SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2007 Commission File No. 0-8765
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BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
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(Not applicable)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,133,839 shares of common
stock as of January 14, 2008.
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and Comprehensive
Income (unaudited) - Six and Three Months Ended
November 30, 2007 and 2006........................................... 1
Consolidated Balance Sheet (unaudited) -
November 30, 2007.................................................2 & 3
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended November 30, 2007 and 2006...........................4
Notes to Consolidated Financial Statements (unaudited) ............5-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................11-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........13
Item 4. Controls and procedures..............................................13
PART II Other Information....................................................14
Item 1. Legal Proceedings....................................................14
Item 2. Changes in Securities and Use of Proceeds............................14
Item 3. Defaults upon Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
Signatures...........................................................15
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales .................................................... $ 2,367,599 $ 2,485,442 $ 1,027,534 $ 1,332,176
Cost of sales ........................................... 1,276,809 1,591,373 541,188 813,758
----------- ----------- ----------- -----------
Gross profit ............................................ 1,090,790 894,069 486,346 518,418
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative ..................... 741,920 635,198 421,637 344,743
Research and development ................................ 128,190 99,513 58,446 58,512
----------- ----------- ----------- -----------
870,110 734,711 480,083 403,255
----------- ----------- ----------- -----------
Operating gain from continuing operations .................... 220,680 159,358 6,263 115,163
----------- ----------- ----------- -----------
Other Expense (income):
Interest expense ........................................ 15,448 16,242 11,830 8,740
Other income, net ....................................... (707,754) (35) (8,925) (25)
----------- ----------- ----------- -----------
(692,306) 16,207 2,905 8,715
----------- ----------- ----------- -----------
Income from continuing operations, before income taxes ....... 912,986 143,151 3,358 106,448
Income tax expense ........................................... 24,242 -- -- --
----------- ----------- ----------- -----------
Net income from continuing operations ........................ 888,744 143,151 3,358 106,448
----------- ----------- ----------- -----------
Discontinued operations:
Income from discontinued operations, net ................... -- 27,869 -- --
----------- ----------- ----------- -----------
Net income ................................................... 888,744 171,020 3,358 106,448
Other comprehensive gain, net of tax
Unrealized gain (loss) on available-for-sale securities .... 54,819 (28,207) 20,520 (28,372)
----------- ----------- ----------- -----------
Comprehensive Income ......................................... $ 943,563 $ 142,813 $ 23,878 $ 78,076
=========== =========== =========== ===========
Basic net income per common share:
Net income from continuing operations ................... $ .15 .02 $ .00 $ .02
Net income from discontinued operations ................. .00 .00 .00 .00
----------- ----------- ----------- -----------
Basic net income per common share ............................ $ .15 $ .02 $ .00 $ .02
=========== =========== =========== ===========
Diluted net income per common share:
Net income from continuing operations ................... $ .12 $ .02 $ .00 $ .02
Net income from discontinued operations ................. .00 .00 .00 .00
----------- ----------- ----------- -----------
Diluted net income per common share .......................... $ .12 $ .02 $ .00 $ .02
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares:
Basic ................................................... 6,009,282 5,926,111 6,066,454 5,929,580
=========== =========== =========== ===========
Diluted ................................................. 7,347,671 6,379,965 7,329,266 6,364,358
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
1
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 30,
2007
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Assets
Current Assets
Cash and cash equivalents ................................................ $ 807,805
Available for-sale securities ............................................ 666
Accounts receivable, less allowance for doubtful accounts of $132,333 .... 662,352
Inventories, net ......................................................... 1,668,990
Notes receivable ......................................................... 1,500
Prepaid expenses and other ............................................... 235,239
Net assets from discontinued operations .................................. 598
----------
Total Current Assets ............................................... 3,377,150
