SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2006 Commission File No. 0-8765
----------------- ------
BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
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(Not applicable)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,939,214 shares of common
stock as of January 15, 2007.
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and Comprehensive
Gain (unaudited) - Six and Three Months Ended
November 30, 2006 and 2005........................................1 & 2
Consolidated Balance Sheet (unaudited) -
November 30, 2006.................................................3 & 4
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended November 30, 2006 and 2005...........................5
Notes to Consolidated Financial Statements (unaudited) ............6-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................17-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 20
Item 4. Controls and procedures..............................................20
PART II Other Information....................................................21
Item 1. Legal Proceedings....................................................21
Item 2. Changes in Securities and Use of Proceeds............................21
Item 3. Defaults upon Senior Securities......................................21
Item 4. Submission of Matters to a Vote of Security Holders..................21
Item 5. Other Information....................................................21
Item 6. Exhibits and Reports on Form 8-K.....................................21
Signatures...........................................................22
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE GAIN (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales ....................................................... $ 2,485,442 $ 4,774,074 $ 1,332,176 $ 2,423,924
Cost of sales .............................................. 1,591,373 3,226,131 813,758 1,618,189
----------- ----------- ----------- -----------
Gross profit .............................................. 894,069 1,547,943 518,418 805,735
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative ........................ 635,198 1,593,580 344,743 840,420
Research and development ................................... 99,513 154,581 58,512 69,804
----------- ----------- ----------- -----------
734,711 1,748,161 403,255 910,224
----------- ----------- ----------- -----------
Operating gain (loss) from continuing operations ................ 159,358 (200,218) 115,163 (104,489)
----------- ----------- ----------- -----------
Other Expense (income):
Interest expense ........................................... 16,242 29,503 8,740 18,490
Other income, net .......................................... (35) (44,845) (25) (6,948)
----------- ----------- ----------- -----------
16,207 (15,342) 8,715 11,542
----------- ----------- ----------- -----------
Income (loss) from continuing operations, before
minority interest in net loss of consolidated
subsidiaries and income taxes ............................ 143,151 (184,876) 106,448 (116,031)
Minority interest in net losses of consolidated subsidiaries .... -- 251,670 -- 119,434
----------- ----------- ----------- -----------
Income from continuing operations, before income taxes .......... 143,151 66,794 106,448 3,403
Income tax expense .............................................. -- 1,600 -- 1,600
----------- ----------- ----------- -----------
Net income from continuing operations ........................... $ 143,151 $ 65,194 $ 106,448 $ 1,803
=========== =========== =========== ===========
1
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE GAIN - Continued (UNAUDITED)
Discontinued operations:
Income from discontinued operations, net ............ 27,869 -- -- --
------------- ------------- ------------- -------------
Net income ............................................ 171,020 65,194 106,448 1,803
Other comprehensive loss, net of tax
Unrealized loss on available-for-sale securities .... (28,207) (4,380) (28,372) (1,022)
------------- ------------- ------------- -------------
Comprehensive gain .................................... $ 142,813 $ 60,814 $ 78,076 $ 781
============= ============= ============= =============
Basic net income per common share:
Net income from continuing operations ............ $ .02 $ .01 $ .02 $ .00
Net income from discontinued operations .......... .00 .00 .00 .00
------------- ------------- ------------- -------------
Basic net income per common share ..................... $ .02 $ .01 $ .02 $ .00
============= ============= ============= =============
Net income from continuing operations ............ $ .02 $ .01 $ .02 $ .00
Net income from discontinued operations .......... .00 .00 .00 .00
------------- ------------- ------------- -------------
Diluted net income per common share ................... $ .02 $ .01 $ .02 $ .00
============= ============= ============= =============
Weighted average number of common and common
equivalent shares:
Basic ............................................ 5,926,111 5,753,791 5,929,580 5,753,912
============= ============= ============= =============
Diluted .......................................... 6,379,965 6,354,655 6,364,358 6,376,094
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 30,
2006
------------
Assets
Current Assets
Cash and cash equivalents ............................................... $ 38,371
Available for-sale securities ........................................... 2,414
Accounts receivable, less allowance for doubtful accounts of $8,407 ..... 736,260
Inventories, net ........................................................ 1,214,315
Notes receivable ........................................................ 3,300
Prepaid expenses and other .............................................. 48,725
Net assets from discontinued operations ................................. 598
------------
Total Current Assets ............................................. 2,043,983
Inventory, non-current ...................................................... 23,663
Property and Equipment, net of accumulated depreciation and amortization .... 189,712
Intangible assets, net of accumulated amortization .......................... 5,175
Available-for-sale securities ............................................... 382,795
Other Assets ................................................................ 13,419
------------
$ 2,658,747
============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
November 30,
2006
-------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities ............... $ 701,969
Accrued compensation ................................... 466,795
Shareholder loan ....................................... 242,110
Capital lease - short term portion ..................... 3,884
-------------
Total Current Liabilities ......................... 1,414,758
