FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended August 31, 2007 Commission File No. 0-8765
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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: 6,059,839 shares of common
stock as of October 15, 2007.
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Gain (unaudited) - Three Months Ended
August 31, 2007 and 2006..........................................1 & 2
Consolidated Balance Sheet (unaudited) -
August 31, 2007................................................. 3 & 4
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended August 31, 2007 and 2006..................... 5
Notes to Consolidated Financial Statements (unaudited) ......... 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data..................................... 11-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
Item 4. Controls and procedures......................................... 14
PART II Other Information............................................... 15
Item 1. Legal Proceedings............................................... 15
Item 2. Changes in Securities and Use of Proceeds....................... 15
Item 3. Defaults upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
Signatures...................................................... 16
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE GAIN (UNAUDITED)
Three Months Ended
August 31,
2007 2006
----------- -----------
Net sales .......................................................... $1,340,065 $ 1,153,266
Cost of sales ................................................. (735,621) (777,615)
---------- -----------
Gross profit .................................................. 604,444 375,651
---------- -----------
Operating Expenses:
Selling, general and administrative ........................... 320,283 290,455
Research and development ...................................... 69,744 41,001
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390,027 331,456
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Operating gain from continuing operations .......................... 214,417 44,195
---------- -----------
Other Expense (income):
Interest expense .............................................. 12,543 7,502
Other income, net ............................................. (707,754) (10)
---------- -----------
(695,211) 7,492
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Income from continuing operations, before income taxes ............. 909,628 36,703
Income tax expense ................................................. 24,242 0
---------- -----------
Net income from continuing operations .............................. $ 885,386 $ 36,703
========== ===========
1
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE GAIN - Continued (UNAUDITED)
Discontinued operations:
Income from discontinued operations, net ................... -- 27,869
------------ -------------
Net income ................................................... 885,386 64,572
Other comprehensive gain, net of tax
Unrealized gain on available-for-sale securities ........... 34,299 165
------------ -------------
Comprehensive gain ........................................... $ 919,685 $ 64,737
============ =============
Basic net income per common share:
Net income from continuing operations ................... $ .15 $ .01
Net income from discontinued operations ................. .00 .00
------------ -------------
Basic net income per common share ............................ $ .15 $ .01
============ =============
Diluted net income per common share:
Net income from continuing operations ................... $ .13 $ .01
Net income from discontinued operations ................. .00 .00
------------ -------------
Diluted net income per common share .......................... $ .13 $ .01
============ =============
Weighted average number of common and common
equivalent shares:
Basic ................................................... 5,952,730 5,922,681
============ =============
Diluted ................................................. 7,070,187 6,376,894
============ =============
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
August 31,
2007
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Assets
Current Assets
Cash and cash equivalents ............................................... $ 990,559
Available for-sale securities ........................................... 653
Accounts receivable, less allowance for doubtful accounts of $63,292 .... 739,733
Inventories, net ........................................................ 1,442,498
Notes receivable ........................................................ 1,950
Prepaid expenses and other .............................................. 137,901
Net assets from discontinued operations.................................. 598
-----------
Total Current Assets .............................................. 3,313,892
Property and Equipment, net of accumulated depreciation and amortization .... 159,691
Intangible assets, net of accumulated amortization .......................... 1,294
Available-for-sale securities................................................ 444,315
Other Assets ................................................................ 43,508
------------
$ 3,962,700
============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
August 31,
2007
-----------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities ...................... $ 572,173
Accrued compensation .......................................... 471,966
Current portion of shareholder loan ........................... 153,003
Capital lease - short term portion ............................ 4,564
-----------
Total Current Liabilities ................................ 1,201,706
Capital lease-long-term portion .................................... 2,976
Loan for equipment purchase ........................................ 61,670
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares,
issued and outstanding 5,989,214 ............................ 479,136