Property and Equipment, net of accumulated depreciation and amortization ..... 179,202
Intangible assets, net of accumulated amortization ........................... --
Available-for-sale securities ................................................ 464,823
Other Assets ................................................................. 57,083
----------
$4,078,258
==========
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
November 30,
2007
------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities ............... $ 563,688
Accrued compensation ................................... 423,930
Shareholder loan ....................................... 138,111
Capital lease - short-term portion ..................... 4,733
Equipment loan - short-term portion .................... 44,873
------------
Total Current Liabilities ......................... 1,175,335
Capital lease - long-term portion ........................... 1,729
Equipment loan - long-term portion .......................... 136,327
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000
shares, issued and outstanding 6,113,839 ............. 489,105
Additional paid-in-capital ............................. 17,309,898
Accumulated other comprehensive loss ................... (174,898)
Accumulated deficit .................................... (14,859,238)
------------
Total Shareholders' Equity .................................. $ 2,764,867
------------
Total Liabilities and Equity ................................ $ 4,078,258
============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended November 30, 2007 2006
--------- ---------
Cash flows from operating activities:
Net income from continuing operations .......................................... $ 888,744 $ 143,151
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 31,750 27,003
Common stock, warrants and options issued for services rendered ........... 10,309 708
Provision for losses on accounts receivable ............................... 73,550 1,378
Changes in current assets and liabilities:
Accounts Receivable ..................................................... (231,135) (176,916)
Inventories ............................................................. (207,277) (109,948)
Prepaid expenses and other current assets ............................... (134,586) 5,643
Accounts payable and other accrued liabilities .......................... (102,563) 121,202
Accrued compensation .................................................... (143,662) (16,513)
--------- ---------
Net cash provided by (used in) operating activities ............................ 185,130 (4,292)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment .................................. (40,328) (86,737)
--------- ---------
Net cash used in investing activities .......................................... (40,328) (86,737)
--------- ---------
Cash flows from financing activities:
Repayment of shareholder loan ............................................. (29,759) (18,832)
Proceeds from sale of common stock ........................................ -- 24,960
Proceeds from exercise of stock options ................................... 58,444 5,130
Payments on capital lease ................................................. (2,112) (1,772)
Increase in loan for equipment purchase ................................... 119,530 --
--------- ---------
Net cash provided by financing activities ...................................... 146,103 9,486
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... 290,905 (81,543)
Cash and cash equivalents at beginning of period ............................... 516,900 119,914
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 807,805 $ 38,371
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest .................................................................. $ 24,636 $ 17,709
Income taxes .............................................................. 1,600 --
========= =========
Change in unrealized holding gain (loss) on available-for-sale securities .... $ 54,819 $ (28,207)
========= =========
The accompanying notes are an integral part of these statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2007
(1) Reference is made to Note 2 of the Notes to Consolidated Financial
Statements contained in Biomerica, Inc.'s (the "Company") Annual Report on Form
10-KSB for the fiscal year ended May 31, 2007, for a summary of significant
accounting policies utilized by the Company.
(2) As of November 30, 2007, the Company had cash and available-for-sale
securities in the amount of $808,471 and working capital of $2,201,815. The
Company also has $464,823 of long term available-for-sale securities.
(3) In December 2004, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting For
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost is measured based on the grant- date fair value of the
equity or liability instruments issued. Compensation cost is recognized over the
period that an employee provides service in exchange for the award. As of the
beginning of fiscal 2007, June 1, 2006, the Company was required to account for
stock-based compensation using this method.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For the six months ended November 30, 2007, the Company expensed
$10,309 of stock option expense due to SFAS 123(R) in its financial statements.