Capital lease-long-term portion ............................. 6,632
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000
shares, issued and outstanding 5,939,214 ............. 475,136
Additional paid-in-capital ............................. 17,131,238
Accumulated other comprehensive loss ................... (255,177)
Accumulated deficit .................................... (16,113,840)
-------------
Total Shareholders' Equity .................................. $ 1,237,357
-------------
Total Liabilities and Equity ................................ $ 2,658,747
=============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended November 30, 2006 2005
------------- -------------
Cash flows from operating activities:
Net income from continuing operations .............................................. $ 143,151 $ 65,194
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization ................................................. 27,003 96,980
Minority interest in net loss of consolidated Subsidiary ...................... -- (251,670)
Common stock, warrants and options issued for services rendered ............... 708 469
Provision for losses on accounts receivable ................................... 1,378 17,943
Loss on disposal of fixed assets .............................................. -- 1,704
Provision for losses on inventory ............................................. -- (128)
Changes in current assets and liabilities:
Accounts Receivable ......................................................... (176,916) (338,727)
Inventories ................................................................. (109,948) (252,197)
Prepaid expenses and other current assets ................................... 5,643 (26,479)
Accounts payable and other accrued liabilities .............................. 121,202 198,843
Accrued compensation ........................................................ (16,513) 2,364
------------- -------------
Net cash (used in) operating activities ............................................ (4,292) (485,704)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment ...................................... (86,737) (235,664)
------------- -------------
Net cash used in investing activities .............................................. (86,737) (235,664)
------------- -------------
Cash flows from financing activities:
Change in minority interest ................................................... -- 37,250
Decrease in shareholder loan .................................................. (18,832) (26,843)
Gross proceeds from private placement at subsidiary ........................... -- 469,800
Proceeds from sale of common stock ............................................ 24,960 --
Exercise of stock options ..................................................... 5,130 398
Increase in line of credit at subsidiary ...................................... -- 65,000
Payments on capital lease ..................................................... (1,772) (25,799)
------------- -------------
Net cash provided by financing activities .......................................... 9,486 519,806
------------- -------------
Net decrease in cash and cash equivalents .......................................... (81,543) (201,562)
Cash and cash equivalents at beginning of period ................................... 119,914 351,881
------------- -------------
Cash and cash equivalents at end of period ......................................... $ 38,371 $ 150,319
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the quarter for:
Interest ...................................................................... $ 17,709 $ 27,742
Income taxes .................................................................. -- 1,600
============= =============
Change in unrealized holding loss on available-for-sale securities ............... $ (28,207) $ (4,380)
Change in minority interest due to subsidiary stock issuance ..................... $ -- $ (57,769)
Capital lease for purchase of fixed assets ....................................... $ -- $ 360,593
============= =============
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2006
(1) Reference is made to Note 2 of the Notes to Consolidated Financial
Statements contained in Biomerica, Inc.'s (the "Company") Annual Report on Form
10-KSB for the fiscal year ended May 31, 2006, for a summary of significant
accounting policies utilized by the Company.
(2) As of November 30, 2006, the Company had cash and available-for-sale
securities in the amount of $40,785 and working capital of $629,225. The Company
also has $382,795 of long term available-for-sale securities.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable in the amount of $313,318 bearing interest at 8%
and payable September 1, 2004. The due date on this note was extended until
September 1, 2005 and subsequently to September 1, 2006 at the same terms.
Minimum payments were $4,000 per month plus an additional $3,500 per month,
depending on quarterly results of the Company. Although the Company is currently
out of compliance with the terms of the loan agreement, in August 2006 the note
holder agreed to extend the due date on the note payable until September 1,
2007. The terms of the note are the same except that additional payments of
$3,500 per month, depending on quarterly results of the Company, have been
reduced to $2,000 per month. Of the additional payments per quarter due for the
quarters ended August 31, 2005, November 30, 2005, February 28, 2006, May 31,
2006, and August 31, 2006 only $5,250 has been paid.
Until two years ago Biomerica had suffered substantial recurring losses
from operations. Biomerica has funded its operations through profits as well as
debt and equity financings for the past two years. ReadyScript operations were
discontinued in May 2001. ReadyScript was a contributor to the Company's losses
in prior fiscal years. During the fiscal years ended May 31, 2006 and 2005,
certain ReadyScript liabilities were forgiven and thus income from discontinued
operations for the years then ended was recorded. The subsidiary is being
reported in the financial statements as a discontinued operation because it is
no longer an operating entity.
In the last several years the Company has been focusing on reducing
costs where possible and concentrating on its core business to increase sales.
Management believes that cash flows from current operations will be sufficient
to fund operations for at least the next twelve months. Should the Company have
a downturn in sales or unanticipated, increased expenses, the result for the
Company could be the inability to continue as a going concern. The Company will
continue to have limited cash resources. Biomerica has no open or existing,
operating line of credit or loans on which it can draw any new or additional
debt financing, however management is currently investigating the possibility of
obtaining a line of credit from a bank.