Additional paid-in-capital .................................... 17,275,228
Accumulated other comprehensive loss .......................... (195,418)
Accumulated deficit ........................................... (14,862,598)
-----------
Total Shareholders' Equity ......................................... $ 2,696,348
-----------
Total Liabilities and Equity ....................................... $ 3,962,700
===========
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended August 31, 2007 2006
--------- ---------
Cash flows from operating activities:
Net income from continuing operations ............................ $ 885,386 $ 36,703
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ............................... 15,227 13,520
Stock option expense......................................... 6,581 708
Provision for losses on accounts receivable ................. 4,509 --
Changes in current assets and liabilities:
Accounts Receivable ....................................... (239,474) (9,772)
Inventories ............................................... 19,215 (66,633)
Prepaid expenses and other assets ......................... (24,123) (20,701)
Accounts payable and other accrued liabilities ............ (94,078) 53,251
Accrued compensation ...................................... (95,627) 17,243
--------- ---------
Net cash provided by operating activities ........................ 477,616 24,319
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment .................... (5,588) (66,658)
--------- ---------
Net cash used in investing activities ............................ (5,588) (66,658)
--------- ---------
Cash flows from financing activities:
Paydown on shareholder loan ................................. (14,867) (12,130)
Proceeds from sale of common stock .......................... -- 24,960
Exercise of stock options ................................... 17,533 --
Payments on capital lease ................................... (1,034) (855)
--------- ---------
Net cash provided by financing activities ........................ 1,632 11,975
--------- ---------
Net increase (decrease)in cash and cash equivalents .............. 473,660 ( 30,364)
Cash and cash equivalents at beginning of period ................. 516,899 119,914
--------- ---------
Cash and cash equivalents at end of period ....................... $ 990,559 $ 89,550
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the quarter for:
Interest .................................................... $ 8,080 $ 6,564
Taxes ....................................................... 1,600 --
========= =========
Change in unrealized holding loss on available-for-sale
securities .................................................. $ 34,299 $ 165
========= =========
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2007
(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, 2007, for a summary of significant
accounting policies utilized by the Company.
(2) As of August 31, 2007, the Company had cash and available-for-sale
securities in the amount of $991,212 and working capital of $2,112,186. The
Company also has $444,315 of long term available-for-sale securities.
(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 began 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.
For the three months ended August 31, 2007, the Company expensed $6,581 of stock
option expense due to SFAS 123(R) in its financial statements.
(4) The following summary presents the options granted, exercised, expired,
cancelled and outstanding as of August 31, 2007:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ------------ ---------- ----------
Outstanding
May 31, 2007 1,836,083 217,166 2,053,249 $.48
Granted 25,000 -- 25,000 .78
Exercised (45,000) -- (45,000) .39
Cancelled or expired (7,500) -- (7,500) .52
---------- ------------ ----------- ----------
Outstanding
August 31, 2007 1,808,583 217,166 2,025,749 $.64
========== ============ =========== ==========
(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, 2007, for a description of the investments in
affiliates and consolidated subsidiaries.
6
(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, 2007, for information on commitments and
contingencies.
(9) Aggregate cost exceeded market value of available-for-sale securities by
approximately $195,418 at August 31, 2007.
(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.
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
AUGUST 31,
2007 2006
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Numerator:
Income from continuing operations $ 885,386 $ 36,703
Income from discontinued operations -- 27,869
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Numerator for basic and diluted net
income per common share $ 885,386 $ 64,572
===============================================================================
Denominator for basic net income
per common share 5,952,730 5,922,681
Effect of dilutive securities:
Options and warrants 1,117,457 454,213
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Denominator for diluted net income per common share 7,070,187 6,376,894
===============================================================================
Basic net income per common share:
Income from continuing operations $ .15 $ 0.01
Income from discontinued operations .00 0.00
-------------------------------------------------------------------------------
Basic net income per common share $ .15 $ 0.01
===============================================================================
Diluted net income per common share:
Income from continuing operations $ .13 $ 0.01
Net income from discontinued operations .00 0.00
-------------------------------------------------------------------------------
Diluted net income per common share $ .13 $ 0.01
===============================================================================
(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). FAS 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
expected life of the option.
