UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 R 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _________
COMMISSION FILE NUMBER: 0-8765
BIOMERICA, INC.
(Name of small business issuer in its charter)
DELAWARE 95-2645573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of organization))
1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (949) 645-2111
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
--------------------- -------------------------------------------
NONE OTC-BULLETIN BOARD
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
---------------------
COMMON STOCK, PAR VALUE $0.08
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. ___
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
State issuer's revenues for its most recent fiscal year: $4,926,505
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (based upon 3,897,495 shares held by
non-affiliates and the closing price of $.90 per share for Common Stock in the
over-the-counter market as of July 31, 2008): $3,507,746
State the number of shares of the issuer's common equity, par value $0.08,
outstanding as of August 13, 2008: 6,621,839
DOCUMENTS INCORPORATED BY REFERENCE: Part III contains information incorporated
by reference to the Company's proxy statement for its 2008 Annual Meeting of
Stockholders, which will be filed not later than 120 days after the end of the
Company's fiscal year ended May 31, 2008. The Exhibit Index incorporates by
reference various documents previously filed with the Securities and Exchange
Commission.
Transitional Small Business Disclosure Format YES [_] NO [X]
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
THE COMPANY
Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was incorporated in
Delaware in September 1971 as Nuclear Medical Systems, Inc. We changed our
corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in November
1987 to Biomerica, Inc.
BIOMERICA - DIAGNOSTIC PRODUCTS
Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. The Company's medical diagnostic products are sold worldwide in two
markets: 1) clinical laboratories and 2) point of care (physicians' offices and
over-the-counter drugstores). Our diagnostic test kits are used to analyze blood
or urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances, which may exist in the human body in extremely
small concentrations.
Technological advances in medical diagnostics have made it possible to perform
diagnostic tests within the home and the physician's office (the point of care),
rather than in the clinical laboratory. One of our main objectives has been to
develop and market rapid diagnostic tests that are accurate, employ easily
obtained specimens, and are simple to perform without instrumentation. Our
over-the-counter and professional rapid diagnostic products help to manage
existing medical conditions and may save lives through prompt diagnosis and
early detection. Until recently, tests of this kind required the services of
medical technologists and sophisticated instrumentation. Frequently, results
were not available until at least the following day. We believe that rapid point
of care tests are as accurate as laboratory tests when used properly and they
require no instrumentation, give reliable results in minutes and can be
performed with confidence in the home or the physician's office.
Our clinical laboratory diagnostic products include tests for bone and anemia
conditions, food intolerance, infectious diseases, diabetes and others. These
diagnostic test kits utilize enzyme immunoassay technology. Some of these
products have not yet been submitted for clearance by the FDA for diagnostic
use, but can be sold in various foreign countries.
A significant part of Biomerica's manufacturing operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Biomerica maintains its headquarters in Newport Beach,
California where it houses administration, research and development, sales and
marketing, and customer services.
Biomerica has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any material
amount of its assets, except for the sale of its interest in Lancer
Orthodontics, Inc., during the fiscal year ended May 31, 2008.
DISCONTINUED OPERATIONS
Biomerica's ReadyScript subsidiary was a development-stage enterprise, the
operations of which were discontinued in May 2001. The net liabilities and
operating results of ReadyScript are shown separately in the accompanying
consolidated financial statements as discontinued operations.
LIQUIDITY
As of May 31, 2008, the Company had cash and current available-for-sale
securities in the amount of $2,022,735 (as compared to $517,432 as of May 31,
2007) and working capital of $3,428,936. In May 2008 the Company sold its
investment in Lancer Orthodontics, Inc., for a net amount of $1,083,444, which
increased the cash position of the Company. In June 2007 the Company also
exercised a warrant and sold the underlying shares that it owned in
Hollister-Stier (valued on the books at zero cost) for a net amount of $697,034.
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 May 31, 2008, $162,993 was
owed on the equipment loan and there was no outstanding balance due on the
working capital line of credit. Payments on the shareholder's note payable have
been made during fiscal 2008 according to the agreement for repayment and, as a
result, the balance on the note at May 31, 2008 was $95,936 as compared to
$167,870 at May 31, 2007. On July 31, 2008, the balance of principal and
interest on the shareholder note payable was paid in full.
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PRODUCTION
Most of our diagnostic test kits are processed and assembled at our facilities
in Newport Beach, California and in Mexicali, Mexico. During fiscal 2003, the
diagnostics division established a manufacturing facility in Mexicali, Mexico.
We have moved a significant portion of our diagnostic production (primarily
packaging and assembly) to that facility. We sublease facilities from and
subcontract with Lancer Orthodontics (a former subsidiary) to provide labor and
other services. Production of diagnostic tests can involve formulating component
antibodies and antigens in specified concentrations, attaching a tracer to the
antigen, filling components into vials, packaging and labeling. We continually
engage in quality control procedures to assure the consistency and quality of
our products and to comply with applicable FDA regulations. In June 2008 the
Company incorporated in Mexico under the name of Biomerica de Mexico for the
purpose of establishing our own mequiladora operation in Mexico at some time in
the future.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control department
that monitors and evaluates product quality and output. We also have an internal
Quality Systems department which ensures that our operating procedures are in
compliance with current FDA, CE Mark and ISO regulations. We either produce our
own antibodies and antigens or purchase these materials from qualified vendors.
We have alternate, approved sources for raw materials procurement and we do not
believe that material availability in the foreseeable future will be a problem.
RESEARCH AND DEVELOPMENT
Biomerica is engaged in research and development to broaden its diagnostic
product line in specific areas. Research and development expenses include the
costs of materials, supplies, personnel, facilities and equipment as well as
outside contract services. Consolidated research and development expenses
incurred by Biomerica for the years ended May 31, 2008 and 2007 aggregated
$259,085 and $256,101, respectively.
MARKETS AND METHODS OF DISTRIBUTION
Biomerica has approximately 450 current customers for its diagnostic business,
of which approximately 100 are distributors and the balance are hospital and
clinical laboratories, medical research institutions, medical schools,
pharmaceutical companies, chain drugstores, wholesalers and physicians' offices.
We rely on unaffiliated distributors, advertising in medical and trade journals,
exhibitions at trade conventions, direct mailings and an internal sales staff to
market our diagnostic products. We target two main markets: (a) clinical
laboratories and (b) point of care testing (physicians' offices and
over-the-counter drug stores). Marketing plans are utilized in targeting each of
the two markets.
For the year ended May 31, 2008 the Company had one customer which accounted for
more than 10% of sales and during fiscal 2007 the Company had one customer which
accounted for more than 10% of consolidated sales.
BACKLOG
At May 31, 2008 and 2007 Biomerica had a backlog of approximately $346,000 and
$267,000 respectively.
RAW MATERIALS
The principal raw materials utilized by Biomerica consist of various chemicals,
serums, reagents and packaging supplies. Almost all of our raw materials are
available from several sources, and we are not dependent upon any single source
of supply or a few suppliers. For the year ended May 31, 2008, no company
accounted for more than 10% of the consolidated purchases of raw materials. For
the year ended May 31, 2007 three companies accounted for more than 30% of the
consolidated purchases of raw materials.
We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Some sales orders are processed on the day received while
others are processed at a later date depending on the quantity and type of
order.
COMPETITION
Immunodiagnostic products are currently produced by more than 100 companies.
Biomerica is not a significant factor in the market.
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Our competitors vary greatly in size. Many are divisions or subsidiaries of
well-established medical and pharmaceutical concerns which are much larger than
Biomerica and expend substantially greater amounts than we do for research and
development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic products are
uniqueness, quality of product performance, price, service and marketing. We
believe we compete primarily on the basis of the uniqueness of our products, the
quality of our products, the speed of our test results, our patent position, our
favorable pricing and our prompt shipment of orders. We offer a broader range of
products than many competitors of comparable size, but to date have had limited
marketing capability. We are working on expanding this capability through
marketing and strategic cooperation with larger companies and distributors.
GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS
As part of our diagnostic business, we sell products that are legally defined to
be medical devices. As a result, we are considered to be a medical device
manufacturer, and as such are subject to the regulations of numerous
governmental entities. These agencies include the Food and Drug Administration
(the "FDA"), the United States Drug Enforcement Agency (the "DEA"),
Environmental Protection Agency, Federal Trade Commission, Occupational Safety
and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer
Product Safety Commission. These activities are also regulated by various
agencies of the states and localities in which our products are sold. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture and labeling of medical
devices, the maintenance of certain records and the reporting of potential
product problems and other matters.
The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices in
the United States by classifying them into one of three classes based on the
extent of regulation believed necessary to ensure safety and effectiveness.
Class I devices are those devices for which safety and effectiveness can
reasonably be ensured through general controls, such as device listing, adequate
labeling, pre-market notification and adherence to the Quality System Regulation
("QSR") as well as Medical Device Reporting (MDR), labeling and other regulatory
requirements. Some Class I medical devices are exempt from the requirement of
Pre-Market Approval ("PMA") or clearance. Class II devices are those devices for
which safety and effectiveness can reasonably be ensured through the use of
special controls, such as performance standards, post-market surveillance and
patient registries, as well as adherence to the general controls provisions
applicable to Class I devices. Class III devices are devices that generally must
receive pre-market approval by the FDA pursuant to a pre-market approval
application to ensure their safety and effectiveness. Generally, Class III
devices are limited to life-sustaining, life-supporting or implantable devices.
However, this classification can also apply to novel technology or new intended
uses or applications for existing devices. The Company's products are primarily
either Class I or Class II medical devices. The following is a breakdown of the
Biomerica products by class:
Class I - Fortel(TM) Ovulation test, EZ-LH(TM) Rapid Ovulation test
Class II - GAP(tm) IgG H. Pylori ELISA kit, Anti-thyroglobulin ELISA kit,
anti-TPO ELISA kit, PTH (intact) ELISA kit, Calcitonin ELISA kit, Erythropoietin
ELISA kit, ACTH ELISA kit, Fortel Ultra Midstream (OTC and plastic stick),
EZ-HCG(tm) Rapid Pregnancy test (professional and dipstick), EZ Detect(tm) Fecal
Occult Blood test (Physician's dispenser pack and OTC), Aware(tm) Breast
Self-Examination, drugs of abuse rapid tests, EZ-HP Professional, GAP(tm) IgA H.