Our independent registered public accounting firm has concluded that
there is substantial doubt as to the Company's ability to continue as a going
concern for a reasonable period of time, and have, therefore modified their
report in the form of an explanatory paragraph describing the events that have
given rise to this uncertainty. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
6
The following tables present on a pro forma basis a breakdown by company of the
Statement of Operations for the six and three months ended November 30, 2005.
The Statement of Operations for the six and three months ended November 30,
2006, includes only the operations of Biomerica and is presented on the
Statement of Operations and Comprehensive Gain above.
PRO FORMA STATEMENT OF OPERATIONS BY COMPANY (UNAUDITED)
Six Months Ended
November 30, 2005
-----------------
Intercompany Pro-forma
Actual Eliminations Lancer Biomerica
---------------------------------------------------------------------------------------------------------------------------
NET SALES $ 4,774,074 -- $ (2,925,038) $ 1,849,036
COST OF SALES 3,226,131 $ 15,780 (1) (2,190,495) 1,051,416
---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,547,943 (15,780) (1) (734,543) 797,620
---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
SELLING, GENERAL AND ADMIN 1,593,580 -- (1,029,059) 564,521
RESEARCH AND DEVELOPMENT 154,581 -- (42,470) 112,111
---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,748,161 -- (1,071,529) 676,632
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (200,218) (15,780) (1) 336,986 120,988
OTHER EXPENSE (INCOME)
Interest 29,503 -- (14,456) 15,047
Other expense (income) (44,845) (15,780) (2) 33,096 (27,529)
---------------------------------------------------------------------------------------------------------------------------
(15,342) (15,780) (2) 18,640 (12,482)
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST
IN NET INCOME (LOSS) OF CONSOLIDATED
SUBSIDIARIES AND INCOME TAXES (184,876) -- 318,346 133,470
MINORITY INTEREST IN NET LOSS (INCOME)
OF LANCER 251,670 (319,146) (3) -- --
67,476 (4)
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 66,794 (251,670) 318,346 133,470
---------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,600 -- (800) 800
---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 65,194 $ (251,670) $ 319,146 $ 132,670
===========================================================================================================================
(1) To record the charge for rent by Lancer at the manufacturing facility in
Mexico which was eliminated in consolidation.
(2) To record the income from Biomerica received by Lancer for rent at the
Mexico facility, which was eliminated in consolidation.
(3) To de-consolidate Lancer's loss.
(4) Elimination of Biomerica's portion of Lancer's operations as if the
termination of the voting agreement occurred May 31, 2005.
7
Three Months Ended
November 30, 2005
-----------------
Intercompany Pro-forma
Actual Eliminations Lancer Biomerica
---------------------------------------------------------------------------------------------------------------------------
NET SALES $ 2,423,924 -- $ (1,547,940) $ 875,984
COST OF SALES 1,618,189 7,155 (1) (1,125,790) 499,554
---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 805,735 (7,155) (1) (422,150) 376,430
---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
SELLING, GENERAL AND ADMIN 840,420 -- (548,048) 292,372
RESEARCH AND DEVELOPMENT 69,804 -- (22,314) 47,490
---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 910,224 -- (570,362) 339,862
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (104,489) (7,155) (1) 148,212 36,568
OTHER EXPENSE (INCOME)
Interest 18,490 -- (11,566) 6,924
Other expense (income) (6,948) (7,155) (2) 14,086 (17)
---------------------------------------------------------------------------------------------------------------------------
11,542 (7,155) (2) 2,520 6,907
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST
IN NET INCOME (LOSS) OF CONSOLIDATED
SUBSIDIARIES AND INCOME TAXES (116,031) -- 145,692 29,661
MINORITY INTEREST IN NET LOSS (INCOME)
OF LANCER 119,434 (146,492) (3) -- --
27,058 (4)
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 3,403 (119,434) 145,692 29,661
---------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,600 -- (800) 800
---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,803 $ (119,434) $ 146,492 $ 28,861
===========================================================================================================================
(1) To record the charge for rent by Lancer at the manufacturing facility in
Mexico which was eliminated in consolidation.
(2) To record the income from Biomerica received by Lancer for rent at the
Mexico facility, which was eliminated in consolidation.
(3) To de-consolidate Lancer's loss.
(4) Elimination of Biomerica's portion of Lancer's operations as if the
termination of the voting agreement occurred May 31, 2005.
