UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO 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.
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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 lastreport.)
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicated by check mark whether the registrant is a shell company (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: 6,631,039 shares of common
stock, par value $.08, as of October 15, 2008.
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Income (unaudited) - Three Months Ended
August 31, 2008 and 2007........................................ 1 & 2
Consolidated Balance Sheet (unaudited)
August 31 and (audited) May 31, 2008............................ 3 & 4
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended August 31, 2008 and 2007..................... 5
Notes to Consolidated Financial Statements (unaudited) ......... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data..................................... 10-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 12
Item 4. Controls and procedures......................................... 13
PART II Other Information............................................... 14
Item 1. Legal Proceedings............................................... 14
Item 1A. Risk Factors.................................................... 14
Item 2. Unregistered Sales of Equity Securities & 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........................................................ 14
Signatures...................................................... 15
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
August 31,
2008 2007
----------- -----------
Net sales .......................................................... $ 1,194,345 $ 1,340,065
Cost of sales ................................................. (661,216) (735,621)
----------- -----------
Gross profit .................................................. 533,129 604,444
----------- -----------
Operating Expenses:
Selling, general and administrative ........................... 338,883 320,283
Research and development ...................................... 46,988 69,744
----------- -----------
385,871 390,027
----------- -----------
Operating gain from operations ..................................... 147,258 214,417
----------- -----------
Other Expense (income):
Interest (income) expense ..................................... 9,671 12,543
Other income, net ............................................. (12,022) (707,754)
----------- -----------
(2,351) (695,211)
----------- -----------
Income before income taxes ......................................... 149,609 909,628
Income tax expense ................................................. 8,797 24,242
----------- -----------
Net income ......................................................... $ 140,812 $ 885,386
=========== ===========
1
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED) - Continued
Other comprehensive income, net of tax
Unrealized gain on available-for-sale securities ........... $ 25 $ 34,299
------------ -------------
Comprehensive income ......................................... $ 140,837 $ 919,685
============ =============
Basic net income per common share ............................ $ .02 $ .15
============ =============
Diluted net income per common share .......................... $ .02 $ .13
============ =============
Weighted average number of common and common equivalent shares:
Basic ................................................... 6,587,114 5,952,730
============= =============
Diluted ................................................. 7,096,130 7,070,187
============ =============
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET
August 31, May 31,
2008 2008
(unaudited) (audited)
----------- -----------
Assets
Current Assets
Cash and cash equivalents ............................................... $ 1,960,826 $ 2,022,380
Available for-sale securities ........................................... 380 355
Accounts receivable, less allowance for doubtful accounts of $86,972
and $84,206, respectively 524,003 614,330
Inventories, net ........................................................ 1,954,502 1,764,202
Prepaid expenses and other .............................................. 87,446 101,867
Deferred tax asset....................................................... 35,000 35,000
----------- -----------
Total Current Assets .............................................. 4,562,157 4,538,134
Property and Equipment, net of accumulated depreciation and amortization .... 381,294 369,580
Deferred Tax Asset........................................................... 135,000 135,000
Other Assets ................................................................ 75,066 64,997
----------- -----------
$ 5,153,517 $ 5,107,711
============ ===========
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued
August 31, May 31,
2008 2008
(unaudited) (audited)
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities ............................. $ 469,161 $ 473,539
Accrued compensation ................................................. 471,568 487,115
Current portion of shareholder loan .................................. -- 95,936
Capital lease - short term portion ................................... 2,976 4,180
Equipment loan - short term portion .................................. 50,225 48,428
------------ ------------
Total Current Liabilities ....................................... 993,930 1,109,198
Loan for equipment purchase ............................................... 101,521 114,565
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares, issued
and outstanding 6,621,839 and 6,489,839 in at August 31, 2008
and May 31, 2008, respectively ..................................... 529,746 519,186
Additional paid-in-capital ........................................... 17,432,819 17,407,096
Accumulated other comprehensive loss ................................. (7,373) (7,398)
Common stock subscribed .............................................. -- 3,000
Accumulated deficit .................................................. (13,897,126) (14,037,936)
------------ ------------
Total Shareholders' Equity ................................................ $ 4,058,066 $ 3,883,948
------------ ------------
Total Liabilities and Shareholders' Equity ................................ $ 5,153,517 $ 5,107,711
