FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 28, 2007 Commission File No. 0-8765
----------------- ------
BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
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(Not applicable)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,939,214 shares of common
stock as of April 13, 2007.
1
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three and Nine Months Ended
February 28, 2007 and 2006........................................3 & 4
Consolidated Balance Sheet (unaudited) -
February 28, 2007.................................................5 & 6
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended February 28, 2007 and 2006......................7 & 8
Notes to Consolidated Financial Statements (unaudited).............9-22
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................23-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........25
Item 4. Controls and procedures..............................................25
PART II Other Information....................................................26
Item 1. Legal Proceedings....................................................26
Item 2. Changes in Securities and Use of Proceeds............................26
Item 3. Defaults upon Senior Securities......................................26
Item 4. Submission of Matters to a Vote of Security Holders..................26
Item 5. Other Information....................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................26
Signatures...........................................................27
2
THE DECONSOLIDATION OF LANCER ORTHODONTICS FROM BIOMERICA OCCURRED DECEMBER 1,
2005. THEREFORE, THE NINE MONTHS ENDED FEBRUARY 28, 2006, INCLUDES THE
OPERATIONS OF BIOMERICA FOR THE NINE MONTHS THEN ENDED AND SIX MONTHS OF
OPERATIONS FOR LANCER ORTHODONTICS. THE NINE MONTHS ENDED FEBRUARY 28, 2007
INCLUDES THE OPERATIONS OF BIOMERICA ONLY. THE THREE MONTHS ENDED FEBRUARY 28,
2007 AND 2006 INCLUDES THE OPERATIONS OF BIOMERICA ONLY. IN ORDER TO UNDERSTAND
HOW THE BIOMERICA OPERATIONS COMPARE, PLEASE REFER TO NOTE 2 FOR A BREAKDOWN OF
THE RESULTS BY COMPANY FOR THE PERIOD ENDED FEBRUARY 28, 2006.
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
(SEE NOTE 2)
Nine Months Ended Three Months Ended
February 28, February 28,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales ..................................................... $ 3,797,051 $ 5,717,260 $ 1,311,609 $ 998,070
Cost of sales ............................................ (2,427,578) (3,820,715) (836,204) (649,468)
----------- ----------- ----------- -----------
Gross profit ............................................. 1,369,473 $ 1,896,545 $ 475,405 $ 348,602
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative ...................... 943,601 1,866,470 308,403 272,890
Research and development ................................. 170,759 193,360 71,246 38,779
----------- ----------- ----------- -----------
1,114,360 2,059,830 379,649 311,669
----------- ----------- ----------- -----------
Operating income (loss) from continuing operations ............ 255,113 (163,285) 95,756 36,933
----------- ----------- ----------- -----------
Other Expense (income):
Interest expense ......................................... 22,626 36,751 6,385 7,248
Other income, net ........................................ (40,040) (45,575) (40,005) (730)
----------- ----------- ----------- -----------
(17,414) (8,824) (33,620) 6,518
----------- ----------- ----------- -----------
Income (loss) from continuing operations, before
minority interest in net loss of consolidated
subsidiaries and income taxes ............................... 272,527 (154,461) 129,376 30,415
Minority interest in net losses of consolidated subsidiary .... -- 251,670 -- --
----------- ----------- ----------- -----------
Income from continuing operations,
before income taxes ......................................... 272,527 97,209 129,376 30,415
Income tax expense ............................................ 8,006 2,400 8,006 800
----------- ----------- ----------- -----------
Net income from continuing operations ......................... 264,521 94,809 121,370 29,615
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PLEASE REFER TO NOTE 2.