Pylori ELISA kit, C-Peptide ELISA kit, Myoglobin ELISA, Troponin I ELISA, HS-CRP
ELISA, Allerquant (TM), Food Intolerance Kits; Allerquant( tm) Food Additives
Kit, EZ-HP OTC, GAP (TM) IgM H. Pylori ELISA kit, Isletest(tm) GAD ELISA kit,
IAA ELISA kit and IgG Food Additives Kit.
Class III - Isletest(tm) ICA ELISA kit, Isletest (tm), EZ PSA (Professional and
OTC).
If the FDA finds that the device is not substantially equivalent to a predicate
device, the device may be deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed, but approval is required before the
product can be sold for general use in the U.S. In addition to requiring
clearance or approval for new medical devices, FDA rules also require a new
510(k) filing and review period, prior to marketing a changed or modified
version of an existing legally marketed device, if such changes or modifications
could significantly affect the safety or effectiveness of that device. The FDA
prohibits the advertisement or promotion or any approved or cleared device for
uses other than those that are stated in the device's approved or cleared
application.
Pursuant to FDA requirements, we have registered our manufacturing facility with
the FDA as a medical device manufacturer, and listed the medical devices we
manufacture. We are also subject to inspection on a routine basis for compliance
with FDA regulations. This includes the Quality System Requirements, which
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requires that we manufacture our products and maintain our documents in a
prescribed manner with respect to issues such as design controls, manufacturing,
testing and validation activities. Further, we are required to comply with other
FDA requirements with respect to labeling, and the Medical Device Reporting
(MDR) regulation which requires that we provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of our
products, as well as product malfunctions that are likely to cause or contribute
to death or serious injury if the malfunction were to recur. We believe that we
are currently in material compliance with all relevant QSR and MDR requirements.
In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires that we be in compliance with QSR,
labeling and MDR regulations. Our license expires on March 16, 2009. These
licenses are renewed periodically, and to date we have never failed to obtain a
renewal.
Through compliance with FDA and California regulations, we can market our
medical devices throughout the United States. International sales of medical
devices are also subject to the regulatory requirements of each country. In
Europe, the regulations of the European Union require that a device have a "CE
Mark" in order to be sold in EU countries. The directive went into effect
beginning December 7, 2003. The Company has completed the process for complying
with the "CE Mark" directives, In Vitro Directive 98/79/EC, ISO 13485 for
medical devices, and Medical Device Directive 93/42/EEC. At present the
regulatory international review process varies from country to country. We, in
general, rely upon our distributors and sales representatives in the foreign
countries in which we market our products to ensure that we comply with the
regulatory laws of such countries. We believe that our international sales to
date have been in compliance with the laws of the foreign countries in which we
have made sales. Exports of most medical devices are also subject to certain FDA
regulatory controls.
The following products are FDA-cleared and may be sold to clinical laboratories,
physician laboratories and/or retail outlets in the United States as well as
internationally:
ACTH ELISA Kit
Anti-thyroglobulin ELISA kit
Anti-TPO ELISA Kit
AWARE(tm) Breast Self-Examination Kit
Calcitonin ELISA Kit
Drugs-of-Abuse Rapid Tests
Erythropoietin ELISA Kit
EZ-HCG Rapid Pregnancy Test
EZ-LH(tm) Rapid Ovulation Test
EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package)
GAP IgG H. Pylori ELISA Kit
HS-CRP ELISA
Drugs-of-Abuse Rapid Tests
Myoglobin ELISA
PTH (Intact) ELISA Kit
Troponin I ELISA
The following products are not FDA-cleared. These are sold internationally and
can be sold in the U.S. "FOR RESEARCH ONLY":
Allerquant(tm) IgG Food Intolerance ELISA Kit (90-foods, 14-foods, custom kits)
Allerquant IgG Food Additives Kit
C-Peptide ELISA Kit
EZ-PSA Rapid Test
EZ-H. Pylori Rapid Test
Fortel Cat Allergy Test
Fortel(tm) Ultra Midstream Pregnancy Test
Fortel(tm) Ovulation Test
GAP(tm) IgM H. Pylori ELISA Kit
GAP(tm) IgA H. Pylori ELISA Kit
Isletest(tm) GAD ELISA Kit
Isletest(tm) ICA ELISA Kit
Isletest(tm) IAA ELISA Kit
Biomerica is licensed to design, develop, manufacture and distribute IN VITRO
diagnostic and medical devices and is subject to the Code of Federal
Regulations, Section 21, parts 800 - 1299. The FDA is the governing body that
assesses and issues Biomerica's license to assure that it complies with these
regulations. Biomerica is currently licensed, and its last assessment was in
March 2006. During the inspection the FDA noted five observations that were
corrected in a timely manner. Biomerica is also registered and licensed with the
State of California's Department of Health Services. The Company believes that
all Biomerica products sold in the U.S. comply with the FDA regulations.
4
Biomerica's Quality Management System is in compliance with the International
Standards Organization (ISO) EN ISO 13485:2003. EN ISO 13485:2003 is an
internationally recognized standard in which companies establish their methods
of operation and commitment to quality.
SEASONALITY OF BUSINESS
The businesses of the Company and its subsidiary have not been subject to
significant seasonal fluctuations.
INTERNATIONAL BUSINESS
Most of Biomerica's property and equipment are located within southern
California. The Company currently has a minor amount of property and equipment
located in Mexico. The following table sets forth the dollar volume of revenue
attributable to sales to domestic customers and foreign customers during the
last two fiscal years for Biomerica:
Year Ended May 31, 2008 2007
U.S. Customers $1,359,000/27.5% $2,107,000/36.7%
Asia 854,000/17.3% 543,000/9.4%
Europe 2,549,000/51.7% 2,378,000/41.4%
Middle East 57,000/1.1% 64,000/1.1%
Oceania 3,000/.0% 540,000/9.4%
S. America 70,000/1.4% 75,000/1.3%
Other foreign 35,000/1.0% 41,000/0.7%
--------------------------------------------------------------------------------
Total Revenues $4,927,000/100% $5,748,000/100%
We recognize that our foreign sales could be subject to some special or unusual
risks, which are not present in the ordinary course of business in the United
States. Changes in economic factors, government regulations, terrorism and
import restrictions all could impact sales within certain foreign countries.
Foreign countries have licensing requirements applicable to the sale of
diagnostic products, which vary substantially from domestic requirements;
depending upon the product and the foreign country, these may be more or less
restrictive than requirements within the United States. Foreign diagnostic sales
at Biomerica are made primarily through a network of approximately 100
independent distributors in approximately 60 countries.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks and trade
secrets as important to our future success. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
most of our fulfillment partners and strategic partners to limit access to and
disclosure of proprietary information. We cannot be certain that these
contractual arrangements or the other steps taken by us to protect our
intellectual property will prevent misappropriation of our technology. We have
licensed in the past, and expect that we may license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our product brands is
maintained by such licensees, we cannot be certain that such licensees will not
take actions that might hurt the value of our proprietary rights or reputation.
BRANDS, TRADEMARKS, PATENTS
We registered the tradenames "Fortel", "Isletest", "Nimbus" and "GAP" with the
Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZ-Detect", "Candiquant," "Candigen", "EZ-H.P." and "EZ-PSA". A
trademark for "Aware" was issued and assigned in January 2002. Biomerica has
co-patent rights to the EZ-Detect Fecal Occult Blood Test (FOBT). In addition,
Biomerica holds the following patents: Immunotherapy Agents for Treatment of IgE
Mediated Allergies and Allergen-thymic Hormone Conjugates for Treatment of IgE
Mediated Allergies, U.S. Patent #5,275,814, issued January 4, 1994 and
Diagnostic Test for Measuring Islet Cell Autoantibodies and Reagents Relating
Thereto, U.S. Patent #5,786,221, issued July 28, 1998. Biomerica has obtained
the rights to manufacture and sell certain products. In some cases royalties are
paid on the sales of these products. Biomerica anticipates that it will license
or purchase the rights to other products or technology in the future.
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The laws of some foreign countries do not protect our proprietary rights to the
same extent as do the laws of the U.S. Effective copyright, trademark and trade
secret protection may not be available in such jurisdictions. Our efforts to
protect our intellectual property rights may not prevent misappropriation of our
content. In addition, there can be no assurance that Biomerica is not violating
any third party patents.
EMPLOYEES
As of May 31, 2008, the Company employed 33 employees of whom 3 are part-time
employees in the United States. The following is a breakdown between
departments:
2008 2007
---- ----
Administrative 5 4
Marketing & sales 3 3
Research & development 3 3
Production and operations 22 20
------------------ -------------------
Total 33 30
In addition, Biomerica contracts with Lancer for the services of 16 people at
its Mexican facility. We also engage the services of various outside Ph.D. and
M.D. consultants as well as medical institutions for technical support on a
regular basis. We are not a party to any collective bargaining agreement and
have never experienced a work stoppage. We consider our employee relations to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is currently leasing its facilities on a month-to-month agreement
while it explores various other facility options. The facilities are owned and
operated by Ms. Janet Moore (an officer and director of the Company), Ilse
Sultanian, Susan Irani Rigdon and Jennifer Irani, some of whom are shareholders.
Effective May 1, 2007, the monthly rent was set at $14,000. Management believes
there would be no significant difference in the terms of the property rental if
the Company was renting from a third party. Total gross rent expense for this
facility was approximately $168,000 per year during the years ended May 31, 2008
and 2007, respectively.
As of May 31, 2008, we believe that our facilities and equipment are in suitable
condition and are adequate to satisfy the current requirements of our Company.