============ ============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended August 31, 2008 2007
----------- -----------
Cash flows from operating activities:
Net income from continuing operations ............................... $ 140,812 $ 885,386
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 21,048 15,227
Stock option expense ........................................... 3,283 6,581
Provision for losses on accounts receivable .................... 2,766 4,509
Changes in current assets and liabilities:
Accounts Receivable .......................................... 87,561 (239,474)
Inventories .................................................. (190,300) 19,215
Prepaid expenses and other assets ............................ 4,352 (24,123)
Accounts payable and other accrued liabilities ............... (4,380) (94,078)
Accrued compensation ......................................... (15,547) (95,627)
----------- -----------
Net cash provided by operating activities ........................... 49,595 477,616
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ....................... (32,762) (5,588)
----------- -----------
Net cash used in investing activities ............................... (32,762) (5,588)
----------- -----------
Cash flows from financing activities:
Paydown on shareholder loan .................................... (95,936) (14,867)
Exercise of stock options and warrants ......................... 27,000 17,533
Payment of common stock subscribed ............................. 3,000 --
Payments on capital lease ...................................... (1,204) (1,034)
Payment of equipment loan ...................................... (11,247) --
----------- -----------
Net cash (used in) provided by financing activities ................. (78,387) 1,632
----------- -----------
Net (decrease) increase in cash and cash equivalents ................ (61,554) 473,660
Cash and cash equivalents at beginning of period .................... 2,022,380 516,899
----------- -----------
Cash and cash equivalents at end of period .......................... $ 1,960,826 $ 990,559
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the quarter for:
Interest ....................................................... $ 10,062 $ 8,080
Taxes .......................................................... -- 1,600
=========== ===========
Change in unrealized holding loss on available-for-sale
securities ...................................................... $ (25) $ 34,299
=========== ===========
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2008
(1) In December 2004, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting For
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost is measured based on the grant- date fair value of the
equity or liability instruments issued. Compensation cost is recognized over the
period that an employee provides service in exchange for the award. As of the
beginning of fiscal 2007, June 1, 2006, the Company began using this method.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the three months ended August 31, 2008 and 2007 the Company expensed $3,283
and $6,581 of stock option expense due to SFAS 123(R) in its financial
statements, respectively.
(2) The following summary presents the options and warrants granted, exercised,
expired, cancelled and outstanding as of August 31, 2008:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ---------- ---------- ----------
Outstanding
May 31, 2008 1,346,958 155,166 1,502,124 $ 0.76
Granted -- -- -- --
Exercised (100,000) (20,000) (120,000) 0.25
Cancelled or expired (19,500) -- (19,500) 0.69
---------- ---------- ---------- ----------
Outstanding
August 31, 2008 1,227,458 135,166 1,362,624 $ 0.81
========== ========== ========== ==========
(3) 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. All adjustments that were made are of normal recurring nature.
(4) The unaudited Consolidated Financial Statements and Notes are presented as
permitted by the requirements for Form 10-Q and do not contain certain
information included in our annual financial statements and notes. The
Consolidated Balance Sheet data as of May 31, 2008 was derived from audited
financial statements. The accompanying interim Consolidated Financial Statements
should be read in conjunction with the financial statements and related notes
included in our Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission (SEC) for the fiscal year ended May 31, 2008. The results of
operations for our interim periods are not necessarily indicative of results to
be achieved for our full fiscal year.
6
(5) Aggregate cost exceeded market value of available-for-sale securities by
approximately $7,373 and $7,398 at August 31 and May 31, 2008, respectively.
(6) 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:
August 31,
2008
--------------
Raw materials $ 736,392
Work in progress 683,714
Finished products 534,396
--------------
Total $ 1,954,502
==============
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.
(7) Earnings Per Share
Basic EPS is computed as net income divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities.
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
AUGUST 31,
2008 2007
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Numerator:
Income from continuing operations $ 140,812 $ 885,386
================================================================================
Denominator for basic net income
per common share 6,587,114 5,952,730
Effect of dilutive securities:
Options and warrants 509,016 1,117,457
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Denominator for diluted net income per common share 7,096,130 7,070,187
================================================================================
Basic net income per common share $ .02 $ 0.15
================================================================================
Diluted net income per common share $ .02 $ 0.13
================================================================================
(8)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.
7
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. 163, Accounting for Financial Guarantee
Insurance Contracts. The new standard clarifies how FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises, applies to financial
Guarantee insurance contracts issued by insurance enterprises. The Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. The
Company does not believe that the adoption of SFAS No. 163 will have any impact
on its financial statements.