8
(3) In December 2004, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting For
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost is measured based on the grant- date fair value of the
equity or liability instruments issued. Compensation cost is recognized over the
period that an employee provides service in exchange for the award. As of the
beginning of fiscal 2007, June 1, 2006, the Company was required to account for
stock-based compensation using this method.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
If the Company had accounted for its options in accordance with SFAS
123(R) in fiscal 2006, the total value of options granted during the six month
period ended November 30, 2005 would have been expensed over the vesting period
of the options. Thus, the Company's consolidated net income would have been as
follows:
Net Income 2005
--------------------------------------------------------------------------------
As reported $ 65,194
Add: Stock-based employee compensation
expense included in reported net income 469
Less: Stock-based employee compensation
expense determined using fair value
based method for all awards (16,103)
-------------------------------------------------------------------------------
Pro forma $ 49,560
================================================================================
Pro forma net income from
continuing operations
per share - basic $ .01
================================================================================
Pro forma net income from
continuing operations
per share - diluted $ .01
================================================================================
For the six months ended November 30, 2006, the Company expensed
approximately $708 of stock option expense due to SFAS 123(R) in its financial
statements.
9
(4) The following summary presents the options granted, exercised, expired,
cancelled and outstanding as of November 30, 2006:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ------------ ---------- ---------
Outstanding
May 31, 2006 1,748,284 152,666 1,900,950 $ 0.64
Granted 10,000 -- 10,000 0.50
Exercised (16,533) -- (16,533) 0.31
Cancelled or expired (94,668) (1,000) (95,668) 0.96
---------- ---------- ---------- ---------
Outstanding
November 30, 2006 1,647,083 151,666 1,798,749 $ 0.59
========== ========== ========== =========
(5) The information set forth in these condensed consolidated statements is
unaudited and may be subject to normal year-end adjustments. The information
reflects all adjustments which, in the opinion of management, are necessary to
present a fair statement of the consolidated results of operations of Biomerica,
Inc., for the periods indicated. It does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations, and cash flow in conformity with generally accepted accounting
principles.
(6) Consolidated results of operations for the interim periods covered by this
report may not necessarily be indicative of results of operations for the full
fiscal year.
(7) Reference is made to Note 3 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2006, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 9 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2006, for information on commitments and
contingencies.
(9) Aggregate cost exceeded market value of available-for-sale securities by
approximately $255,178 at November 30, 2006.
(10) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted
EPS on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
10
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.
Six Months Ended Three Months Ended
November 30, 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------
Numerator:
Income from continuing operations $ 143,151 $ 65,194 $ 106,448 $ 1,803
Income from discontinued operations 27,869 -- -- --
-------------------------------------------------------------------------------------------------------
Numerator for basic and diluted net
income per common share $ 171,020 65,194 106,448 1,803
=======================================================================================================
Denominator for basic net income
per common share 5,926,111 5,753,791 5,929,580 5,753,912
Effect of dilutive securities:
Options and warrants 453,853 600,864 434,778 622,182
-------------------------------------------------------------------------------------------------------
Denominator for diluted net income
per common share 6,379,965 6,354,655 6,364,358 6,376,094
=======================================================================================================
Basic net income per common share:
Income from continuing operations $ .02 $ .01 $ .02 $ .00
Income from discontinued operations .00 -- -- --
-------------------------------------------------------------------------------------------------------
Basic net income per common share $ .02 $ .01 $ .02 $ .00
=======================================================================================================
Diluted net income per common share:
Income from continuing operations $ .02 $ .01 $ .02 $ .00
Net income from discontinued operations .00 -- -- .00
-------------------------------------------------------------------------------------------------------
Diluted net income per common share $ .02 $ .01 $ .02 $ .00
=======================================================================================================
(11) In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R will require compensation costs related to share-based payment transactions
to be recognized in the financial statement (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. Compensation cost will be
recognized over the period that an employee provides service in exchange for the
award.
In March 2005, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment,
providing guidance on option valuation methods, the accounting for income tax
effects of share-based payment arrangements upon adoption of SFAS No. 123R, and
the disclosures in MD&A subsequent to the adoption. The Company has provided SAB
No. 107 required disclosures upon adoption of SFAS No. 123R on June 1, 2006.
In April 2005, the Securities and Exchange Commission adopted a new
rule that amends the compliance dates for SFAS No. 123R. The Statement requires
that compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on the
fair value of the equity or liability instruments issued. SFAS No. 123R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. The Company adopted SFAS No. 123R on June 1,
2006.
11
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and
Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods. The Company does not
believe the adoption of this standard will have an impact on its results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140
("SFAS, 155"). This statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets. SFAS No. 155: a) permits fair value
remeasurement for any hybrid financial instrument that contains an imbedded
derivative that otherwise would require bifurcation; (b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an imbedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and, (e) eliminates restriction on a qualifying special-purpose
entity's ability to hold passive derivative financial instruments that pertain
to beneficial interests that are or contain a derivative financial instrument.
SFAS No. 155 also requires presentation within the financial statements that
identifies those hybrid financial instruments for which the fair value election
has been applied and information on the income statement impact of the changes
in fair value of those instruments. The Company is required to apply SFAS No.
155 to all financial instruments acquired, issued or subject to a remeasurement
event beginning June 1, 2007. The Company does not expect the adoption of SFAS
No. 155 to have a material impact on the Company's financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, an amendment of FASB Statement No. 140 (Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).