3
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
(SEE NOTE 2)
Nine Months Ended Three Months Ended
February 28, February 28,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Discontinued operations:
Income from discontinued operations, net ....................... (27,869) -- -- --
------------ ------------ ------------ ------------
Net income ................................................ 292,390 94,809 121,370 29,615
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale
securities .................................................... (36,868) (240,100) (8,662) (236,286)
------------ ------------ ------------ ------------
Comprehensive income (loss) income ............................... $ 255,522 $ (145,291) $ 112,708 $ (206,671)
============ ============ ============ ============
Basic net income per common share:
Net income from continuing operations ................ $ .04 $ .01 $ .02 $ .00
Net income from discontinued operations .............. .00 .00 .00 .00
------------ ------------ ------------ ------------
Basic net income per common share ......................... $ .04 $ .01 $ .02 $ .00
============ ============ ============ ============
Diluted net income per common share
Net income from continuing operations ................ $ .04 $ .01 $ .02 $ .00
Net income from discontinued operations .............. .00 .00 .00 .00
------------ ------------ ------------ ------------
Diluted net income per common share ....................... $ .04 $ .01 $ .02 $ .00
============ ============ ============ ============
Weighted average number of common and common equivalent shares:
Basic ....................................................... 5,925,860 5,753,831 5,939,214 5,752,912
============ ============ ============ ============
Diluted ..................................................... 6,368,245 6,617,955 6,371,192 6,604,035
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PLEASE REFER TO NOTE 2.
4
BIOMERICA, INC.
BALANCE SHEET (UNAUDITED)
February 28,
2007
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Assets
Current Assets
Cash and cash equivalents ............................................. $ 66,491
Available for-sale securities ......................................... 588
Accounts receivable, less allowance for doubtful accounts of $23,415 .. 674,484
Inventories, net of reserve of $2,864 ................................. 1,411,066
Notes receivable ...................................................... 2,850
Prepaid expenses and other ............................................ 57,356
Net assets from discontinued operations ............................... 598
----------
Total Current Assets ............................................ 2,213,433
Inventory, non-current .................................................... 20,529
Available-for-sale securities ............................................. 375,959
Property and Equipment, net of accumulated depreciation and amortization .. 179,514
Intangible assets, net of accumulated amortization ........................ 3,882
Other Assets .............................................................. 13,419
----------
$2,806,736
==========
The accompanying notes are an integral part of these financial statements.
5
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
February 28,
2007
------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities ...................... $ 720,580
Accrued compensation .......................................... 487,451
Current portion of shareholder loan ........................... 234,426
Capital lease - short-term portion ............................ 4,054
------------
Total Current Liabilities ................................ 1,446,511
Capital lease-long-term portion .................................... 5,512
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares,
subscribed or issued and outstanding 5,939,214 .............. 475,136
Additional paid-in-capital .................................... 17,135,886
Accumulated other comprehensive loss .......................... (263,839)
Accumulated deficit ........................................... (15,992,470)
------------
Total Shareholders' Equity ......................................... 1,354,713
------------
Total Liabilities and Equity ....................................... $ 2,806,736
============
The accompanying notes are an integral part of these financial statements.
6
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended February 28, 2007 2006
--------- ---------
Cash flows from operating activities:
Net income from continuing operations ................................... $ 264,521 $ 94,809
Adjustments to reconcile net income to net cash (used in)
operating activities:
Depreciation and amortization ...................................... 41,896 107,597
Minority interest in net loss of consolidated subsidiary ........... -- (251,670)
Common stock, warrants and options issued for services rendered .... 5,357 3,739
Provision for losses on accounts receivable ........................ 16,385 16,092
(Gain) loss on disposal of equipment ............................... (40,000) 1,704
Provision for losses on inventory .................................. -- (714)
Changes in current assets and liabilities:
Accounts receivable .............................................. (130,149) (417,219)
Inventories ...................................................... (303,565) (311,394)
Prepaid expenses and other current assets ........................ (2,538) (22,098)
Accounts payable and other accrued liabilities ................... 139,813 340,800
Accrued compensation ............................................. 4,143 2,065
--------- ---------
Net cash (used in) operating activities ................................. (4,137) (436,289)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ................................ (100,138) (247,577)