(9) Financial information about foreign and domestic operations and export sales
is as follows:
For the Three Months Ended
8/31/08 8/31/07
---------- ----------
Revenues from sales to unaffiliated customers:
United States $ 191,000 $ 335,000
Asia 280,000 318,000
Europe 680,000 648,000
South America 35,000 21,000
Middle East 7,000 4,000
Other 1,000 14,000
---------- ----------
$1,194,000 $1,340,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(10) 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
$0.76 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 $0.73 and expire in five years. Management assigned a value of
$72,489 to these options.
In May 2007 the board of directors granted stock options for 171,000 options to
certain officers and employees. The options vested one half immediately and then
one quarter per year thereafter. The options are at the exercise price of $0.80
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 $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 various employees. The options vested one quarter immediately and then one
quarter per year thereafter. The options are at the exercise price of $1.30 per
share and expire in five years. Management assigned a value of $10,952 to these
options.
During the year ended May 31, 2008, 557,625 options and warrants to purchase
Biomerica, Inc., common stock were exercised. The options were at prices ranging
from $0.20 to $0.73. The total proceeds to the Company were $162,386.
8
During the quarter ended August 31, 2008, 120,000 warrants to purchase
Biomerica, Inc. common stock were exercised. The warrants had an exercise price
of $0.25 per share. Total proceeds to the Company were $30,000.
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 123R 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.
(11) In July 2008, the Company paid off the principal and interest balance owed
on the shareholder note payable.
(12) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid.
As a result of its insurance policy coverage, the Company believes the estimated
fair value of these indemnification agreements is minimal and has no liabilities
recorded for these agreements as of August 31, 2008. The Company enters into
indemnification provisions under (i) its agreements with other companies in its
ordinary course of business, typically with business partners, contractors, and
customers, landlords and (ii) its agreements with investors. Under these
provisions the Company generally indemnifies and hold harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result of
the Company's activities or, in some cases, as a result of the indemnified
party's activities under the agreement. These indemnification provisions often
include indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company has not incurred material
costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, the Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has no liabilities recorded for
these agreements as of August 31, 2008.
(13) 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.
(14) Subsequent Events
During September 2008 an employee exercised 4,200 options to purchase common
stock at an exercise price of $0.33 per share. Total proceeds to the Company
were $1,386.
During October 2008 an employee exercised 5,000 options to purchase common stock
at an exercise price of $0.40 per share. Total proceeds to the Company were
$2,000.
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL
STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED
FUTURE REVENUES OF THE COMPANY AND SUCCESS OR CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY
IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS
TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $1,194,345 for the first
quarter of fiscal 2009 as compared to $1,340,065 for the same period in the
previous year. This represents a decrease of $145,720 or 10.9% for the quarter
ended August 31, 2008 as compared to the quarter ended August 31, 2007. The
decrease was primarily due to less screening programs being conducted by certain
drug stores this quarter which resulted in lower sales of the EZ Detect product.
Cost of sales in the first quarter of fiscal 2009 were $661,216, or
55.4% of sales as compared to $735,621, or 54.9% of sales in fiscal 2008. Cost
of sales as a percentage of sales in fiscal 2008 increased by .5%.
Selling, general and administrative costs increased by $18,600, or 5.8%
for the period ended August 31, 2008 as compared to the period ended August 31,
2007. The increase was primarily the result of higher wages and accounting
related to our SOX 404 project . Research and development decreased by $22,756,
or 32.6% for period ended August 31, 2008 as compared to the period ended August
31, 2007, due to a reduction in personnel and lower materials costs. The
decrease in personnel and materials cost was temporary and should increase again
in the second quarter as work on certain research projects intensifies.
For the three months ended August 31, 2008, other income of $12,022 was
realized as compared to $707,754 in the same period in the prior fiscal year.
This decrease was due to one-time benefit of $697,034 in fiscal 2008, which was
realized from the sale of a marketable security which had been carried on the
Company's books at zero. The balance of the increase was due to interest income
on the Company's cash balances.
Interest income, net of interest expense, decreased by $2,872 due to
lower interest expense due to lower balances on notes.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31 and May 31, 2008, the Company had cash and
available-for-sale securities in the amount of $1,961,206 and $2,022,735 and
working capital of $3,568,227 and $3,428,936, respectively.
10
During the quarter ended August 31, 2008 the Company operations
provided cash of $49,595 as compared to $477,616 in the prior fiscal year. The
decrease was primarily due to the one-time other income of $707,754 in fiscal
2008 as well as an increase in inventory during the current year of $209,515,
which was partially offset by the collection on accounts receivable of $327,035.