However, management is exploring alternative leasing space, which may be more
beneficial to the needs of the Company and allow for a more efficient operation
at a cost effective rate.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company's obligations and commitments as of
May 31, 2008:
Payments Due by Period
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4 YEARS
----- ------ --------- -------
Shareholder debt* $ 95,936 $ 95,936 -- --
Capital Leases $ 4,180 $ 4,180 -- --
Equipment loan** $162,993 $ 48,428 $109,855 $ 4,710
-------- -------- -------- --------
Total $263,109 $148,544 $109,855 $ 4,710
* Paid in full on July 31, 2008.
** Payments as of May 31, 2008 were $5,038 per month at the interest rate of
9.5%. Effective July 16, 2008, the interest rate was reduced to a fixed rate of
8.0%.
Biomerica has various insignificant leases for office equipment.
ITEM 3. LEGAL PROCEEDINGS
Inapplicable.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 20, 2002, the Company's stock has been quoted on the OTC Bulletin
Board under the symbol "BMRA.OB". The following table shows the high and low bid
prices for Biomerica's common stock for the periods indicated, based upon data
reported by Yahoo Finance. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions.
Bid Prices
----------
High Low
---- ---
Quarter ended:
May 31, 2008 $1.26 $0.97
February 29, 2008 $1.55 $1.10
November 30, 2007 $1.80 $1.30
August 31, 2007 $1.50 $0.71
May 31, 2007 $0.80 $0.42
February 28, 2007 $0.62 $0.40
November 30, 2006 $0.59 $0.45
August 31, 2006 $0.59 $0.42
As of May 31, 2008, the number of holders of record of Biomerica's common stock
was approximately 891, excluding stock held in street name. The number of record
holders does not bear any relationship to the number of beneficial owners of the
Common Stock.
The Company has not paid any cash dividends on its Common Stock in the past and
does not plan to pay any cash dividends on its Common Stock in the foreseeable
future. The Company's Board of Directors intends, for the foreseeable future, to
retain any earnings to finance the continued operation and expansion of the
Company's business.
During the past three fiscal years we completed the following private placement
transactions exempt under Regulation D of the Securities Act of 1933, as
amended:
Class or Persons Price per
Date Title Amount Sold To Share Total
insider & qualified
5/06 common 156,000 investors $0.48 $ 74,880
The table below provides information relating to our equity compensation plans
as of May 31, 2008:
Securities Remaining
Available for Future Issuance
Securities Number Of Securities To Be Compensation Plans Under Compensation Plans
Plan Issued Upon Exercise Of Weighted-Average Exercise (Excluding those Reflected in
Category Outstanding Options Price of Outstanding Options First Column)
Equity compensation
Plans approved by 1,130,125 $0.54 794,739
Securities holders
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS FORM
10-KSB MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF
1933. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S RESULTS IN FUTURE PERIODS TO DIFFER
MATERIALLY FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF
RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT
ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND
APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR
FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT
ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS.
YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS WHICH WE FILE
WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
Fiscal 2008 Compared to Fiscal 2007
Our consolidated net sales were $4,926,505 for fiscal 2008 compared to
$5,748,319 for fiscal 2007. This represents a decrease of $821,814, or 14.3% for
fiscal 2008. The decrease was due to the loss of a large foreign distributor at
the end of fiscal 2007 as well as a larger than usual sale to a domestic chain
drug store in fiscal 2007 that did not occur in fiscal 2008.
Cost of sales in fiscal 2008 as compared to fiscal 2007 decreased by $711,724 or
20.3%. The percentage of cost of sales relative to sales decreased from 60.9% to
56.7%, or by 4.2% due to a larger percent of inventory in work-in-process with
associated labor and overhead costs capitalized at May 31, 2008.
Selling, general and administrative costs decreased in fiscal 2008 as compared
to fiscal 2007 by $101,773 or 6.9%. The decrease was primarily due to lower
commissions and advertising costs associated with screening programs.
Research and development expense was $259,085 in fiscal 2008 as compared to
$256,101 in fiscal 2007. This is an increase of $2,984, or 1.2%. The Company
continues to work on the development of several new products and anticipates
that it will increase its efforts for development and product approvals in the
next fiscal year.
Interest expense, net of interest income, decreased in fiscal 2008 as compared
to fiscal 2007 by $19,061 or 54.4%. The change in interest expense resulted from
the decrease in the balance on the shareholder/note payable, which was offset by
an increased balance on the equipment line of credit. Interest income increased
due to larger cash balances. This resulted in a lower net interest expense.
Other income increased by $1,109,505 in fiscal 2008 as compared to fiscal 2007.
This increase was a result of one-time income from the sale of the Company's
interest in Lancer Orthodontics as well as income received as a result of the
one-time sale of a warrant held in Hollister-Stier.
Consolidated net income was $1,710,044 for the year ended May 31, 2008. This was
a result of operating income of $509,489, plus other income of $1,133,555 plus
tax benefit of $67,000. As of May 31, 2008, Biomerica had federal income tax net
operating loss carryforwards of approximately $1,119,000, and research and
development tax credit carry forwards of approximately $6,000. The federal net
operating loss carry forwards begin to expire in 2021. The federal research and
development tax credit carry forwards begin to expire in 2026. During the fiscal
year ended May 31, 2008, the Company recognized $170,000 in income tax benefit
from the release of previously allowed for net operating loss carryforwards
which are expected to be used against future income.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2008, we had cash and current available for sale securities of
$2,022,735 (see Note 2 of Notes to Consolidated Financial Statements) and
working capital of $3,428,936. During 2008, cash used in operations was $194,595
as compared to cash provided by operations in fiscal 2007 of $463,708. During
fiscal 2008, cash provided by investing activities was $1,515,695 as compared to
cash used in investing activities of $62,695 in fiscal 2007. Cash of $264,782
and $112,695 for fiscal 2008 and 2007, respectively, was used for the purchase
of property and equipment. In fiscal 2008 proceeds from the sale of marketable
securities was $1,780,478. Cash provided by financing activities in fiscal 2008
was $184,380 as compared to cash used in financing activities of $4,027 in
fiscal 2007. During fiscal 2008, Biomerica repaid shareholder debt of $61,056 as
compared to $93,072 in fiscal 2007, which was offset by funds received from the
equipment line of credit of $119,530 (offset by payments of $18,207). The change
in cash and cash equivalents at May 31, 2008 compared to May 31, 2007 was an
increase of $1,505,480.
8
SUBSEQUENT EVENTS
On July 31, 2008, the Company paid off the remaining principal and interest
balance on the shareholder note payable.
In June 2008 warrants for 120,000 shares were exercised at $.25 per share which
resulted in net proceeds to the Company of $30,000.
In June 2008 the Company incorporated in Mexico under the name of Biomerica de
Mexico for the purpose of establishing our own mequiladora operation in Mexico
at some time in the future.
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 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. An allowance is
established if necessary 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.
Historically we were in a loss position for tax purposes, and established a
valuation allowance against deferred tax assets, as we did not believe it was
likely that we would generate sufficient taxable income in future periods to
realize the benefit of our deferred tax assets. Although the Company has
achieved net income in increasing amounts over the last three fiscal years,
predicting future taxable income is difficult, and requires the use of
significant judgment. Due to the fact that many factors can influence
profitability, management determined at May 31, 2008, that $170,000 of
previously allowed for deferred tax assets should be released, which resulted in
an income tax benefit of $170,000 being recognized. Management will re-evaluate
this determination periodically.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should read the following factors in conjunction with the factors discussed
elsewhere in this and our other filings with the Securities and Exchange
Commission 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, Inc. and are not meant to be
an exhaustive discussion of risks that apply to companies such as Biomerica,
Inc. Like other businesses, Biomerica, Inc. is susceptible to macroeconomic
downturns in the United States or abroad, as were experienced in fiscal year
2002, that may affect the general economic climate and performance of Biomerica,
Inc. or its customers.
9
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 out 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 operations as a whole;
failure to manage the future expansion of our business could have a material
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, some 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 these factors make it difficult to predict
operating results for any particular period.
INSURANCE COVERAGE
Biomerica currently carries various insurance policies including products
liability ($2,000,000), general liability ($2,000,000), property insurance
(personal property-$2,700,000), business income insurance ($1,316,252), employee
benefit errors or omissions liability insurance ($1,000,000), commercial crime
insurance ($100,000), crime insurance (pension plan) ($300,000), employee theft
($100,000), depositor's forgery ($100,000), commercial auto ($1,000,000),
umbrella liability insurance ($1,000,000), workman's compensation insurance
($1,000,000), directors and officers' insurance ($3,000,000), group health,
disability and life insurance. Biomerica's workman's compensation policy covers
injuries to employees as a result of accidental contamination from or by
hazardous materials.
RECENT ACCOUNTING PRONOUNCEMENTS
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 is required to adopt this statement as of June 1, 2007. The adoption
of SFAS No. 156 did not have a material impact on the Company's 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
adoption of SFAS No. 157 did not have a material impact on the Company's
financial statements.
10
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.
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 that the adoption
of FIN 48 has had a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, Accounting for the Fair Value
Option for Financial Assets and Financial Liabilities, Including an amendment of
FASB Statement No. 115. This Statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This Statement shall be effective as of the beginning
of each reporting entity's first fiscal year that begins after November 15,
2007, therefore Biomerica will not be required to adopt SFAS No. 159 until June
1, 2008. The Company does not believe that the adoption of SFAS No. 159 will
have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS
141R establishes a defined measurement period that governs the time period
within which the business combination must be reported. In addition, the revised
standard significantly expands the scope of disclosure requirements. SFAS No.