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.
7
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.
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 adoption of this
standard did not have an impact on our 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 adoption of SFAS
No. 155 did not 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 was 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 does not believe the adoption of SFAS 157 has had a material impact 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. The adoption of SFAS No. 158 did not have a material
impact on the Company's financial statements.
8
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 does not believe the adoption of FIN
48 has had a material impact on its consolidated financial statements.
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Three Months Ended
8/31/07 8/31/06
---------- ----------
Revenues from sales to unaffiliated customers:
United States $ 335,000 $ 226,000
Asia 318,000 132,000
Europe 648,000 624,000
South America 21,000 17,000
Middle East 4,000 5,000
Oceania -0- 131,000
Other 14,000 18,000
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$1,340,000 $1,153,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(12) 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.
In February 2007 the board of directors granted a stock option for 50,000
options to directors of the Company. The options vested one quarter immediately
and one quarter vesting in May 2007. One quarter will vest each year thereafter
on the grant date. The exercise price is $.57 per share and the option expires
in five years. Management assigned a value of $18,112 to these options.
In July 2007 the board of directors granted a stock option for 25,000 options to
a new Company director. The options vested one half immediately and then one
quarter per year thereafter. The option is at the exercise price of $.78 per
share and expires in five years. Management assigned a value of $11,343 to this
option.
In April 2007 the board of directors granted a stock option for 25,000 options
to a new Company director. The options vested one half immediately and then one
quarter per year thereafter. The option is at the exercise price of $.76 per
share and expires in five years. Management assigned a value of $11,632 to this
option.
In April 2007 the board of directors granted stock options for 163,500 options
to employees and consultants of the company. The options vested one half
immediately and then one quarter per year thereafter. The options are at the
exercise price of $.73 and expire in five years. Management assigned a value of
$72,489 to these options.
In May 2007 the board of directors granted stock options for 171,000 options to
certain officers and employees. The options vested one half immediately and then
one quarter per year thereafter. The options are at the exercise price of $.80
and expire in five years. Management assigned a value of $78,895 to these
options.
During the quarter ended August 31, 2007 45,000 options to purchase Biomerica,
Inc. common stock were exercised. The options were at prices ranging from $.20
to $.73. The total proceeds to the Company were $17,533.
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 expected life. 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 123R footnote disclosure,
the Black-Scholes Model is also used for calculating employee options and
warrants valuations.
9
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.
(13) In August 2007, the Company and the holder of the Note payable-shareholder
agreed to the extension of the note due date until September 1, 2008, at the
same terms and conditions as the previous agreement.
(14) 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 August 31, 2007. 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 August 31, 2007.
(15) Subsequent Events
During September and October 2007 employees have exercised 18,625 options to
purchase common stock at exercise prices ranging from $.20 to $.73. Total
proceeds to the Company were $6,965.
On September 19, 2007 the Company entered into an agreement with the landlords
for payment of $97,165 in back rent (included in the August 31, 2007 accounts
payable), $2,500 in attorney's fees and extension of the lease term. The Company
and landlords agreed to an initial payment of $14,575 and five monthly payments
of $14,575 commencing October 1, 2007. No further interest will accrue on the
past due amount after August 1, 2007 and if payments are made on a timely basis
a discount of 10% ($9,716) will be given at the end of the agreement term. Prior
to the agreement the Company was on a month-to-month rental term. The landlords
and Company have agreed to a three month holdover period and each has agreed to
provide the other at least 90 days prior written notice on non-renewal if it
does not intend to further renew the Lease Term for an additional three months.
In September 2007 the Company borrowed an additional $92,350 on the equipment
loan. This draw brings the loan balance up to $154,020.
10
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 $1,340,065 for the first
quarter of fiscal 2007 as compared to $1,153,266 for the same period in the
previous year. This represents an increase of $186,799 or 16.2% for the quarter
ended August 31, 2007 as compared to the quarter ended August 31, 2006. The
increase was primarily due to an increase in sales of the existing product line
domestically and internationally.
