Biomerica, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal third quarter and first nine months ended February 29, 2012, compared with the periods ended February 28, 2011. The request labels this “2011 Q3,” but the filing reports fiscal 2012 Q3.
Business context
Biomerica develops, manufactures and markets diagnostic test kits for clinical laboratories and point-of-care settings, with sales in the United States and internationally. It also manufactures and assembles products in Mexico. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Three months ended Feb. 29, 2012 | Three months ended Feb. 28, 2011 | Nine months ended Feb. 29, 2012 | Nine months ended Feb. 28, 2011 |
|---|---|---|---|---|
| Net sales | $1.515 million | $1.346 million | $4.539 million | $3.684 million |
| Gross profit | $566,843 | $499,479 | $1.751 million | $1.189 million |
| Operating income (loss) | $134,493 | $73,015 | $445,480 | $(116,830) |
| Net income | $181,445 | $73,403 | $494,329 | $61,354 |
| Diluted earnings per share | $0.03 | $0.01 | $0.07 | $0.01 |
- Nine-month sales rose 23.2%; quarterly sales rose 12.5%. Management attributed growth mainly to Asia over nine months and to Asia, Europe and the United States in the quarter, including larger orders from existing and new customers for certain ELISA kits.
- Cost of sales was 61.4% of sales for the nine months, down from 67.7%; quarterly cost of sales was 62.6%, versus 62.9%. Management cited sales growth against relatively stable fixed costs and a higher-margin product mix.
- Nine-month selling, general and administrative expense increased 4.9% to $1.039 million; research and development expense declined 15.4% to $266,258, reflecting completed product development and reduced dedicated research staffing.
- Nine-month operating cash flow was $103,134, compared with $65,888. Net income was partly offset by a $633,448 increase in accounts receivable and a $79,169 increase in inventory. Investing cash use was $185,528; financing cash use was $6,890.
- Cash was $898,458 at February 29, 2012, versus $989,270 at May 31, 2011. Working capital was $3.751 million, up from $3.261 million. Current liabilities totaled $662,639.
- No line-of-credit balance or equipment-loan balance was outstanding at February 29. The renewed, asset-secured line provides up to $400,000 at prime plus 1%; on March 22, 2012, the company borrowed $53,000 for equipment.
- Total liabilities were $662,639 and shareholders’ equity was $4.882 million at February 29. The company reported no defaults on senior securities.
Material changes and unusual items
- Nine-month operating results improved from an operating loss to income, alongside higher revenue and lower cost of sales as a percentage of sales.
- Quarterly and nine-month net income included a $68,106 net gain from insurance proceeds after water damage. The insurer reimbursed $101,628 for approximately all related expenses and replacement costs.
- Prior-year nine-month other income included a research grant-related amount; management said this did not recur in fiscal 2012. The note reports $173,648 recognized in the prior-year period, while MD&A describes a grant of $217,076 less consulting expenses of $43,428.
- One customer represented 46.7% of gross receivables at February 29, compared with 10% at May 31, 2011, following a large order. Management said it closely monitors collection and may require payment of existing invoices before shipping new orders.
- The company granted 402,500 options in January 2012 at an exercise price of $0.43 per share, with five-year expirations. Common shares outstanding increased to 6,918,339 from 6,868,339 at May 31, 2011.
Outlook, risks and controls
The filing provides no specific revenue or earnings guidance. Management cautions that results may vary and identifies risks including demand and competition, margins and product mix, raw-material availability, international distributors and foreign operations, regulatory approvals and compliance costs, shipping disruptions, customer concentration, and access to capital. It also notes the potential impact of economic conditions and quarterly operating fluctuations. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting. No legal proceedings were reported.
Important facts for investors to verify
- Whether the large customer’s concentrated receivable was collected, and whether receivables growth or the bad-debt reserve signals heightened credit risk.
- How much of reported earnings reflects recurring operations versus the $68,106 insurance gain, and how the prior-year grant amount is presented in the detailed records.
- Whether operating cash generation can keep pace with working-capital needs, particularly accounts receivable and inventory.
- The availability and terms of the renewed credit line, including the impact of the subsequent $53,000 borrowing and the line’s security over company assets.
- Whether international sales growth, product margins and regulatory approvals are sustainable; the filing gives no quantified forward guidance.