141R is effective for annual periods beginning after December 15, 2008. The
Company does not believe that the adoption of SFAS No. 141R will have a material
impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51. This statement
applies to all entities that prepare consolidated financial statements, except
for non-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for annual periods
beginning December 15, 2008. The Company does not believe that the adoption of
SFAS No. 160 will have a material impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of FASB Statement No. 133. This
Statement requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issue years and interim periods beginning
after November 15, 2008. The Company does not believe that the adoption of SFAS
No. 161 will have a material impact on its financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS No. 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411. The Company does not believe that the adoption of
SFAS No. 161 will have a material impact on its financial statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Exhibit 99.3, "Biomerica, Inc. and Subsidiary Consolidated Financial Statements"
is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
ITEM 8A. CONTROLS AND PROCEDURES
Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the framework outlined by the
Committee of Sponsoring Organizations (COSO). Our Management concluded that our
internal control over financial reporting was effective as of May 31, 2008.
11
EVALUATION OF DISCLOSURE CONTROLS
As of May 31, 2008, Company management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2008, the Company's disclosure
controls and procedures were effective for the purposes of recording,
processing, summarizing and timely reporting of material information relating to
the Company required to be included in its periodic reports.
For the reasons discussed in "Management's Report on Internal Control over
Financial Reporting" below, Company management, including the Chief Executive
Officer and Chief Financial Officer concluded that, as of May 31, 2008, the
Company's internal control over financial reporting was effective. Management
has concluded that the consolidated financial statements included in this annual
report present fairly, in all material respects, the Company's financial
position, results of operations, and cash flows for the periods presented in
conformity with accounting principles generally accepted in the United States.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than the changes described in "Management's Report on Internal Control
Over Financial Reporting" below, there were no changes in the Company's internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the year ended May 31, 2008, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Company management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. The Company's internal control over financial
reporting is designed to provide reasonable assurance to the Company's
management and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of financial statements for
external purposes in accordance with generally accepted accounting principles.
A Company's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
The effectiveness of any system of internal control over financial reporting is
subject to inherent limitations, including the exercise of judgment in
designing, implementing, operating and evaluating the controls and procedures.
Because of these inherent limitations, internal control over financial reporting
cannot provide absolute assurance regarding the reliability of financial
reporting and may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Company management, with the participation of the Chief Executive Officer and
the Chief Financial Officer, assessed the effectiveness of the Company's
internal control over financial reporting as of May 31, 2008. In making this
assessment, Management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. Based on this assessment, management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
believes that, as of May 31, 2008, the Company's internal control over financial
reporting was effective based on those criteria.
Company management will continue to monitor and evaluate the effectiveness of
its disclosure controls and procedures and its internal controls over financial
reporting on an ongoing basis and are committed to taking further action and
implementing improvements, as necessary and as funds allow.
Note: This 10-KSB does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this 10-KSB.
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
This information is incorporated by reference to the Company's proxy statement
for its 2008 Annual Meeting of Stockholders, which will be filed not later than
120 days after the end of the Company's fiscal year ended May 31, 2008.
ITEM 10. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's proxy statement
for its 2008 Annual Meeting of Stockholders, which will be filed not later than
120 days after the end of the Company's fiscal year ended May 31, 2008.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's proxy statement
for its 2008 Annual Meeting of Stockholders, which will be filed not later than
120 days after the end of the Company's fiscal year ended May 31, 2008.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 2003, Biomerica entered into an agreement with Lancer whereby
Biomerica agreed to pay an initial shelter fee of $5,000 with additional monthly
payments of $2,875 for use of the Lancer de Mexico facilities to produce and
manufacture Biomerica products. The monthly payments are due as long as
Biomerica produces its products at the Lancer de Mexico facility. At May 31,
2008, Biomerica has paid all applicable shelter fees.
Other information regarding related transactions is incorporated by reference to
the Company's proxy statement for its 2008 Annual Meeting of Stockholders, which
will be filed not later than 120 days after the end of the Company's fiscal year
ended May 31, 2008.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File
No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 6, 1978 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 4, 1983 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on January 19, 1987 (incorporated by reference to Exhibit 3.4
filed with Form 8 Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on November 4, 1987 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on December 20, 1994 (incorporated by reference to Exhibit 3.7
filed with Registrant's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1995).
13
3.8 First Amended and Restated Certificate of Incorporation of
Biomerica, Inc. filed with the Secretary of State of Delaware
on August 1, 2000 (incorporated by reference to Exhibit 3.8
filed with the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 2000).
4.1 Specimen Stock Certificate of Common Stock of Registrant
(incorporated by reference to Exhibit 4.1 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.3 1999 Stock Incentive Plan of Registrant (incorporated by
reference to Exhibit 10.1 to Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on March
29, 2000 and on May 30 , 2007).
10.4 1995 Stock Option and Common Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on January 20, 1996).
10.5 1991 Stock Option and Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on April 6, 1992).
10.31 Loan Modification, Forbearance and Security Agreement
(incorporated by reference to the Company's February 29, 2004
Form 10-QSB filed April 14, 2004).
10.32 Promissory Note (incorporated by reference to the Company's
February 29, 2004 Form 10-QSB filed April 14, 2004).
10.33 Second Amendment of the Note, Loan and Modification Agreement
(incorporated by reference to the Company's February 28, 2007
Form 10-QSB filed April 16, 2007).
10.34 Commercial Security Agreement (loan #0100000250) with
Commercial Bank of California dated February 20, 2007
(incorporated by reference to the Company's February 28, 2007
Form 10-QSB filed April 16, 2007).
10.35 Promissory Note (loan #0100000250) dated February 20, 2007
with Commercial Bank of California (incorporated by reference
to the Company's February 28, 2007 Form 10-QSB filed April 16,
2007).
10.36 Promissory Note (loan #0100000251) dated February 20, 2007
with Commercial Bank of California (incorporated by reference
to the Company's February 28, 2007 Form 10-QSB filed April 16,
2007).
10.37 Subordination Agreement (loan #0100000250) dated February 20,
2007 with Commercial Bank of California and Janet Moore,
Trustee of the Janet Moore Trust (incorporated by reference to
the Company's February 28, 2007 Form 10-QSB filed April 16,
2007).
10.38 Business Loan Agreement with Commercial Bank of California
(incorporated by reference to the Company's February 28, 2007
Form 10-QSB filed April 16, 2007).
21.1 Subsidiary of Registrant.
23.2 Consent of Independent Registered Public Accounting Firm (PKF
San Diego).
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Biomerica, Inc. and Subsidiary Consolidated Financial
Statements For The Years Ended May 31, 2008 and 2007 and
Independent Registered Public Accounting Firm's Report.
14
(b) Reports on Form 8-K.
The following Forms 8-K are incorporated by reference to the Forms 8-K filed on
the following dates: May 1, 2007, May 3, 2007, June 19, 2007, July 16, 2007, and
May 29, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed for professional services by PKF (San Diego) in 2008
and 2007 were as follows:
2008 2007
---- ----
Audit fees $58,198 (1) $50,000 (2)
Audit related fees
Tax fees 9,874 5,362
All other fees 3,792 1,732
------- -------
Total $71,864 $57,094
(1) Also includes fees to be billed in fiscal 2009 for fiscal 2008.
(2) Also includes fees to be billed in fiscal 2008 for fiscal 2007.
Audit Fees consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements, the audit of our
subsidiary's financial statements, the reviews of the financial statements
included in our Forms 10-QSB and for any other services that are normally
provided by PKF in connection with our statutory and regulatory filings or
engagements.
Audit Related Fees consist of the aggregate fees billed for professional
services rendered for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and the financial statements of our subsidiary that were not otherwise included
in Audit Fees.
Tax Fees consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.
All Other Fees consist of the aggregate fees billed for products and services
provided by PKF and not otherwise included in Audit Fees, Audit Related fees or
Tax Fees.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
The Audit Committee has the responsibility of appointing the independent audit
firm and overseeing their work. The Audit Committee pre-approves all audit and
related services. Should the audit committee pre-approve any services other than
audit and related services, it evaluates whether the services would compromise
the auditor's independence.
Of the services provided in fiscal 2008 and 2007, all fees and services were
pre-approved by the audit committee.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /s/ Zackary S. Irani
------------------------------
Zackary S. Irani,
Chief Executive Officer
Dated: 8/29/08
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
Signature and Capacity
/s/ Zackary S. Irani Date: 8/29/08
-------------------------------------
Zackary S. Irani
Director, Chief Executive Officer
/s/ Janet Moore Date: 8/29/08
-------------------------------------
Janet Moore,
Secretary, Director, Chief Financial Officer
/s/ Francis R. Cano, Ph.D. Date: 8/29/08
-------------------------------------
Francis R. Cano, Ph.D.
Director
/s/ Allen Barbieri Date: 8/29/08
-------------------------------------
Allen Barbieri
Director
/s/ Jane Emerson, M.D., Ph.D. Date: 8/29/08
-------------------------------------
Jane Emerson,
M.D.,Ph.D. Director
/s/ John Roehm Date: 8/29/08
-------------------------------------
John Roehm
Director
16
BIOMERICA, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Report Of Independent Registered Public Accounting Firm FS-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of May 31, 2008 FS-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended May 31, 2008 and 2007 FS-4 - FS-5
Consolidated Statements of Shareholders' Equity for the
Years Ended May 31, 2008 and 2007 FS-6 - FS-9
Consolidated Statements of Cash Flows for the Years
Ended May 31, 2008 and 2007 FS-10 - FS-11
Notes to the Consolidated Financial Statements FS-12 - FS-27
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Biomerica, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
(a Delaware Corporation) and its subsidiary as of May 31, 2008 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the years ended May 31, 2008 and 2007. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We have conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal controls over financial reporting. Our audits included consideration of
internal controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstance, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. as of May 31, 2008, and the results of its consolidated
operations and cash flows for the years ended May 31, 2008 and 2007 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2, to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R),
SHARE-BASED PAYMENT, as of June 1, 2006.