5
(4) The following summary presents the options granted, exercised, expired,
cancelled and outstanding as of November 30, 2007:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ------------ ---------- ---------
Outstanding
May 31, 2007 1,836,083 217,166 2,053,249 $ 0.48
Granted 41,000 -- 41,000 .98
Exercised (169,625) -- (169,625) .34
Cancelled or expired (25,500) -- (25,500) .63
---------- ---------- ---------- ---------
Outstanding
November 30, 2007 1,681,958 217,166 1,899,124 $ .66
========== ========== ========== =========
(5) The information set forth in these condensed consolidated statements is
unaudited and may be subject to normal year-end adjustments. The information
reflects all adjustments which, in the opinion of management, are necessary to
present a fair statement of the consolidated results of operations of Biomerica,
Inc., for the periods indicated. It does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations, and cash flow in conformity with generally accepted accounting
principles.
(6) Consolidated results of operations for the interim periods covered by this
report may not necessarily be indicative of results of operations for the full
fiscal year.
(7) Reference is made to Note 3 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2007, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 9 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2007, for information on commitments and
contingencies.
(9) Aggregate cost exceeded market value of available-for-sale securities by
approximately $174,900 at November 30, 2007.
(10) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted
EPS on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
6
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.
Six Months Ended Three Months Ended
November 30, 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------
Numerator:
Income from continuing operations $ 888,744 $ 143,151 $ 3,358 $ 106,448
Income from discontinued operations -- 27,869 -- --
-------------------------------------------------------------------------------------------------------
Numerator for basic and diluted net
income per common share $ 888,744 171,020 $ 3,358 $ 106,448
=======================================================================================================
Denominator for basic net income
per common share 6,009,282 5,926,111 6,066,454 5,929,580
Effect of dilutive securities:
Options and warrants 1,338,389 453,854 1,262,812 434,778
-------------------------------------------------------------------------------------------------------
Denominator for diluted net income
per common share 7,347,671 6,379,965 7,329,266 6,364,358
=======================================================================================================
Basic net income per common share:
Income from continuing operations $ .15 $ .02 $ .00 $ .02
Income from discontinued operations .00 .00 .00 --
-------------------------------------------------------------------------------------------------------
Basic net income per common share $ .15 $ .02 $ .00 $ .02
=======================================================================================================
Diluted net income per common share:
Income from continuing operations $ .12 $ .02 $ .00 $ .02
Net income from discontinued operations .00 .00 .00 --
-------------------------------------------------------------------------------------------------------
Diluted net income per common share $ .12 $ .02 $ .00 $ .02
=======================================================================================================
(11) In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R will require compensation costs related to share-based payment transactions
to be recognized in the financial statement (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. Compensation cost is
recognized over the expected life of the option.
In March 2005, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment,
providing guidance on option valuation methods, the accounting for income tax
effects of share-based payment arrangements upon adoption of SFAS No. 123R, and
the disclosures in MD&A subsequent to the adoption. The Company has provided SAB
No. 107 required disclosures upon adoption of SFAS No. 123R on June 1, 2006.
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.
7
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and
Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods. The Company does not
believe the adoption of this standard will have an impact on its results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140
("SFAS, 155"). This statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets. SFAS No. 155: a) permits fair value
remeasurement for any hybrid financial instrument that contains an imbedded
derivative that otherwise would require bifurcation; (b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an imbedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and, (e) eliminates restriction on a qualifying special-purpose
entity's ability to hold passive derivative financial instruments that pertain
to beneficial interests that are or contain a derivative financial instrument.
SFAS No. 155 also requires presentation within the financial statements that
identifies those hybrid financial instruments for which the fair value election
has been applied and information on the income statement impact of the changes
in fair value of those instruments. The Company is required to apply SFAS No.
155 to all financial instruments acquired, issued or subject to a remeasurement
event beginning June 1, 2007. The adoption of SFAS No. 155 did not have a
material impact on the Company's financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, an amendment of FASB Statement No. 140 (Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).
