Bionexus Gene Lab Corp. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2021, filed May 17, 2021. The company operates primarily in Malaysia through BioNexus Malaysia, a molecular diagnostics and RNA screening business, and Chemrex Corporation, a wholesaler of industrial chemicals. Chemrex was acquired on December 31, 2020 in a common-control transaction and contributed approximately 97% of consolidated first-quarter revenue.
The company had 171,218,152 common shares outstanding as of April 30, 2021. It is a smaller reporting company and emerging growth company. No securities were registered under Section 12(b).
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $3,449,159 | $3,070,026 | Approximately +12% |
| Cost of revenue | $2,866,594 | $2,414,719 | Approximately +19% |
| Gross profit | $582,565 | $655,307 | Approximately -11% |
| Profit from operations | $342,102 | $1,073,530 | Approximately -68% |
| Profit before tax | $338,744 | $1,070,504 | Approximately -68% |
| Net profit | $338,744 | $1,069,644 | Approximately -68% |
| Comprehensive income | $130,276 | $774,948 | Approximately -83% |
Based on the financial statements, gross margin was approximately 16.9% versus 21.3% in the prior-year quarter, operating margin was approximately 9.9% versus 35.0%, and net margin was approximately 9.8% versus 34.8%. The decline in profitability primarily reflects the absence of a large prior-year gain on disposal of property, plant and equipment, which was included in other income in Q1 2020. General and administrative expense decreased approximately 8%, principally because travel and marketing activity shifted toward videoconferencing.
BioNexus Malaysia generated $97,363 of revenue in Q1 2021 compared with no revenue in Q1 2020. Chemrex generated $3,351,796, compared with $3,070,026 in the prior-year quarter. Management attributed the increase to easing of Malaysian movement restrictions.
Balance sheet, cash flow, debt and liquidity
- Cash and bank balances were $853,198, and fixed deposits were $1,621,461, for total cash and cash equivalents of $2,474,659 at March 31, 2021, compared with $1,396,747 at March 31, 2020.
- Total assets were $9,898,531, down from $10,115,293 at December 31, 2020. Trade receivables were $3,593,663 and inventories were $1,469,192.
- Total liabilities were $3,106,101, down from $3,453,139 at December 31, 2020. The filing reports working capital of $4,527,642, compared with $4,611,896 at year-end 2020.
- Finance lease obligations totaled $51,791, including $22,843 current and $28,948 non-current. Operating lease liabilities totaled $56,704. The filing does not report conventional bank debt.
- Net cash generated from operating activities was $115,428, compared with $977,348 used in Q1 2020. The improvement reflected working-capital movements, including collections of receivables, partly offset by increased inventories and reductions in payables.
- Investing cash outflow was $295,826, primarily due to a $296,025 acquisition of other investments. Q1 2020 investing cash flow benefited from $1,467,865 of proceeds from property, plant and equipment disposals and $346,008 of cash from a common-control business acquisition.
- Financing cash outflow was $8,550 for finance lease repayments. Net cash decreased by $313,033 during the quarter, including a $124,085 foreign-currency translation adjustment.
Material changes, outlook and risks
- The Chemrex acquisition materially changed the company’s consolidated business mix; however, the comparative financial statements were not retrospectively adjusted because Chemrex was not under common control during the prior-year comparative period.
- Management stated that operating cash flow is expected to be sufficient to sustain the current level of operations for at least the next 12 months. Expected liquidity pressures include additional administrative and marketing personnel, website development, increased advertising and marketing, and public-company costs.
- COVID-19 and Malaysian movement-control restrictions adversely affected BioNexus’s hospital- and clinic-based RNA screening activity. The movement-control order had been extended through June 7, 2021, and management did not provide a quantitative estimate of the potential continuing impact.
- Key disclosed risks include limited operating history and growth, uncertainty regarding the efficacy of the blood-screening process, potential uninsured product-liability claims, and risks associated with operating and enforcing judgments in Malaysia.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements material to investors, and no material contractual obligations beyond those reflected in the financial statements.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective and identified material weaknesses relating to lack of segregation of duties and the absence of a functioning audit committee with a majority of independent members. Remediation may be delayed because of limited resources.
- The company disclosed that its CFO received 2,000,000 shares from Chemrex shareholders in connection with services related to the Chemrex acquisition, increasing her ownership to 4,797,709 shares, or approximately 2.8% of outstanding common stock.
- On April 28, 2021, BioNexus entered into a memorandum of understanding with Universiti Tunku Abdul Rahman regarding collaboration in RNA research and potential clinical applications.
Most important facts for investors to verify
- Verify the appropriate gross profit and operating profit figures: the financial statements report $582,565 and $342,102, respectively, while the MD&A includes inconsistent figures of $590,235 and $349,102.
- Assess the sustainability and comparability of results after the Chemrex common-control acquisition, including the lack of retrospective adjustment to prior-period comparatives.
- Evaluate supplier concentration: three suppliers represented 56.92% of Q1 cost of revenue, with $2,111,242 payable to those suppliers at March 31, 2021.
- Review the collectibility of $3.6 million in trade receivables and the adequacy of the company’s conclusion that no expected-credit-loss allowance was required.
- Monitor COVID-19 restrictions, the recovery of BioNexus screening revenue, and the company’s ability to commercialize its RNA-screening technology.
- Confirm remediation of the disclosed material weaknesses in internal controls, segregation of duties, and audit committee independence.
- Consider foreign-exchange exposure: the company reported a $208,468 foreign-currency translation loss in Q1 2021 and operates principally in Malaysia while reporting in U.S. dollars.