August 25, 2008 /s/ PKF
San Diego California Certified Public Accountants
A Professional Corporation
FS-2
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31,
2008
----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,022,380
Available-for-sale securities 355
Accounts receivable, less allowance for doubtful accounts of $84,206 614,330
Inventories 1,764,202
Deferred Tax Asset 35,000
Prepaid expenses and other 101,867
----------------
Total current assets 4,538,134
----------------
PROPERTY AND EQUIPMENT, at cost
Equipment 897,664
Furniture, fixtures and leasehold improvements 187,873
----------------
Total property and equipment 1,085,537
----------------
ACCUMULATED DEPRECIATION (715,957)
----------------
Net property and equipment 369,580
----------------
Deferred Tax Asset- long-term 135,000
OTHER ASSETS 64,997
----------------
$ 5,107,711
================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 473,539
Accrued compensation 487,115
Capital lease - short-term portion 4,180
Notes payable-shareholder 95,936
Loan for equipment purchase - current 48,428
----------------
Total current liabilities 1,109,198
----------------
Loan for equipment purchase - long-term 114,565
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 25,000,000
shares authorized; 6,489,839 shares and issued and outstanding 519,186
Additional paid in capital 17,407,096
Common stock subscribed 3,000
Accumulated other comprehensive loss (7,398)
Accumulated deficit (14,037,936)
----------------
Total shareholders' equity 3,883,948
----------------
$ 5,107,711
================
See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.
FS-3
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED MAY 31,
------------------------------
2008 2007
-------------- --------------
Net Sales $ 4,926,505 $ 5,748,319
Cost of sales 2,790,883 3,502,607
-------------- --------------
GROSS PROFIT 2,135,622 2,245,712
-------------- --------------
OPERATING EXPENSES
Selling, general and administrative 1,367,048 1,468,821
Research and development 259,085 256,101
-------------- --------------
Total operating expenses 1,626,133 1,724,922
-------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 509,489 520,790
OTHER INCOME (EXPENSE)
Interest expense, net of interest income (15,990) (35,051)
Other income, net 1,149,545 40,040
-------------- --------------
INCOME FROM CONTINUING OPERATIONS 1,643,044 525,779
INCOME TAX (BENEFIT) EXPENSE (67,000) 16,769
-------------- --------------
INCOME FROM CONTINUING OPERATIONS 1,710,044 509,010
DISCONTINUED OPERATIONS
Income from discontinued operations, net -- 27,869
-------------- --------------
NET INCOME $ 1,710,044 $ 536,879
See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.
FS-4
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)
YEARS ENDED MAY 31,
-----------------------------
2008 2007
-------------- -------------
OTHER COMPREHENSIVE GAIN (LOSS), net of tax
Unrealized gain (loss) on available-for-sale securities 673,030 (2,746)
Reclassification adjustment, net of tax (450,711) --
-------------- -------------
COMPREHENSIVE INCOME $ 1,932,363 $ 534,133
============== =============
BASIC NET INCOME PER COMMON SHARE:
Income from continuing operations $ .28 $ .09
Income from discontinued operations .00 .00
-------------- -------------
Basic net income per common share $ .28 $ .09
-------------- -------------
DILUTED NET INCOME PER COMMON SHARE:
Income from continuing operations $ .25 $ .08
Income from discontinued operations .00 .00
-------------- -------------
Diluted net income per common share $ .25 $ .08
============== =============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
Basic 6,125,981 5,929,445
============== =============
Diluted 6,978,039 6,513,477
============== =============
See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.
FS-5
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Common Stock Additional Subscribed
---------------------------- Paid-in ----------------------------
Shares Amount Capital Shares Amount
------------- ------------- ---------------- ------------- -------------
Balances, May 31, 2006 5,766,681 $ 461,333 $ 17,064,324 156,000 $ 74,880
Exercise of Stock Options 21,533 1,722 4,406 -- --
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
Compensation expense in connection with options and
warrants granted -- -- 123,584 -- --
Private Placement 156,000 12,480 62,400 (104,000) (49,920)
Private Placement - receivable -- -- -- (52,000) (24,960)
Net income -- -- -- -- --
------------- ------------- ---------------- ------------- -------------
Balances, May 31, 2007 5,944,214 475,535 17,254,714 -- --
------------- ------------- ---------------- ------------- -------------
(Continued)
FS-6
Accumulated
Common Other
Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Total
------------ ------------- --------------- -------------
Balances, May 31, 2006 $ (24,960) $ (226,971) $ (16,284,859) $ 1,063,747
Exercise of Stock Options -- -- -- 6,128
Change in unrealized gain (loss) on available-for-sale
securities -- (2,746) -- (2,746)
Compensation expense in connection with options and warrants
granted -- -- -- 123,584
Private Placement -- -- -- 24,960
Private Placement - receivable 24,960 -- -- --
Net Income -- -- 536,879 536,879
------------ ------------- --------------- -------------
Balances, May 31, 2007 -- (229,717) (15,747,980) 1,752,552
------------ ------------- --------------- -------------
(Continued)
FS-7
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Common Stock
Common Stock Additional Subscribed
---------------------------- Paid-in ----------------------------
Shares Amount Capital Shares Amount
------------- ------------- ---------------- ------------- -------------
Exercise of stock options & warrants 545,625 43,651 115,735 12,000 3,000
Change in unrealized gain (loss)
on available-for-sale securities -- -- -- -- --
Compensation expense in connection
with options and warrants granted -- -- 36,647 -- --
Net income -- -- -- -- --
------------- ------------- ---------------- ------------- -------------
Balances, May 31, 2008 6,489,839 $ 519,186 $ 17,407,096 12,000 $ 3,000
============= ============= ================ ============= =============
FS-8
Accumulated
Common Other
Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Total
------------ ------------- --------------- -------------
Exercise of stock options & warrants -- -- -- 162,386
Change in unrealized gain (loss) on available-for-sale
securities -- 222,319 -- 222,319
Compensation expense in connection with options and
warrants granted -- -- -- 36,647
Net income -- -- 1,710,044 1,710,044
------------ ------------- --------------- -------------
Balances, May 31, 2008 -- $ (7,398) $ (14,037,936) $ 3,883,948
============ ============= =============== =============
See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.
FS-9
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
May 31,
------------------------------
2008 2007
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,710,044 $ 509,010
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 65,827 56,736
Provision for losses on accounts receivable 25,423 51,753
(Gain) on sale of available-for-sale securities (1,147,845) --
Options issued 36,647 123,584
(Gain) loss on sale of equipment -- (29,512)
Changes in assets and liabilities:
Accounts receivable (134,986) 4,200
Inventories (302,489) (333,683)
Prepaid expenses and other 25,768 (69,969)
Notes receivable 1,800 1,800
Other assets (31,598) (19,980)
Accounts payable and other accrued expenses (192,710) 85,484
Increase in deferred tax asset (170,000) --
Accrued compensation (80,476) 84,285
-------------- --------------
Net cash (used in) provided by operating activities (194,595) 463,708
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment -- 50,000
Proceeds from sale of available-for-sale securities 1,780,478 --
Purchases of property and equipment (264,783) (112,695)
-------------- --------------
Net cash provided by (used in) investing activities 1,515,695 (62,695)
-------------- --------------
(Continued)
FS-10
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended
May 31,
--------------------------------
2008 2007
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital leases (4,394) (3,714)
Decrease of shareholder debt (61,056) (93,072)
Exercise of stock options and warrants 148,507 6,129
Sale of common stock, net of offering expenses -- 24,960
Borrowings on loan for equipment purchase 119,530 61,670
Payments on loan for equipment (18,207) --
-------------- --------------
Net cash provided by (used in) financing activities 184,380 (4,027)
-------------- --------------
Net change in cash and cash equivalents 1,505,480 396,986
CASH AND CASH EQUIVALENTS, beginning of year 516,900 119,914
-------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 2,022,380 $ 516,900
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 53,922 $ 34,859
============== ==============
Income taxes $ 4,523 $ 1,600
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain (loss) on available-for-sale securities $ 222,319 $ (2,746)
============== ==============
Non-cash exercise of warrants and options by reduction of note payable 10,878 --
============== ==============
Increases in deferred tax asset 170,000 --
============== ==============
Subscribed stock receivable $ 3,000 $ (24,960)
============== ==============
See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.
FS-11
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
1. ORGANIZATION AND LIQUIDITY
ORGANIZATION
Biomerica, Inc. and Subsidiary (collectively "the Company") are primarily
engaged in the development, manufacture and marketing medical diagnostic kits.
As of May 31, 2008 the Company had one operational unit.
LIQUIDITY
As of May 31, 2008, the Company had cash and current available-for-sale
securities in the amount of $2,022,735 as compared to $517,432 on May 31, 2007
and working capital of $3,428,936. In May 2008 the Company sold its investment
in Lancer Orthodontics, Inc., for a net amount of $1,083,444, which increased
the cash position of the Company. In June, 2007, the Company also exercised a
warrant and sold the underlying shares that it owned in Hollister-Stier (valued
on the books at zero cost) for a net amount of $697,034.
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 May 31, 2008, $162,993 was
owed on the equipment loan and there was no outstanding balance due on the
working capital line of credit. Payments on the shareholder's note payable have
been made during fiscal 2008 according to the agreement for repayment and, as a
result, the balance on the note at May 31, 2008 was $95,936 as compared to
$167,870 at May 31, 2007. On July 31, 2008, the Company paid the remaining
principal and interest balance owed on the shareholder note payable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended May 31, 2008 and 2007
(see Note 3) include the accounts of Biomerica, Inc. ("Biomerica") and
ReadyScript, Inc. (as discontinued operations). All significant intercompany
accounts and transactions have been eliminated in consolidation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could materially differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, available-for-sale securities, capital lease,
shareholder debt, commercial bank line of credit, commercial bank equipment loan
and accounts payable. The carrying amounts of the Company's financial
instruments approximate their fair values at May 31, 2008.
CONCENTRATION OF CREDIT RISK
The Company, on occasion, maintains cash balances at certain financial
institutions in excess of amounts insured by federal agencies.
FS-12
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company's sales are not
materially dependent on a single customer or a small group of customers.
Biomerica had one customer which accounted for greater than 10% of its sales for
the fiscal year ended May 31, 2008 and one customer which accounted for greater
than 10% of its sales for the fiscal year ended May 31, 2007. The Company
performs ongoing credit evaluations of its customers and requires prepayment in
some circumstances. The Company does not obtain collateral with which to secure
its accounts receivable. The Company maintains reserves for potential credit
losses based upon the Company's historical experience related to credit losses.