This Statement requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
The Company would be required to adopt this statement as of June 1, 2007. The
Company has not yet determined the impact, if any, of adopting SFAS 156 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Defining Fair Value
Measurement. The purpose of SFAS No. 157 is to eliminate the diversity in
practice that exists due to the different definitions of fair value and the
limited guidance for applying those definitions in GAAP that are dispersed among
the many accounting pronouncements that require fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company has not yet determined the impact, if any, of adopting SFAS 157 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
For Defined Benefit Pension and Other Postretirement Plans. Effective in
calendar- year 2006 (with certain exceptions) for public companies and
calendar-year 2007 (with certain exceptions) for private companies, SFAS No. 158
represents the "first phase" of a planned "two-phased" project where the FASB is
working on improving financial reporting related to pension and other
postretirement (OPB) plans. SEC registrants have been required to disclose the
"expected impact" of implementing SFAS No. 158 in filings made after September
30, 2006 and before the effective date of SFAS No. 158. The Company does not
expect the adoption of SFAS No. 158 to have a material impact on the Company's
financial statements.
12
In July 2006, the FASB issued FIN 48, entitled Accounting for
Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109,
entitled Accounting for Income Taxes. Through the interpretive guidance, the
FASB clarifies the accounting for uncertainty in income taxes, provides
recognition and measurement guidance related to accounting for income taxes, and
provides guidance related to classification and disclosure of income tax-related
financial statement components. The Company has not yet determined the impact,
if any, of adopting FIN 48 on its consolidated financial statements.
(12) Financial information about foreign and domestic operations and export
sales is as follows (the 11/30/05 column includes the former subsidiary, Lancer
Orthodontics):
For the Six Months Ended
11/30/06 11/30/05
---------- ----------
Revenues from sales to unaffiliated customers:
United States $ 710,000 $1,986,000
Asia 224,000 230,000
Europe 1,185,000 1,534,000
South America 37,000 431,000
Middle East 11,000 115,000
Oceania 289,000 291,000
Other 29,000 187,000
---------- ----------
$2,485,000 $4,774,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(13) During fiscal 2006 an employee of the Company exercised a stock option for
750 shares at the purchase price of $.20 per share and 750 shares at the
purchase price of $.33 per share. The total proceeds to the Company was $398.
In June 2005 the Company granted 111,000 stock options to purchase
shares of common stock at an exercise price of $.53 to several of the Company's
officers. The options vest over four years and have a term of five years.
Management assigned a value of $37,405 to these options.
On September 14, 2005, the Company granted 10,000 stock options to
purchase shares of common stock at an exercise price of $.47 to an employee of
the Company. The options vest over four years and have a term of five years.
Management assigned a value of $3,200 to these options.
In February 2006 the Company granted 20,000 stock options to purchase
shares of common stock at an exercise price of $.48 to two employees. The
options vest over four years, and have a term of five years. Management assigned
a value of $5,520 to these options.
In May 2006 the Company granted 498,500 stock options to purchase
shares of common stock at an exercise price of $.40 to various employees,
consultants, officers and directors. The options vest over three years, and have
a term of five years. Management assigned a value of $118,643 to these options.
In May 2006 the Company granted warrants to purchase 52,000 shares of
restricted common stock at an exercise price of $.65 as part of the private
placement conduted at that time. The options vest immediately and have a term of
five years. Management assigned a value of $9,880 to these warrants.
In July 2006 the board of directors granted a stock option for 10,000
options to an employee of the company. The options vests one quarter immediately
and then one quarter per year thereafter. The option is at the exercise price of
$.50 per share and expires in five years. Management assigned a value of $2,830
to this option.
13
During the six month period ended November 30, 2006, employees
exercised stock options for 16,533 shares at purchase prices ranging from
$.20-$.42 per share. The total proceeds to the Company was $5,130.
Options or warrants granted are assigned values according to current
market value, using the Black-Scholes model for option valuation. The term used
in the calculation of the options or warrants is the vesting period. A discount
rate equivalent to five-year (or other life of the option or warrant) Treasury
constant maturity interest rates is utilized. The historical volatility of the
stock is calculated using weekly historical closing prices for the prior year as
reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the
Black-Scholes Model is also used for calculating employee options and warrants
valuations.
When shares are issued for services or other non-cash consideration,
fair value is measured using the current market value on the day of the Board of
Directors approval of such issuance.