Cash used by financing activities in fiscal 2009 was $78,387 as compared to cash
provided by financing activities for fiscal 2008 of $1,632. The major reason for
this increase was the $95,936 used to pay off the shareholder note. The Company
invested $32,762 in the purchase of fixed assets in fiscal 2009 as compared to
$5,588 in the prior fiscal year.
In February 2007 the Company obtained a $200,000 working capital line
of credit and was approved for a $200,000 equipment loan with Commercial Bank of
California. The credit line and the equipment loan are collateralized by
substantially all of the assets of the Company. As of August 31, 2008 $151,846
was owed on the equipment loan and there was no outstanding balance due on the
working capital line of credit. In August 2008 Commercial Bank of California
extended the expiration date on the line of credit of $200,000, which was
scheduled to expire September 1, 2008, until November 1, 2008, while terms of a
new line of credit can be evaluated by both parties.
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, 2008, describes the significant accounting policies essential to the
consolidated financial statements. The preparation of these financial statements
requires estimates and assumptions that affect the reported amounts and
disclosures.
We believe the following to be critical accounting policies as they
require more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments and
estimates are appropriate and correct, actual future results may differ from our
estimates.
In general the critical accounting policies that may require judgments
or estimates relate specifically to the Allowance for Doubtful Accounts,
Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of
Long-Lived Assets, Stock Based Compensation and Income Tax Accruals.
Revenues from product sales are recognized at the time the product is
shipped, customarily FOB shipping point, at which point title passes. When
necessary an allowance is established for estimated returns as revenue is
recognized.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed by
management and discussed with the audit committee. We have identified specific
customers where collection is not probable and have established specific
reserves, but to the extent collection is made, the allowance will be released.
Additionally, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
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Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on hand to
management's forecast of customer demand. Customer demand is dependent on many
factors and requires us to use significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from older
products to newer products. Once a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product.
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 during fiscal year end May
31, 2008. Management re-evaluated this at August 31, 2008 and determined that
the deferred tax asset should remain at $170,000.
The Company has historically classified income from freight charges to
customers as sales, which has been offset by shipping and handling costs. The
income from freight for the quarters ended August 31, 2008 and 2007,
respectively, was $24,872 and $34,893. The financial statements presented herein
show the income from shipping and handling as a component of sales for both
periods and the costs of shipping and handling as a component of cost of goods
sold.
Please refer to the annual report on Form 10-KSB for the period ended
May 31, 2008 for an in-depth discussion of risk factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
abroad, that may affect the general economic climate and performance of
Biomerica or its' customers. Aside from general macroeconomic downturns, the
additional material factors that could affect future financial results include,
but are not limited to: Terrorist attacks and the impact of such events;
diminished access to raw materials that directly enter into our manufacturing
process; shipping labor disruption or other major degradation of the ability to
ship our products to end users; inability to successfully control our margins
which are affected by many factors including competition and product mix;
protracted shutdown of the U.S. Border due to an escalation of terrorist or
counter terrorist activity; any changes in our business relationships with
international distributors or the economic climate they operate in; any event
that has a material adverse impact on our foreign manufacturing operations may
adversely affect our operation as a whole; failure to manage the future
expansion of our business could have an adverse affect on our revenues and
profitability; possible costs in complying with government regulations and the
delays in receiving required regulatory approvals or the enactment of new
adverse regulations or regulatory requirements; numerous competitors, most of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or medical professionals
alleging harm caused by the use of or exposure to our products; quarterly
variations in operating results caused by a number of factors, including
business and industry conditions and other factors beyond our control. All of
these factors make it difficult to predict operating results for any particular
period.
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Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the
Company's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of August 31, 2008,
that the design and operation of the Company's "disclosure controls and
procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the Company's management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the quarter ended August 31, 2008, 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. None.
Item 1A. RISKS AND UNCERTAINTIES.
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.
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; concentrations
of sales with certain distributions could adversely affect the results of the
Company if the Company were to lose the sales of that distributor and other
factors beyond our control. All these factors make it difficult to predict
operating results for any particular period.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None.
Item 3. DEFAULTS UPON SENIOR SECURITIES. None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
Item 5. OTHER INFORMATION. None.
Item 6. EXHIBITS.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
- Zackary S. Irani.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
- Janet Moore.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
- Zackary S. Irani.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
- Janet Moore.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 15, 2008
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
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