The Company monitors its accounts receivables balances closely. At May 31, 2008,
three customers each accounted for greater than 10% of gross accounts
receivable. At May 31, 2007, three customers each accounted for greater than 10%
of gross accounts receivable.
For the year ended May 31, 2008 no company accounted for more than 10% of the
purchases of raw materials for Biomerica. For the fiscal year ended May 31, 2007
three companies accounted for more than 30% of the purchases for Biomerica on an
unconsolidated basis.
GEOGRAPHIC CONCENTRATION
Approximately $523,000 of Biomerica's gross inventory and $22,000 of Biomerica's
property and equipment, net of accumulated depreciation and amortization, is
located in Mexicali, Mexico.
CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and money market accounts.
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES." This statement addresses the accounting and
reporting for investments in equity securities which have readily determinable
fair values and all investments in debt securities. The Company's marketable
equity securities are classified as available-for-sale under SFAS 115 and
reported at fair value, with changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-sale securities consist of
common stock of publicly-traded companies and are stated at market value in
accordance with SFAS 115. Cost for purposes of computing realized gains and
losses is computed on a specific identification basis. The proceeds from the
sale of available-for-sale securities during fiscal 2008 was $1,780,478 and
during fiscal 2007 it was $0. The change in the net unrealized holding gain
(loss) on available-for-sale securities that has been included as a separate
component of shareholders' equity totaled $(222,319) and $(2,746) for the years
ended May 31, 2008 and 2007, respectively. The Company has a total of $355 in
available-for-sale securities at May 31, 2008.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of biological chemicals. Cost includes raw
materials, labor, manufacturing overhead and purchased products. Market is
determined by comparison with recent purchases or net realizable value. Such net
realizable value is based on forecasts for sales of the Company's products in
the ensuing years. The industry in which the Company operates is characterized
by technological advancement and change. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown on the accompanying consolidated balance sheet.
Inventories approximate the following:
MAY 31,
2008
-----------------
Raw materials $ 687,959
Work in progress 570,011
Finished products 506,232
-----------------
Total $ 1,764,202
=================
Approximately $523,000 of Biomerica's gross inventory is located at its
manufacturing facility in Mexicali, Mexico as of May 31, 2008.
FS-13
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically reserve
for obsolete inventory that the Company intends to dispose of.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation or amortization are
removed from the accounts, and gains or losses from retirements and dispositions
are credited or charged to income.
Depreciation and amortization are provided over the estimated useful lives of
the related assets, ranging from 5 to 10 years, using the straight-line method.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Depreciation and amortization
expense amounted to $65,827 and $56,736 for the years ended May 31, 2008 and
2007, respectively. At May 31, 2008, approximately $22,000 of Biomerica's
property and equipment, net of accumulated depreciation and amortization, is
located in Mexicali, Mexico.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation and amortization of such assets over
their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. Management has determined
that there is no impairment of property and equipment at May 31, 2008.
INTANGIBLE ASSETS
On June 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142
requires that the Company's license agreements be tested annually (or more
frequently if impairment indicators arise) for impairment. Upon initial
application of SFAS No. 142, the Company determined there was no impairment. The
Company has established the date of May 31 on which to conduct its annual
impairment test.
Intangible assets are being amortized using the straight-line method over the
useful life, not to exceed 18 years for marketing and distribution rights and
purchased technology use rights, and 17 years for patents. Amortization amounted
to $2,588 and $5,175 for each of the years ended May 31, 2008 and 2007,
respectively (see Note 4).
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset's balance over its remaining
life can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on fair value and charged to
operations in the period in which the impairment is determined by management.
RISKS AND UNCERTAINTIES
Biomerica has entered into a royalty agreement which continues pursuant to which
it has obtained rights to manufacture and market certain products for the life
of the products. Royalty expense of approximately $118,500 and $120,600 is
included in cost of sales for this agreement for the years ended May 31, 2008
and 2007, respectively. Sales of products manufactured under this agreement
comprise approximately 17.6% and 8% of total sales for the fiscal years ended
May 31, 2008 and 2007, respectively. Biomerica may license other products or
technology in the future as the Company deems necessary for conducting business.
Distribution - Biomerica has entered into various exclusive and non-exclusive
distribution agreements (the "Agreements") which generally specify territories
of distribution. The Agreements range in term from one to five years. Biomerica
may be dependent upon such distributors for the marketing and selling of its
products worldwide during the terms of these agreements. Such distributors are
generally not obligated to sell any specified minimum quantities of the
Company's product. There can be no assurance of the volume of product sales that
may be achieved by such distributors. The Company has several large distributors
which account for a significant portion of its business. The loss of one of
these distributors could adversely affect the Company's financial results.
FS-14
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
Government Regulation - Biomerica's immunodiagnostic products are regulated in
the United States as medical devices primarily by the FDA and as such, require
regulatory clearance or approval prior to commercialization in the United
States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates, among other things, the clinical
testing, manufacture, labeling, promotion, distribution, sale and use of medical
devices in the United States. Failure of Biomerica to comply with applicable
regulatory requirements can result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, the government's refusal to grant pre-market
clearance or pre-market approval of devices, withdrawal of marketing approvals,
and criminal prosecution.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements. There
can be no assurance that Biomerica will be able to obtain regulatory clearances
for its current or any future products in the United States or in foreign
markets.
European Community - Biomerica is required to obtain certification in the
European community to sell products in those countries. The certification
requires Biomerica to maintain certain quality standards. Biomerica has been
granted certification and undergoes annual audits to assure that the Company
remains in compliance with regulations. There is no assurance that Biomerica
will be able to retain its certification in the future. The loss of business or
the ability to conduct business in Europe could materially adversely affect the
results of the Company.
Risk of Product Liability - Testing, manufacturing and marketing of Biomerica's
products entails risk of product liability. Biomerica currently has product
liability insurance. There can be no assurance, however, that Biomerica will be
able to maintain such insurance at a reasonable cost or in sufficient amounts to
protect Biomerica against losses due to product liability. An inability to
obtain sufficient insurance coverage could prevent or inhibit the
commercialization of Biomerica's products. In addition, a product liability
claim or recall could have a material adverse effect on the business or
financial condition of the Company.
Hazardous Materials - Biomerica's manufacturing and research and development
involves the controlled use of hazardous materials and chemicals. Although
Biomerica believes that safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and Federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations.
Common stock performance - The common stock of the Company is subject to
fluctuations as a result of a variety of factors including, but not limited to,
financial results, general economic conditions, fluctuations in sales volumes
and expenses, competition, and our failure to generate new products.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), "ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS NO. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
implementation of SFAS No. 148 did not have a material effect on the Company's
consolidated financial position or results of operations.
The fair value for granted options was estimated at the date of grant using the
Black Scholes option pricing model with the following assumptions for the years
ended May 31, 2008 and 2007; risk free interest rates ranging from 3.09% to
5.1%; dividend yield of 0%; expected life of the options of two and a half and
three and a half years; and volatility factors of the expected market price of
the Company's common stock ranging from 60.39% to 75.53%.
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.
FS-15
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
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 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.
Effective June 1, 2006, Biomerica implemented the provisions of this Statement.
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 the
required disclosures of SAB No. 107 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 and recognized
stock based compensation which vested beginning in fiscal 2007 in the financial
statements.
As of May 31, 2008 total compensation cost related to nonvested stock option
awards not yet recognized totaled $31,965. The weighted-average period over
which this amount is expected to be recognized is 1.88 years.
MINORITY INTEREST
At May 31, 2008 and 2007, Biomerica owned 88.9% of ReadyScript (see Notes 3 and
11), the business of which was discontinuted in 2001. ReadyScript's results of
operations are reported under discontinued operations.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped,
customarily FOB shipping point, at which point title passes. An allowance is
established when necessary for estimated returns as revenue is recognized.
SHIPPING AND HANDLING FEES AND COSTS
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 fiscal years 2008 and 2007, respectively, was
$122,668 and $124,784. 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.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred. The Company expensed
$259,085 and $256,101 of research and development expenses during the years
ended May 31, 2008 and 2007, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
FS-16
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
ADVERTISING COSTS
The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were approximately $57,000 and
$90,460 for the years ended May 31, 2008 and 2007, respectively.
CURRENCY
The functional currency for the contractor for labor and facilities in Mexicali,
(Lancer de Mexico) is primarily in dollars. However, the Company does incur some
monthly charges that must be paid in pesos. The invoices are paid in pesos
according to the current conversion rate at the time the invoice is paid. The
currency that is used for our other international business is dollars.
Therefore, all customers pay their invoices in dollars and we pay international
vendors in dollars.
INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "EARNINGS PER
SHARE" ("EPS"). SFAS 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/(loss) 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 total amount of anti-dilutive warrants or
options not included in the earnings per share calculation for the years ended
May 31, 2008 and 2007 was 150,000 and 201,999, respectively.
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
For the Years Ended
May 31,
------------------------------
2008 2007
-------------- --------------
Numerator:
Income from continuing operations $ 1,710,044 $ 509,010
Income from discontinued operations -- 27,869
-------------- --------------
Numerator for basic and diluted net income per common share $ 1,710,044 $ 536,879
============== ==============
Denominator for basic net income per common share 6,125,981 5,929,445
Effect of dilutive securities:
Options and warrants 852,058 584,032
-------------- --------------
Denominator for diluted net income per common share 6,978,039 6,513,477
============== ==============
Basic net income per common share:
Income from continuing operations $ 0.28 $ 0.09
Income from discontinued operations 0.00 0.00
-------------- --------------
Basic net income per common share $ 0.28 $ 0.09
============== ==============
Diluted net income per common share:
Income from continuing operations $ 0.25 $ 0.08
Net income from discontinued operations 0.00 0.00
-------------- --------------
Diluted net income per common share $ 0.25 $ 0.08
============== ==============
FS-17
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
SEGMENT REPORTING
The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION". SFAS 131 requires public companies to report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company's business segments are disclosed in Note 8.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE INCOME."