This Statement requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
The Company was required to adopt this statement as of June 1, 2007. The Company
has not yet determined the impact. 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
Company does not believe the adoption of SFAS 157 has had a material impact on
its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
For Defined Benefit Pension and Other Postretirement Plans. Effective in
calendar- year 2006 (with certain exceptions) for public companies and
calendar-year 2007 (with certain exceptions) for private companies, SFAS No. 158
represents the "first phase" of a planned "two-phased" project where the FASB is
working on improving financial reporting related to pension and other
postretirement (OPB) plans. SEC registrants have been required to disclose the
"expected impact" of implementing SFAS No. 158 in filings made after September
30, 2006 and before the effective date of SFAS No. 158. The adoption of SFAS No.
158 did not have a material impact on the Company's financial statements.
8
In July 2006, the FASB issued FIN 48, entitled Accounting for
Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109,
entitled Accounting for Income Taxes. Through the interpretive guidance, the
FASB clarifies the accounting for uncertainty in income taxes, provides
recognition and measurement guidance related to accounting for income taxes, and
provides guidance related to classification and disclosure of income tax-related
financial statement components. The Company does not believe the adoption of
FIN 48 has had a material impact on its consolidated financial statements.
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Six Months Ended
11/30/07 11/30/06
---------- ----------
Revenues from sales to unaffiliated customers:
United States $ 568,000 $ 710,000
Asia 443,000 224,000
Europe 1,272,000 1,185,000
South America 35,000 37,000
Middle East 17,000 11,000
Oceania 1,000 289,000
Other 32,000 29,000
---------- ----------
$2,368,000 $2,485,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(13) In July 2006 the Board of Directors granted a stock option for 10,000
options to an employee of the company. The options vests one quarter immediately
and then one quarter per year thereafter. The option is at the exercise price of
$.50 per share and expires in five years. Management assigned a value of $2,830
to this option.
In February 2007 the Board of Directors granted a stock option for
50,000 options to directors of the Company. The options vested one quarter
immediately and one quarter in May 2007. One quarter will vest each year
thereafter on the grant date. The exercise price is $.57 per share and the
option expires in five years. Management assigned a value of $18,112 to these
options.
In April 2007 the Board of Directors granted a stock option for 25,000
options to a new Company director. The options vested one half immediately and
then one quarter per year thereafter. The option is at the exercise price of
$.76 per share and expires in five years. Management assigned a value of $11,632
to this option.
In April 2007 the Board of Directors granted stock options for 163,500
options to employees and consultants of the Company. The options vested one half
immediately and then one quarter per year thereafter. The options are at the
exercise price of $.73 and expire in five years. Management assigned a value of
$72,489 to these options.
In May 2007 the Board of Directors granted stock options for 171,000
options to certain officers and directors. The options vested one half
immediately and then one quarter per year thereafter. The options are at the
exercise price of $.80 and expire in five years. Management assigned a value of
$78,895 to these options.
In July 2007 the Board of Directors granted a stock option for 25,000
options to a new Company director. The options vested one half immediately and
then one quarter per year thereafter. The option is at the exercise price of
$.78 per share and expires in five years. Management assigned a value of $11,343
to this option.
In 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 $12,589 to these options.
9
During the six month period ended November 30, 2007, employees
exercised warrants and stock options for 169,625 shares at purchase prices
ranging from $.20-$.73 per share. The total proceeds to the Company was $58,444.
Options or warrants granted are assigned values according to current
market value, using the Black-Scholes model for option valuation. The term used
in the calculation of the options or warrants is the expected life. A discount
rate equivalent to 5-year (or other life of the option or warrant) Treasury
constant maturity interest rates is utilized. The historical volatility of the
stock is calculated using weekly historical closing prices for the period prior
to the option grant that is equivalent to the expected life of the option as
reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the
Black-Scholes Model is also used for calculating employee options and warrants
valuations.
When shares are issued for services or other non-cash consideration,
fair value is measured using the current market value on the day of the Board of
Directors approval of such issuance.
(14) In August 2007, the Company and the holder of the Note payable-shareholder
agreed to the extension of the note due date until September 1, 2008, at the
same terms and conditions agreed upon in August 2006.