(14) Reportable business segments for the quarters ended November 30, 2006 and
2005 are as follows:
Six Months Ended Three Months Ended
November 30, 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------
Domestic sales:
Orthodontic products $ -- $ 1,584,000 $ -- $ 836,000
==================================================================================================
Medical diagnostic products $ 710,000 402,000 $ 484,000 $ 207,000
==================================================================================================
Foreign sales:
Orthodontic products $ -- 1,341,000 $ -- $ 712,000
==================================================================================================
Medical diagnostic products $ 1,775,000 $ 1,447,000 $ 848,000 $ 669,000
==================================================================================================
Net sales:
Orthodontic products $ -- 2,925,000 $ -- $ 1,548,000
Medical diagnostic products 2,485,000 1,849,000 1,332,000 876,000
--------------------------------------------------------------------------------------------------
Total $ 2,485,000 4,774,000 $ 1,332,000 $ 2,424,000
==================================================================================================
Operating gain (loss):
Orthodontic products $ -- (337,000) $ -- $ (148,000)
Medical diagnostic products 159,000 137,000 115,000 44,000
--------------------------------------------------------------------------------------------------
Total $ 159,000 $ (200,000) $ 115,000 $ (104,000)
==================================================================================================
14
Operating gain from discontinued segment:
ReadyScript 27,869 -- -- --
--------------------------------------------------------------------------------------------------
Total $ 27,869 $ -- $ -- $ --
==================================================================================================
Domestic long-lived assets:
Orthodontic products $ -- $ 780,000
Medical diagnostic products 164,000 104,000
----------------------------------------------------------------
Total $ 164,000 884,000
================================================================
Foreign long-lived assets:
Orthodontic products $ -- $ 417,000
Medical diagnostic products 26,000 16,000
----------------------------------------------------------------
Total $ 26,000 $ 433,000
================================================================
Total assets:
Orthodontic products $ -- $ 4,900,000
Medical diagnostic products 2,659,000 1,782,000
----------------------------------------------------------------
Total $ 2,659,000 $ 6,682,000
================================================================
Depreciation and amortization
expense:
Orthodontic products $ -- $ 63,000
Medical diagnostic products 27,000 34,000
----------------------------------------------------------------
Total $ 27,000 97,000
================================================================
Capital expenditures:
Orthodontic products $ -- $ 575,000
Medical diagnostic products 87,000 21,000
----------------------------------------------------------------
Total $ 87,000 $ 596,000
================================================================
The net sales as reflected above consist of sales of unaffiliated customers only
as there were no significant intersegment sales during the quarters ended
November 30, 2006 and 2005.
(15) In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in Mexicali,
Mexico. The agreement requires reimbursement from Biomerica for discrete
expenses such as payroll, shipping, and customs fees and service fees of
approximately $2,900 per month.
15
(16) On July 29, 2005, Biomerica entered into an agreement for the research,
development and transfer of certain technology. The total of the project is
estimated to be $55,000.
(17) In August 2006, the Company and the holder of the Note payable-shareholder
agreed to the extension of the note due date until September 1, 2007, at the
same terms and conditions as the previous agreement except that additional
payments of $3,500 per month, contingent upon certain earnings, have been
reduced to $2,000 per month.
(18) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has no
liabilities recorded for these agreements as of November 30, 2006. The Company
enters into indemnification provisions under (i) its agreements with other
companies in its ordinary course of business, typically with business partners,
contractors, and customers, landlords and (ii) its agreements with investors.
Under these provisions the Company generally indemnifies and hold harmless the
indemnified party for losses suffered or incurred by the indemnified party as a
result of the Company's activities or, in some cases, as a result of the
indemnified party's activities under the agreement. These indemnification
provisions often include indemnifications relating to representations made by
the Company with regard to intellectual property rights. These indemnification
provisions generally survive termination of the underlying agreement. The
maximum potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited. The Company has not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of November 30, 2006.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL
STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED
FUTURE REVENUES OF THE COMPANY AND SUCCESS OR CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY
IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS
TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $2,485,442 for the first six
months of fiscal 2007 as compared to $4,774,074 for the same period in the
previous year. This represents a decrease of $2,288,632, or 47.9%. The overall
decrease in sales from fiscal 2006 to 2007 is a result of the deconsolidation of
the Lancer Orthodontics subsidiary as of December 1, 2005. On a stand-alone
basis, the sales of Biomerica increased from $1,849,036 to $2,485,442, or
$636,406 (34.4%) for the six-month period. For the quarter then ended net sales
were $1,332,176 as compared to $2,423,924 for the same period in the previous
year. This represents a decrease of $1,091,748, or 45.0%. On a stand-alone
basis, the sales of Biomerica increased from $875,984 to $1,332,176. This
represents an increase of $456,192, or 52.1%.
For the six months ended November 30, 2006 as compared to 2005, cost of
sales decreased from $3,226,131, or 67.6% of sales, to $1,591,373, or 64.0% of
sales. For the three month period then ended cost of sales decreased from
$1,618,189, or 66.8% of sales, to $813,758, or 61.1% of sales. The overall
dollar decrease in cost of goods from fiscal 2006 to 2007 is a result of the
deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis for the
six months, Biomerica's cost of sales increased from $1,051,416 to $1,591,373 or
from 56.9% of sales to 64.0% of sales. On a stand-alone basis for the three
months, cost of sales Increased from $499,554 to $813,758, or from 57.0% of
sales to 61.1% of sales. This increase was primarily due to hiring of additional
personnel in production in anticipation of higher production volumes in the
forthcoming months.