This statement establishes standards for reporting the components of
comprehensive income (loss) and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
(loss) be included in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income (loss) includes
net income (loss) as well as certain items that are reported directly within a
separate component of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
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 No.
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 embedded derivative requiring
bifurcation; (d) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and, (e) eliminates restrictions 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
believe that the adoption of SFAS No. 155 has had 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 is required to adopt this statement as of June 1, 2007. The Company
does not believe that the adoption of SFAS No. 156 has had a material impact on
the Company's 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 that the adoption of SFAS No. 157 has had a material
impact on the Company's 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.
FS-18
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
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 that the adoption
of FIN 48 has had a material impact, if any, on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, Accounting for the Fair Value
Option for Financial Assets and Financial Liabilities, Including an amendment of
FASB Statement No. 115. This Statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This Statement shall be effective as of the beginning
of each reporting entity's first fiscal year that begins after November 15,
2007, therefore Biomerica will not be required to adopt SFAS No. 159 until June
1, 2008. The Company does not believe that the adoption of SFAS No. 159 will
have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51. This statement
applies to all entities that prepare consolidated financial statements, except
for non-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for annual periods
beginning December 15, 2008. The Company does not believe that the adoption of
SFAS No. 160 will have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS
141R establishes a defined measurement period that governs the time period
within which the business combination must be reported. In addition, the revised
standard significantly expands the scope of disclosure requirements. SFAS No.
141R is effective for annual periods beginning after December 15, 2008. The
Company does not believe that the adoption of SFAS No. 141R will have a material
impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of FASB Statement No. 133. This
Statement requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issue years and interim periods beginning
after November 15, 2008. The Company does not believe that the adoption of SFAS
No. 161 will have a material impact on its financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS No. 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411. The Company does not believe that the adoption of
SFAS No. 161 will have a material impact on its financial statements.
3. CONSOLIDATED SUBSIDIARY
The ReadyScript subsidiary was a development-stage enterprise and required the
raising of a significant amount of capital to fund its short-term working
capital needs. The ReadyScript operations were discontinued in May 2001 (see
Note 11). The net assets and operating results of ReadyScript are included in
the accompanying consolidated financial statements as discontinued operations.
For the Years Ended
May 31,
------------------------------
2008 2007
-------------- --------------
Gain from continuing operations
Discontinued operations of ReadyScript:
Income from discontinued operations, net -- 27,869
-------------- --------------
Net income $ -- $ 27,869
============== ==============
FS-19
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
4. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the following:
MAY 31,
2008
---------------
Patents and other intangible $ 36,465
Less accumulated amortization 36,465
---------------
$ --
===============
5. RELATED PARTY TRANSACTIONS
NOTES PAYABLE -SHAREHOLDER
In March 2004 the Company signed a note payable for the principal and interest
due at that time of $313,318 and agreed to a forbearance of any payments for the
length of the agreement. The note payable was secured by all the Company's
assets except for the Lancer common stock owned by Biomerica. The note was due
September 1, 2004. On March 9, 2007 the Company entered into an additional
agreement entitled "Second Amendment of the Note, Loan and Modification
Agreement" which was filed as an exhibit to a Form 10-QSB on April 16, 2007. The
agreement called for payment of overdue principal by August 31, 2007, agreement
by Janet Moore to enter into a Commercial Subordination Agreement, pledge of
additional collateral to Janet Moore (all of which is subordinate to the
Commercial Bank of California) and the reduction by Moore of additional payments
of $3,500 per month, depending on certain quarterly results of the Company, to
$2,000 per month. There was $95,936 of outstanding principal and $0 of interest
payable under this note payable at May 31, 2008. On July 31, 2008, the remaining
principal and interest were paid.
During 2008 and 2007, the Company incurred $10,973 and $19,898, respectively, in
interest expense related to the shareholder note payable.
During 2004, a shareholder/director advanced the Company $4,000. At May 31, 2008
and 2007 $1,659, was owed in interest payable on this loan and a previous loan
of $10,000.
During fiscal 2007 a shareholder/director advanced the Company $15,000, $50,000
and $35,000 in short term loans. The loans were repaid in two days, twenty-five
days and fourteen days, respectively. Interest of $388 was paid on the loans.
RENT EXPENSE
Biomerica, Inc. currently leases facilities from four individuals, some of whom
are shareholders of the Company. Gross rent expense of approximately $168,000
was incurred during 2008 and 2007, for this lease. There was no rent payable at
May 31, 2008.
FS-20
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
ACCRUED COMPENSATION
During fiscal 2002-2005, two officers, who are also shareholders of the Company,
agreed to defer payment of a portion of their salaries. At May 31, 2008,
$240,118 of deferred officer's salary is included in accrued compensation in the
accompanying consolidated financial statements. No interest was accrued on the
deferred wages until March 2007. As of March 1, 2007 the Company has been
accruing interest at the rate of 8% per year. For the year ended May 31, 2008,
$20,299 in interest expense was incurred.
Included in accrued compensation as of May 31, 2008 is vacation accrual of
$171,998. Of this, approximately $121,000 is due to the former chief executive
officer's estate. The Company is disputing the validity of this claim.
6. SHAREHOLDERS' EQUITY
1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS
In January 1996, the Company adopted a stock option and restricted stock plan
(the "1995 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 500,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. Options granted under the 1995 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock and expire not
more than 10 years after the date of grant.
In August 1999, the Company adopted a stock option and restricted stock plan
(the "1999 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 1,000,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. As of January 1, of each calendar year, commencing January 1, 2000,
this amount is subject to automatic annual increases equal to the lesser of 1.5%
of the total number of outstanding common shares, assuming conversion of
convertible securities, or 500,000. Options granted under the 1999 Plan may be
granted at prices not less than 85% of the then fair market value of the common
stock and expire not more than 10 years after the date of grant.
The Company has 371,999 warrants outstanding at May 31, 2008, which are included
in the table below. The warrants were issued in transactions related to
financing, primarily as a component of private placements. The warrants are for
restricted stock and have expiration dates ranging from five to ten years from
date of issue. Purchase prices range from $0.25 to $3.00.
Activity as to stock options and warrants granted are as follows:
NUMBER WEIGHTED
OF STOCK AVERAGE
OPTIONS AND PRICE RANGE EXERCISE
WARRANTS PER SHARE PRICE
-------- --------- -----
Options and warrants outstanding at May 31, 2007 2,053,249 $0.20-$3.00 $0.48
Options granted 41,000 $0.78-$1.30 $0.98
Options and warrants exercised (557,625) $0.20-$0.73 $0.29
Options and warrants canceled or expired (34,500) $0.33-$0.80 $0.69
Options and warrants outstanding at May 31, 2008 1,502,124 $0.25-$3.00 $0.76
The weighted average fair value of options and warrants granted during 2008 and
2007 was $0.98 and $0.74 respectively. The aggregate intrinsic value of options
exercised during 2008 and 2007 was approximately $295,000 and $6,700,
respectively. The aggregate intrinsic value of options outstanding at May 31,
2008 was approximately $579,600. The aggregate intrinsic value of options vested
and exercisable at May 31, 2008 was approximately $543,400.
The following summarizes information about all of the Company's stock options
and warrants outstanding at May 31, 2008. These options and warrants are
comprised of those granted under the 1995 and 1999 plan and those granted
outside of these plans.
FS-21
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
PRICES MAY 31, 2008 LIFE IN YEARS PRICE MAY 31, 2008 PRICE
------ ------------ ------------- ----- ------------ -----
$0.20 - $0.33 197,250 .85 $0.27 197,250 $0.27
$0.40 - $0.87 1,138,874 3.07 $0.55 1,023,499 $0.53
$1.30 - $3.00 166,000 1.36 $2.84 154,000 $2.96
STOCK ACTIVITY
In July 2006 the Company granted 10,000 stock options to purchase shares of
common stock at an exercise price of $0.50 to one employee. The options vest
over four years and have a term of five years. Management assigned a value of
$3,636 to these options.
In February 2007 the Company granted 50,000 stock options to purchase shares of
common stock at an exercise price of $0.57 to two directors. The options vest
over three years and have a term of five years. Management assigned a value of
$18,112 to these options.
In April 2007 the Company granted 163,500 stock options to purchase shares of
common stock at an exercise price of $0.73 to various employees and consultants.
The options vest over three years and have a term of five years. Management
assigned a value of $72,489 to these options.
In April 2007 the Company granted 25,000 stock options to purchase shares of
common stock at an exercise price of $0.76 to a new director. The options vest
over three years and have a term of five years. Management assigned a value of
$11,632 to these options.
In May 2007 the Company granted 171,000 stock options to purchase shares of
common stock at an exercise price of $0.80 to various employees and officers of
the Company. The options vest over three years and have a term of five years.
Management assigned a value of $78,895 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 will
vest one quarter per year thereafter. The option is exercisable at a price of
$0.78 per share and expires in five years. Management assigned a value of
$10,541 to this option.
In November 2007 the Board of Directors granted stock options for 16,000 options
to employees of the Company. The options vested one quarter immediately and then
will vest one quarter per year thereafter. The options are at the exercise price
of $1.30 and expire in five years. Management assigned a value of $10,952 to
these options
During the fiscal year ended May 31, 2007, options to purchase 21,533 shares
were exercised at prices ranging from $0.20 to $0.42 per share. Total proceeds
to the Company were $6,130.
During the fiscal year ended May 31, 2008, options and warrants to purchase
557,625 shares were exercised at prices ranging from $0.20 to $0.73. Total
proceeds to the Company were $162,386.
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 of the option,
taking into consideration cancellations, exercises and expirations. A discount
rate equivalent to the expected life of the option is calculated using Treasury
constant maturity interest rates. For the options granted in fiscal 2008
Biomerica used the simplified method (as defined in SAB 107) for calculating the
expected life of an option because estimating the expected life is difficult
based on historical data. The historical volatility of the stock is calculated
using weekly historical closing prices for the length of the vesting period 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 approval of
such issuance.
