter.
Most important facts for investors to verify
- Whether Asian sales growth can continue and whether European sales recover, given the company’s international distributor exposure and order timing variability.
- Whether improved gross margins are sustainable, particularly because management attributed part of the improvement to inventory capitalization and volume absorption.
- Cash conversion, inventory levels, and receivable collections, including the reported December cash balance and the concentration of certain customer balances.
- Whether the proposed stock raise is pursued or completed, and its effect on liquidity and share dilution.
- Development, patent, and potential U.S. regulatory costs for the gastroenterology product, alongside commercialization prospects.