For the six months ended November 30, 2006 compared to 2005, selling,
general and administrative costs decreased by $958,382, or 60.1%.For the three
months then ended these expenses decreased from $840,420 to $344,743, or
$495,677 (59.0%). The overall decrease in selling, general and administrative
from fiscal 2006 to 2007 is a result of the deconsolidation of Lancer as of
December 1, 2005. For the six months on a stand-alone basis, selling, general
and administrative costs increased from $564,521 to $635,198, or $70,677
(12.5%). For the three months then ended these costs increased from $292,372 to
$344,743, or $52,371 (17.9%). These increases were primarily a result of
increased wages and advertising costs.
For the six months ended November 30, 2006 compared to 2005, research
and development decreased by $55,068, or 35.6% and for the three months
decreased by $11,292, or 16.2%. The overall decrease in research and development
expenses is a result of the deconsolidation of Lancer as of December 1, 2005. On
a stand-alone basis, research and development costs decreased by $12,598 for the
six months and increased by $11,022 for the three months. The decrease for the
six months was due to a research contract payment in fiscal 2006 and the
increase for the three months was due to expenses for the research of new
products.
For the six months ended November 30, 2006, other income of $35 was
realized as compared to $44,845 in the prior year, which resulted in a decrease
of $44,810. For the three months then ended, other income of $25 was realized as
compared to $6,948 in the prior fiscal year. The overall decrease in other
income is a result of the deconsolidation of Lancer as of December 1, 2005. On a
stand-alone basis for the six months, other income decreased by $27,494 due to a
one-time sales contract payment in fiscal 2006. On a stand-alone basis for the
three months, other income increased by $8.
For the six months interest expense decreased from $29,503 to $16,242.
For the three months interest expense decreased from $18,490 to $8,740. The
overall decrease in interest expense is a result of the deconsolidation of
Lancer as of December 1, 2005. On a stand-alone basis for the six months,
interest expense increased by $1,195 and for the three months increased by
$1,816.
17
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2006, the Company had cash and current
available-for-sale securities in the amount of $40,785 and working capital of
$629,225. The Company also has long-term available-for-sale securities in the
amount of $382,795.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable in the amount of $313,318 bearing interest at 8%
and payable September 1, 2004. The due date on this note was extended until
September 1, 2005 and subsequently to September 1, 2006 at the same terms.
Minimum payments are $4,000 per month plus an additional $3,500 per month,
depending on quarterly results of the Company. Although the Company is currently
out of compliance with the terms of the loan agreement, in August 2006 the note
holder agreed to extend the due date on the note payable until September 1,
2007. The terms of the note are the same except that additional payments of
$3,500 per month, depending on quarterly results of the Company, have been
reduced to $2,000 per month. Of the additional payments per quarter due for the
quarters ended August 31, 2005, November 30, 2005, February 28, 2006, May 31,
2006 and August 31, 2006, only $5,250 has been paid.
Until two years ago Biomerica had suffered substantial recurring losses
from operations. Biomerica has funded its operations through profits as well as
debt and equity financings for the past two years. ReadyScript operations were
discontinued in May 2001. ReadyScript was a contributor to the Company's losses
in prior fiscal years. During the fiscal years ended May 31, 2006 and 2005,
certain ReadyScript liabilities were forgiven and thus income from discontinued
operations for the years then ended was recorded. The subsidiary is being
reported in the financial statements as a discontinued operation because it is
no longer an operating entity.
In the last several years the Company has been focusing on reducing
costs where possible and concentrating on its core business to increase sales.
Management believes that cash flows from current operations will be sufficient
to fund operations for at least the next twelve months. Should the Company have
a downturn in sales or unanticipated, increased expenses, the result for the
Company could be the inability to continue as a going concern. The Company will
continue to have limited cash resources. Biomerica has no open or existing,
operating line of credit or loans on which it can draw any new or additional
debt financing, however management is currently investigating the possibility of
obtaining a line of credit from a bank.
Our independent registered public accounting firm has concluded that
there is substantial doubt as to the Company's ability to continue as a going
concern for a reasonable period of time, and have, therefore modified their
report in the form of an explanatory paragraph describing the events that have
given rise to this uncertainty. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
During the six months ended November 30, 2006, the Company operations
used cash of $4,292 as compared to cash used in operations of $485,704 in the
same period in the prior fiscal year. Cash provided by financing activities for
fiscal 2007 was $9,486 due to payments on the shareholder note payable as
compared to cash provided by financing activities of $519,806 in fiscal 2006,
which was a result of a private placement at Lancer. The cash flow in fiscal
2007 no longer includes Lancer due to the deconsolidation of Lancer as of
December 1, 2005. Purchases of property and equipment for fiscal 2007 were
$86,737 compared to $235,664 in fiscal 2006. In fiscal 2006 this included the
purchases made by Lancer, whereas fiscal 2007 only included purchases made by
Biomerica. The overall decrease in cash and cash equivalents for the six months
ended November 30, 2006 was $81,543 as compared to the prior year of $201,562.