Proceeds from sale of equipment .................................... 50,000 --
--------- ---------
Net cash used in investing activities ................................... (50,138) (247,577)
--------- ---------
Cash flows from financing activities:
Payments on capital lease .......................................... (2,722) --
Change in minority interest ........................................ -- 37,250
Decrease in shareholder loan ...................................... (26,516) (33,485)
Exercise of stock options .......................................... 5,130 398
Increase in line of credit at subsidiary ........................... -- 65,000
Payments of capital leases at subsidiary ........................... -- (25,799)
Private placement at subsidiary .................................... -- 469,800
Proceeds from sale of common stock ................................. 24,960 --
--------- ---------
Net cash provided by financing activities ............................... 852 513,164
--------- ---------
Net decrease in cash and cash equivalents ............................... (53,423) (170,702)
Net decrease in cash-reclassification of
Lancer Orthodontics Inc. to the cost method ......................... -- (134,003)
Cash at beginning of period ............................................. 119,914 351,881
--------- ---------
Cash at end of period ................................................... $ 66,491 $ 47,176
========= =========
Supplemental Disclosure of Cash Flow Information
Cash Paid During The Year For:
Interest ........................................................... $ 21,675 $ 36,751
========= =========
Income taxes ....................................................... $ 1,600 $ 2,400
========= =========
Supplemental disclosures on non-cash investing & financing activity
Change in unrealized holding loss on available-for-sale securities .... $ (36,868) $(240,626)
========= =========
Change in minority interest due to subsidiary stock issuance .......... $ -- $ (57,769)
========= =========
Capital lease for purchase of fixed assets ............................ $ 12,841 $ 360,593
========= =========
Increase in investment due to de-consolidation of Lancer .............. $ -- $ 632,732
========= =========
The accompanying notes are an integral part of these financial statements.
7
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended February 28, 2007 2006
----------- -----------
Changes due to de-consolidation of Lancer
Accounts Receivable ......................... $ -- $ 1,590,504
Inventories .................................. -- 1,838,698
Prepaid expenses and other current assets .... -- 90,676
Net fixed assets ............................. -- 1,197,310
Other ........................................ -- 48,821
----------- -----------
Subtotal assets ................................... -- 4,766,009
----------- -----------
Accounts payable and other accrued liabilities -- 899,483
Line of credit ............................... -- 240,000
Capital lease ................................ -- 334,794
Subscribed stock ............................. -- 85,850
Common stock ................................. -- 5,670,565
Accumulated deficit .......................... -- (2,330,680)
----------- -----------
Subtotal liabilities & equity ..................... -- (4,900,012)
----------- -----------
Net decrease in cash ............................. $ -- $ (134,003)
=========== ===========
The accompanying notes are an integral part of these financial statements.
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
February 28, 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, 2006, for a summary of significant
accounting policies utilized by the Company.
(2) As of February 28, 2007 the Company had cash and available-for-sale
securities in the amount of $67,079 and working capital of $766,922. The Company
also has $375,959 of long term available-for-sale securities of Lancer Ortho-
dontics. This stock is restricted and should the Company desire to sell this
stock on the open market, it may be subject to certain trading restrictions as
imposed by the Federal Securities Act of 1933.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has had operating
and liquidity concerns due to historically reporting net losses and negative
cash flows from operations. Biomerica's shareholder's line of credit expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable in the amount of $313,318 bearing interest at 8%
and payable September 1, 2004. The due date on this note has been extended each
year and is currently due September 1, 2007. This loan has been subordinated to
the Commercial Bank of California loans dated February 20, 2007. Minimum
payments are $4,000 per month plus an additional $2,000 per month (reduced from
$3,500 per month at September 1, 2006), depending on quarterly results of the
Company. The Company is currently out of compliance with this agreement due to
the fact that of the additional payments for fiscal 2006 and 2007, only $5,250
has been paid. As of February 28, 2007 $234,426 in principal was owed.
Until two years ago Biomerica had suffered substantial recurring losses
from operations. Biomerica has funded its operations through profits as well as
debt and equity financings for the past three years and has recently obtained a
commercial line of credit from a bank which will help fund operations and
growth. Operations of ReadyScript, which was a contributor to the Company's
consolidated losses in prior fiscal years, were discontinued in May 2001. Since
then, certain ReadyScript liabilities were forgiven and thus income from
discontinued operations was recorded. The subsidiary is being reported in the
financial statements as a discontinued operation because it is no longer an
operating entity.