FS-22
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
7. INCOME TAXES
Income tax (benefit) expense from continuing operations for the years ended May
31, 2008 and 2007 consists of the following current (benefit) provisions:
May 31,
------------------------------
2008 2007
-------------- --------------
U.S. Federal $ (149,000) $ 11,769
State and local 82,000 5,000
-------------- --------------
$ (67,000) $ 16,769
============== ==============
Income tax benefit expense from continuing operations differs from the amounts
computed by applying the U.S. Federal income tax rate of 35 percent to pretax
loss as a result of the following:
May 31,
-----------------------------
2008 2007
-------------- --------------
Computed "expected" tax expense benefit $ 575,000 $ 188,000
Increase (reduction) in income taxes resulting from:
Tax credits - true up of carryforwards 148,000 (2,000)
Change in valuation allowance (731,000) (206,000)
State income taxes, net of federal benefit 94,000 31,000
Tax benefit from the release of deferred tax allowance (170,000) --
Other 17,000 5,769
-------------- --------------
$ (67,000) $ 16,769
============== ==============
The tax effect of temporary differences that give rise to significant portions
of liabilities are presented below.
May 31,
------------------------------
2008 2007
-------------- --------------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and sales returns $ 34,000 $ 24,000
Compensated absences and deferred payroll 196,000 170,000
Net operating loss carryforwards 391,000 908,000
Tax credit carryforwards 6,000 154,000
Accumulated depreciation of property and equipment 16,000 16,000
Other 93,000 25,000
Less valuation allowance (566,000) (1,297,000)
-------------- --------------
Net deferred tax asset $ 170,000 $ 0
============== ==============
FS-23
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
The Company has provided a valuation allowance for $566,000 as of May 31, 2008.
Although the Company has achieved net income in increasing amounts over the last
three fiscal years, predicting future taxable income is difficult and influenced
by many factors. After analyzing our tax position, Management has provided such
allowance against deferred tax assets. In fiscal 2008 Management recorded a net
deferred tax asset of $170,000. Management will re-evaluate this determination
periodically.
At May 31, 2008, the Company has federal income tax net operating loss
carryforwards of approximately $1,119,000. The federal net operating loss
carryforwards begin to expire in 2021. At May 31, 2008 the Company has federal
research and development tax credit carryforwards of approximately $6,000. The
federal credits begin to expire in 2026.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss ("NOL") and credit carryforwards may be limited by
statute because of a cumulative change in ownership of more than 50%. Pursuant
to Sections 382 and 383 of the Code, the annual use of the Company's NOLs would
be limited if there is a cumulative change of ownership (as that term is defined
in Section 382(g) of the Code) of greater than 50% in a three year period. Based
on management's analysis the Company does not believe that a cumulative change
in ownership of greater than 50% has taken place.
In June 2006, the FASB issued Interpretation No. 48, or FIN 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FAS 109. FIN 48 provides
clarification for the financial statement measurement and recognition of tax
positions that are taken or expected to be taken on a tax return. For the fiscal
year ended May 31, 2008 and 2007 the Company did an analysis of its FIN 48
position and has not identified any uncertain tax positions as defined under FIN
48. Should such position be identified in the future and should the Company owe
interest and penalties as a result of this, these would be recognized as income
taxes in the financial statements.
FS-24
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
8. BUSINESS SEGMENTS
Reportable business segments are identified by product line and for the years
ended May 31, 2008 and 2007 are as follows:
Operating income from discontinued segment:
ReadyScript $ -- $ 27,869
-------------- --------------
Total $ -- $ 27,869
============== ==============
Domestic long-lived assets, net:
Medical diagnostic products $ 348,000 $ 140,000
-------------- --------------
Total $ -- $ 140,000
============== ==============
Foreign long-lived assets, net:
Medical diagnostic products $ 22,000 $ 28,000
-------------- --------------
Total $ 22,000 $ 28,000
============== ==============
The Company operates in one business segment, Medical Diagnostic Products.
The net sales as reflected above consist of sales to unaffiliated customers only
as there were no significant intersegment sales during fiscal years 2008 and
2007. Biomerica had one customer which accounted for greater than 10% of its
sales for the fiscal year ended May 31, 2008 and one customer which accounted
for greater than 10% of its sales for the fiscal year ended May 31, 2007.
Geographic information regarding net sales is as:
2008 2007
-------------- --------------
Net sales:
United States $ 1,359,000 $ 2,107,000
Europe 2,549,000 2,378,000
South America 70,000 75,000
Middle East 57,000 64,000
Asia 854,000 543,000
Oceania 3,000 540,000
Other foreign 35,000 41,000
-------------- --------------
Total net sales $ 4,927,000 $ 5,748,000
============== ==============
Identifiable assets by business segment are those assets that are used in the
Company's operations in each industry. Identifiable assets are held primarily in
the United States.
FS-25
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is currently leasing its facilities on a month-to-month basis while
management explores various other facility options. The facilities are owned and
operated by four individuals, some of whom are shareholders and one of whom is
an officer and director. Effective May 1, 2007 the monthly rent was set at
$14,000. Management believes there would be no significant difference in the
terms of the property rental if the Company leased from a third party. Total
rent expense for this facility was approximately $168,000 during each of the
years ended May 31, 2008 and 2007.
Biomerica has various insignificant leases for office equipment.
RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute to
the plan up to the maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The
Company, at the discretion of its Board of Directors, may make contributions to
the plan in amounts determined by the Board each year. No contributions by the
Company have been made since the plan's inception.
LITIGATION
The Company is, from time to time, involved in legal proceedings, claims and
litigation arising in the ordinary course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows. There were
no legal proceedings pending as of May 31, 2008, except for proceedings related
to the collection of accounts receivable which have been previously reserved
for.
CONTRACT
During the first quarter of fiscal 2006 the Company entered into an agreement
with another company for the purpose of developing certain technology for
Biomerica. The total amount of the contract was for $55,000, with a 40% down
payment required and milestone payments for the balance of the contract. The
balance due at May 31, 2007 was $16,500. On June 5, 2006, a milestone payment of
$16,500 was made which was included in payables as of May 31, 2006. The
remaining $16,500 has not been recorded as a liability at May 31, 2008 due to
the fact that payment of it is contingent upon performance of certain functions
by the contractor. The Company does not expect to make payment in the future on
this contract because complete performance of the contract has not been achieved
and the contract has been discontinued.
COMMERCIAL LINE OF CREDIT
In February 2007 the Company entered into a Commercial Security Agreement, two
Promissory Notes (loan #0100000250 and loan #0100000251), a Subordination
Agreement and a Business Loan Agreement. These agreements pertain to a $200,000
working capital line of credit and a $200,000 equipment loan with Commercial
Bank of California and are collateralized by substantially all of the assets of
the Company. Copies of these agreements in their entirety were filed on April
16, 2007, with Biomerica's Form 10-QSB for the period ended February 28, 2007.
Any outstanding balance on the Promissory Note for Loan #0100000250 (up to
$200,000) is due at the maturity date on September 1, 2008. On August 21, 2008,
Commercial Bank of California agreed to an extension of the working capital line
of credit for an additional sixty days to allow time to work on its renewal.
Accrued unpaid interest on the outstanding balance is due on a monthly basis.
The initial interest rate was 9.75% and is subject to change based on changes in
the Wall Street Journal Prime Rate. The interest rate is set at 1.500 percentage
points over the Index. As of May 31, 2008 no balance was due on this note.
FS-26
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2008 AND 2007
With respect to the balance due on Promissory Note for Loan #0100000251, nine
monthly consecutive interest payments, beginning April 1, 2007, with interest
calculated on the unpaid principal balances at an interest rate based on the
Wall Street Journal Prime Rate, plus a margin of 1.250 percentage points were
due. In addition, 47 monthly consecutive principal and interest payments in the
initial amount of $5,038.21 each (assuming a balance of $200,000), beginning
January 1, 2008, with interest calculated on the unpaid principal balances at an
interest rate of 9.500%, and one principal and interest payment of $5,038.46 on
December 1, 2011, with interest calculated on the unpaid principal balances at
an interest rate of 9.500% are due. As of May 31, 2008 the balance due on this
loan was $162,993. On July 16, 2008, Commercial Bank of California agreed to
lower the interest rate on the equipment loan to a fixed rate of 8%.
Future maturities of the Shareholder note and commercial line of credit are as
follows:
Year Ended May 31,
2009 $ 144,364
2010 51,019
2011 54,782
2012 8,764
-----------
Total obligation 258,929
Less current portion 144,364
-----------
Long-term portion $ 114,565
===========
10. DISCONTINUED OPERATIONS
The following summarizes the net liabilities of the discontinued operations,
ReadyScript, as of May 31, 2008 and the results of its operations for each of
the years in the two-year period ended May 31, 2008.
Balance Sheet Items:
May 31,
2008
--------------
Assets:
Miscellaneous receivable $ 5,304
Less liabilities:
Accrued expenses 4,709
--------------
Net liabilities $ 595
==============
Results of its operations items:
Years Ended May 31,
------------------------------
2008 2007
-------------- --------------
Legal settlements and debt forgiveness $ -- $ 27,869
Cost and expenses:
General and administrative (reduction of previous expenses) -- --
-------------- --------------
Total costs and expenses -- --
-------------- --------------
Income from operations $ -- $ 27,869
============== ==============
11. SUBSEQUENT EVENTS
On July 31, 2008, the Company paid off the remaining principal and interest
balance on the shareholder note payable.
In June 2008 warrants for 120,000 shares were exercised at $.25 per share which
resulted in net proceeds to the Company of $30,000.
In June 2008 the Company incorporated in Mexico under the name of Biomerica de
Mexico for the purpose of establishing our own mequiladora operation in Mexico
at some time in the future.
FS-27