18
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Note 2 of the Notes to Consolidated Financial Statements
contained in the Company's annual report on Form 10KSB for the period ended May
31, 2006, describes the significant accounting policies essential to the
consolidated financial statements. The preparation of these financial statements
requires estimates and assumptions that affect the reported amounts and
disclosures.
We believe the following to be critical accounting policies as they
require more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments and
estimates are appropriate and correct, actual future results may differ from our
estimates.
In general the critical accounting policies that may require judgments
or estimates relate specifically to the Allowance for Doubtful Accounts,
Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of
Long-Lived Assets, Stock Based Compensation and Income Tax Accruals.
Revenues from product sales are recognized at the time the product is
shipped, customarily FOB shipping point, at which point title passes. When
necessary an allowance is established for estimated returns as revenue is
recognized.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed by
management and discussed with the audit committee. We have identified specific
customers where collection is not probable and have established specific
reserves, but to the extent collection is made, the allowance will be released.
Additionally, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on hand to
management's forecast of customer demand. Customer demand is dependent on many
factors and requires us to use significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from older
products to newer products. Once a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product. The Company has
classified certain inventory as long-term since it is estimated that it will not
be used within the next year. Biomerica currently has $23,663 classified as
long-term inventory.
We have been in a loss position for tax purposes in prior years, and
have established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future
taxable income is difficult, and requires the use of significant judgment. At
November 30, 2006, all of our deferred tax assets were reserved. Accruals are
made for specific tax exposures and are generally not material to our operating
results or financial position, nor do we anticipate material changes to these
reserves in the near future.
The consolidated financial statements reflect, for all periods
presented, the adoption of the classification or disclosure requirements
pursuant to Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping
and Handling Fees and Costs." The Company has historically classified income
from freight charges to customers as sales, which has been offset by shipping
and handling costs. The income from freight for the six months ended November
30, 2006 and 2005, respectively, was $46,785 and $58,175 and for the quarters
then ended was $21,717 and $22,285. The financial statements presented herein
show the income from shipping and handling as a component of sales for both
periods and the costs of shipping and handling as a component of cost of goods
sold. Fiscal 2006 revenue and cost of sales were adjusted to reflect compliance
with EITF 00-10.
19
Please refer to the annual report on Form 10-KSB for the period ended
May 31, 2006 for an in-depth discussion of risk factors.
SUBSEQUENT EVENTS
On December 1 and December 12, 2006, the Chief Executive Officer made short-term
loans to the Company in the amounts of $50,000 and $35,000, respectively. These
loans, plus approximately $388 in interest (at the rate of 7.75% per annum),
were re-paid on December 26, 2006.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
abroad, that may affect the general economic climate and performance of
Biomerica or its' customers. Aside from general macroeconomic downturns, the
additional material factors that could affect future financial results include,
but are not limited to: Terrorist attacks and the impact of such events;
diminished access to raw materials that directly enter into our manufacturing
process; shipping labor disruption or other major degradation of the ability to
ship our products to end users; inability to successfully control our margins
which are affected by many factors including competition and product mix;
protracted shutdown of the U.S. Border due to an escalation of terrorist or
counter terrorist activity; any changes in our business relationships with
international distributors or the economic climate they operate in; any event
that has a material adverse impact on our foreign manufacturing operations may
adversely affect our operation as a whole; failure to manage the future
expansion of our business could have an adverse affect on our revenues and
profitability; possible costs in complying with government regulations and the
delays in receiving required regulatory approvals or the enactment of new
adverse regulations or regulatory requirements; numerous competitors, most of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or medical professionals
alleging harm caused by the use of or exposure to our products; quarterly
variations in operating results caused by a number of factors, including
business and industry conditions and other factors beyond our control. All of
these factors make it difficult to predict operating results for any particular
period.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the
Company's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of November 30, 2006,
that the design and operation of the Company's "disclosure controls and
procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the Company's management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the six months ended November 30, 2006, there were no changes in
the Company's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
20
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2006 Annual Meeting of the Company's stockholders was held on
November 29, 2006. The only matter voted upon at the meeting, as set
forth in the proxy statement dated September 28, 2006, as filed with
the Securities and Exchange Commission pursuant to Rule 14 under the
Securities Act of 1934, was the election of directors. The following
summarizes the voting:
Proposal No. 1: Election of Directors
Name For Votes Withheld
---- ---- --------------
Barbieri 5,056,521 206,461
Cano 5,057,342 203,640
Irani 5,052,521 202,041
Moore 5,055,941 201,041
All directors were elected.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(a) Exhibits
31 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 15, 2007
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
22