In the last several years the Company has been focusing on reducing
costs where possible and concentrating on its core business to increase sales.
Management believes that cash flows from current operations will be sufficient
to fund operations for at least the next twelve months. Should the Company have
a downturn in sales or unanticipated, increased expenses, the result for the
Company could be the inability to continue as a going concern.
Our independent registered public accounting firm has concluded that
there is substantial doubt as to the Company's ability to continue as a going
concern for a reasonable period of time, and have, therefore modified their
report in the form of an explanatory paragraph describing the events that have
given rise to this uncertainty. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
9
The following tables present on a pro forma basis a breakdown by
company of the Statement of Operations for the nine months ended February 28,
2006 in order that the operations of Biomerica for that period may be compared
to the nine months ended February 28, 2007 on pages 3 and 4.
PRO FORMA STATEMENT OF OPERATIONS BY COMPANY (UNAUDITED)
Nine Months Ended
February 28, 2006
-----------------
Intercompany Pro-forma
Actual Eliminations Lancer Biomerica
---------------------------------------------------------------------------------------------------------------------------
NET SALES $ 5,717,260 -- $ (2,925,038) $ 2,792,222
COST OF SALES 3,820,715 15,780 (1) (2,190,495) 1,646,000
---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,896,545 (15,780) (1) (734,543) 1,146,222
---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
SELLING, GENERAL AND ADMIN 1,866,470 -- (1,029,059) 837,411
RESEARCH AND DEVELOPMENT 193,360 -- (42,470) 150,890
---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,059,830 -- (1,071,529) 988,301
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (163,285) (15,780) (1) 336,986 157,921
OTHER EXPENSE (INCOME)
Interest 36,751 -- (14,456) 22,295
Other expense (income) (45,575) (15,780) (2) 33,096 (28,259)
---------------------------------------------------------------------------------------------------------------------------
(8,824) (15,780) (2) 18,640 (5,964)
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST
IN NET INCOME (LOSS) OF CONSOLIDATED
SUBSIDIARIES AND INCOME TAXES (154,461) -- 318,346 163,885
MINORITY INTEREST IN NET LOSS (INCOME)
OF LANCER 251,670 (319,146) (3) -- --
67,476 (4)
---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 97,209 (251,670) 318,346 163,885
---------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 2,400 -- (800) 1,600
---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 94,809 $ (251,670) $ 319,146 $ 162,285
===========================================================================================================================
(1) To record the charge for rent by Lancer at the manufacturing facility in
Mexico which was eliminated in consolidation.
(2) To record the income from Biomerica received by Lancer for rent at the
Mexico facility, which was eliminated in consolidation.
(3) To de-consolidate Lancer's loss.
(4) Elimination of Biomerica's portion of Lancer's operations as if the
termination of the voting agreement occurred May 31, 2005.
10
(3) In December 2004, the Financial Accounting Standards Board ("FASB") Issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting For
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost is measured based on the grant- date fair value of the
equity or liability instruments issued. Compensation cost is recognized over the
period that an employee provides service in exchange for the award. As of the
beginning of fiscal 2007, June 1, 2006, the Company was required to account for
stock-based compensation using this method.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
If the Company had accounted for its options in accordance with SFAS
123(R) in fiscal 2006, the total value of options granted during the nine month
period ended February 28, 2006 would have been expensed over the vesting period
of the options. Thus, the Company's consolidated net income would have been as
follows:
Net Income 2006
-------------------------------------------------------------------------------
As reported $ 94,809
Add: Stock-based employee compensation
expense included in reported net income 702
Less: Stock-based employee compensation
expense determined using fair value
based method for all awards (17,483)
-------------------------------------------------------------------------------
Pro forma $ 78,028
===============================================================================
Pro forma net income from
continuing operations
per share - basic $ .01
===============================================================================
Pro forma net income from
continuing operations
per share - diluted $ .01
===============================================================================
For the nine months ended February 28, 2007, the Company expensed approximately
$5,357 of stock option expense due to SFAS 123(R) in its financial statements.