Cost of sales in the first quarter of fiscal 2008 were $735,621, or
54.9% of sales as compared to $777,615, or 67.4% of sales in fiscal 2007. Cost
of sales in fiscal 2007 were higher due to increased burden expenses and
expenses due to hiring of additional personnel in production in anticipation of
higher production volumes.
Selling, general and administrative costs increased by $29,828, or
10.3% for the period ended August 31, 2007 as compared to the period ended
August 31, 2006. The increase was primarily the result of higher wages. Research
and development increased by $28,743, or 70.1% for period ended August 31, 2007
as compared to the period ended August 31, 2006, which resulted from the
increased research effort of developing additional new products.
For the three months ended August 31, 2007, other income of $707,754
was realized as compared to $10 in the same period in the prior fiscal year.
This increase was due to one-time other income of $697,034 which was realized
from the sale of a marketable security which had been carried on the Company's
books at zero. The balance of the increase was due to interest income on the
Company's cash balance.
There was interest incurred in fiscal 2008 on the equipment loan from
Commercial Bank, whereas there was no equipment loan in fiscal 2007. In
addition, interest expense increased from $7,502 to $12,543 due to interest
being charged on accrued back wages in fiscal 2008, whereas none was charged in
fiscal 2007.
Income tax expense for the quarter ended August 31, 2007 represents
alternative minimum taxes estimated to be be due primarily due to the other
income recognized from the sale of the Holister Stier securities.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2007, the Company had cash and available-for-sale
securities in the amount of $991,212 and working capital of $2,112,186.
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During the quarter ended August 31, 2007, the Company operations
provided cash of $477,616 as compared to cash used in operations of $24,319 in
the same period in the prior fiscal year. The increase was primarily due to the
other income of $707,754 received in fiscal 2008, which was offset by increased
accounts receivable of $239,474, decreased payables of $94,078 and decreased
accrued compensation of $95,627. Cash provided by financing activities for
fiscal 2007 was $1,632 as compared to $11,975 in the prior fiscal year. The
$1,632 in fiscal 2007 was a result of $17,533 in proceeds from the exercise of
employee stock options, which were offset by $14,867 in payments on the
shareholders' note payable. The Company invested $5,588 in the purchase of fixed
assets in fiscal 2008 as compared to $66,658 in the prior fiscal year.
Until three 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 three 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,
2007 and 2006, 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 February 2007 the Company obtained a $200,000 working capital line
of credit and was approved for a $200,000 equipment loan with Commercial Bank of
California. The credit line and the equipment loan are collateralized by
substantially all of the assets of the Company. As of August 31, 2007 $61,670
was owed on the equipment loan and there was no outstanding balance due on the
working capital line of credit. As of August 31, 2007 $153,003 was owed on the
shareholder note payable and all payments are up to date.
For the fiscal years ended May 31, 2003 through 2006 Biomerica's
independent auditors had concluded that there was substantial doubt as to the
Company's ability to continue as a going concern for a reasonable period of time
and thus rendered a "going concern" opinion on the audited financial statements.
Because the Company has had an upturn in sales and profitability and has an
improved working capital condition, among other factors, the audited financial
statements for the fiscal year ended May 31, 2007, do not contain such a "going
concern" opinion. However, there is no assurance that the Company will be able
to sustain such results in future years.
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, 2007, 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.
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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.
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
August 31, 2007, 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 quarters ended August 31,
2007 and 2006, respectively, was $34,893 and $25,069. 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.
Please refer to the annual report on Form 10-KSB for the period ended
May 31, 2007 for an in-depth discussion of risk factors.
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.
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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 August 31, 2007,
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 quarter ended August 31, 2007, 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.
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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. Inapplicable.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(a) Exhibits
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
and 906 of the Sarbanes-Oxley Act of 2002.
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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: October 15, 2007
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
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