(15) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has no
liabilities recorded for these agreements as of November 30, 2007. The Company
enters into indemnification provisions under (i) its agreements with other
companies in its ordinary course of business, typically with business partners,
contractors, and customers, landlords and (ii) its agreements with investors.
Under these provisions the Company generally indemnifies and hold harmless the
indemnified party for losses suffered or incurred by the indemnified party as a
result of the Company's activities or, in some cases, as a result of the
indemnified party's activities under the agreement. These indemnification
provisions often include indemnifications relating to representations made by
the Company with regard to intellectual property rights. These indemnification
provisions generally survive termination of the underlying agreement. The
maximum potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited. The Company has not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of November 30, 2007.
(16) Subsequent Events
In December 2007 the holder of warrants to purchase 8,000 shares of Biomerica
restricted common stock, at the exercise price of $.25, exercised his warrant.
Proceeds to the Company were $2,000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL
STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED
FUTURE REVENUES OF THE COMPANY AND SUCCESS OR CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY
IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS
TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $2,367,599 for the first six
months of fiscal 2008 as compared to $2,485,442 for the same period in the
previous year. This represents a decrease of $117,843, or 4.7%. For the quarter
then ended net sales were $1,027,534 as compared to $1,332,176 for the same
period in the previous year. This represents a decrease of $304,642, or 22.9%.
The decrease in sales from fiscal 2007 to 2008 is primarily a result of the loss
of one large customer in Australia.
For the six months ended November 30, 2007 as compared to 2006, cost of
sales decreased from $1,591,373, or 64.0% of sales, to $1,276,809, or 53.9% of
sales. For the three month period then ended cost of sales decreased from
$813,758, or 61.1% of sales, to $541,188, or 52.7% of sales. This decrease was
primarily due to the product mix of the sales, decreases in Mexico expenses and
the building of inventory, including new products, which has associated labor
and overhead costs included in the valuation.
For the six months ended November 30, 2007 compared to 2006, selling,
general and administrative costs increased by $106,722, or 16.8%. For the three
months then ended these expenses increased by $76,894, or 22.3%. These increases
were primarily a result of increased advertising, commissions, wages and bad
debt expense.
For the six months ended November 30, 2007 compared to 2006, research
and development increased by $28,677, or 28.8% and for the three months
decreased by $66. The increase for the six months was due to a higher wages and
materials for the research of new products and materials.
For the six months ended November 30, 2007, other income of $707,754
was realized as compared to $35 in the prior year, which resulted in an increase
of $707,719. For the three months then ended, other income of $8,925 was
realized as compared to $25 in the prior fiscal year. The increase for the six
months was a result of the sale of a marketable security that had been carried
on the Company's books at zero value.
For the six months interest expense decreased from $16,242 to $15,448.
For the three months interest expense increased from $8,740 to $11,830.
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LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2007, the Company had cash and current
available-for-sale securities in the amount of $808,471 and working capital of
$2,201,815. The Company also has long-term available-for-sale securities in the
amount of $464,823.
During the six months ended November 30, 2007, the Company operations
provided cash in the amount of $185,130 as compared to cash used in operations
of $4,292 in the same period in the prior fiscal year. Cash provided by
financing activities for the six months ended November 30, 2007 was $146,103 due
to borrowing of $119,530 to finance the purchase of equipment as compared to
cash provided by financing activities of $9,486 in fiscal 2007. Purchases of
property and equipment for fiscal 2008 were $40,328 compared to $86,737 in
fiscal 2007. The Company expects delivery of $181,200 in equipment during the
month of January 2008. Funds paid for this equipment are included in prepaid
assets until the Company takes delivery of the equipment.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Note 2 of the Notes to Consolidated Financial Statements
contained in the Company's annual report on Form 10KSB for the period ended May
31, 2007, describes the significant accounting policies essential to the
consolidated financial statements. The preparation of these financial statements
requires estimates and assumptions that affect the reported amounts and
disclosures.
We believe the following to be critical accounting policies as they
require more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments and
estimates are appropriate and correct, actual future results may differ from our
estimates.
In general the critical accounting policies that may require judgments
or estimates relate specifically to the Allowance for Doubtful Accounts,
Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of
Long-Lived Assets, Stock Based Compensation and Income Tax Accruals.
Revenues from product sales are recognized at the time the product is
shipped, customarily FOB shipping point, at which point title passes. When
necessary an allowance is established for estimated returns as revenue is
recognized.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed by
management and discussed with the audit committee. We have identified specific
customers where collection is not probable and have established specific
reserves, but to the extent collection is made, the allowance will be released.
Additionally, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on hand to
management's forecast of customer demand. Customer demand is dependent on many
factors and requires us to use significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from older
products to newer products. Once a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product. The Company has
classified certain inventory as long-term since it is estimated that it will not
be used within the next year.
We have been in a loss position for tax purposes in prior years, and
have established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in future
periods to realize the entire benefit of our deferred tax assets. Predicting
future taxable income is difficult, and requires the use of significant
judgment. At November 30, 2007, all of our deferred tax assets were reserved.
Accruals are made for specific tax exposures and are generally not material to
our operating results or financial position, nor do we anticipate material
changes to these reserves in the near future.
The consolidated financial statements reflect, for all periods
presented, the adoption of the classification or disclosure requirements
pursuant to Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping
and Handling Fees and Costs." The Company has historically classified income
from freight charges to customers as sales, which has been offset by shipping
and handling costs. The income from freight for the six months ended November
30, 2007 and 2006, respectively, was $56,792 and $46,785 and for the quarters
then ended was $21,899 and $21,716. 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.
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Please refer to the annual report on Form 10-KSB for the period ended
May 31, 2007 for an in-depth discussion of risk factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
abroad, that may affect the general economic climate and performance of
Biomerica or its' customers. Aside from general macroeconomic downturns, the
additional material factors that could affect future financial results include,
but are not limited to: Terrorist attacks and the impact of such events;
diminished access to raw materials that directly enter into our manufacturing
process; shipping labor disruption or other major degradation of the ability to
ship our products to end users; inability to successfully control our margins
which are affected by many factors including competition and product mix;
protracted shutdown of the U.S. Border due to an escalation of terrorist or
counter terrorist activity; any changes in our business relationships with
international distributors or the economic climate they operate in; any event
that has a material adverse impact on our foreign manufacturing operations may
adversely affect our operation as a whole; failure to manage the future
expansion of our business could have an adverse affect on our revenues and
profitability; possible costs in complying with government regulations and the
delays in receiving required regulatory approvals or the enactment of new
adverse regulations or regulatory requirements; numerous competitors, most of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or medical professionals
alleging harm caused by the use of or exposure to our products; quarterly
variations in operating results caused by a number of factors, including
business and industry conditions and other factors beyond our control. All of
these factors make it difficult to predict operating results for any particular
period.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the
Company's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of November 30, 2007,
that the design and operation of the Company's "disclosure controls and
procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the Company's management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the six months ended November 30, 2007, there were no changes in
the Company's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2007 Annual Meeting of the Company's stockholders was held on
November 29, 2007. The only matter voted upon at the meeting, as set
forth in the proxy statement dated September 28, 2007, as filed with
the Securities and Exchange Commission pursuant to Rule 14 under the
Securities Act of 1934, was the election of directors. The following
summarizes the voting:
Proposal No. 1: Election of Directors
Name For Votes Withheld
---- ---- --------------
Barbieri 5,037,500 65,927
Cano 5,045,870 57,557
Emerson 5,047,420 56,007
Irani 5,041,895 61,532
Moore 5,048,970 54,457
Roehm 5,048,370 55,057
All directors were elected.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(a) Exhibits
31 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 14, 2008
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
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