11
(4) The following summary presents the options granted, exercised, expired, and
outstanding as of February 28, 2007:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ---------- ---------- --------
Outstanding
May 31, 2006 1,748,284 152,666 1,900,950 $ 0.64
Granted 60,000 -- 60,000 0.56
Exercised (16,533) (16,533) 0.31
Expired or cancelled (190,668) ( 4,000) (194,668) 0.69
---------- ---------- ---------- --------
Outstanding
February 28, 2007 1,601,083 148,666 1,749,749 $ 0.60
========== ========== ========== ========
(5) The information set forth in these condensed consolidated statements is
unaudited and may be subject to normal year-end adjustments. The information
reflects all adjustments which, in the opinion of management, are necessary to
present a fair statement of the consolidated results of operations of Biomerica,
Inc., for the periods indicated. It does not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations, and cash flow in conformity with generally accepted accounting
principles.
(6) Consolidated results of operations for the interim periods covered by this
report may not necessarily be indicative of results of operations for the full
fiscal year.
(7) Reference is made to Note 3 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2006, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 9 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2006, for information on commitments and
contingencies.
(9) Aggregate cost exceeded market value of available-for-sale securities by
approximately $263,839 at February 28, 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.
12
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
Nine Months Ended Three Months Ended
February 28, 2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------
Numerator:
Income from continuing operations $ 264,521 $ 94,809 $ 121,370 $ 29,615
Income from discontinued operations 27,869 -- -- --
-------------------------------------------------------------------------------------------------------
Numerator for basic and diluted net
income per common share $ 292,390 94,809 121,370 29,615
=======================================================================================================
Denominator for basic net income
per common share 5,925,860 5,753,791 5,939,214 5,752,912
Effect of dilutive securities:
Options and warrants 442,385 864,164 431,978 851,123
-------------------------------------------------------------------------------------------------------
Denominator for diluted net income
per common share 6,368,245 6,617,955 6,371,192 6,604,035
=======================================================================================================
Basic net income per common share:
Income from continuing operations $ .04 $ .01 $ .02 $ --
Income from discontinued operations -- -- -- --
-------------------------------------------------------------------------------------------------------
Basic net income per common share $ .04 $ .01 $ .02 $ --
=======================================================================================================
Diluted net income per common share:
Income from continuing operations $ .04 $ .01 $ .02 $ --
Net income from discontinued operations -- -- -- --
-------------------------------------------------------------------------------------------------------
Diluted net income per common share $ .04 $ .01 $ .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 requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost ismeasured 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.
13
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.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods. The Company does not
believe the adoption of this standard will have an impact on its results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140
("SFAS, 155"). This statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets. SFAS No. 155: a) permits fair value
remeasurement for any hybrid financial instrument that contains an imbedded
derivative that otherwise would require bifurcation; (b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an imbedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and, (e) eliminates restriction on a qualifying special-purpose
entity's ability to hold passive derivative financial instruments that pertain
to beneficial interests that are or contain a derivative financial instrument.
SFAS No. 155 also requires presentation within the financial statements that
identifies those hybrid financial instruments for which the fair value election
has been applied and information on the income statement impact of the changes
in fair value of those instruments. The Company is required to apply SFAS No.
155 to all financial instruments acquired, issued or subject to a remeasurement
event beginning June 1, 2007. The Company does not expect the adoption of SFAS
No. 155 to have a material impact on the Company's financial statements.
14
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, an amendment of FASB Statement No. 140 (Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).
This Statement requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
The Company would be required to adopt this statement as of June 1, 2007. The
Company has not yet determined the impact, if any, of adopting SFAS 156 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Defining Fair Value
Measurement. The purpose of SFAS No. 157 is to eliminate the diversity in
practice that exists due to the different definitions of fair value and the
limited guidance for applying those definitions in GAAP that are dispersed among
the many accounting pronouncements that require fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company has not yet determined the impact, if any, of adopting SFAS 157 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
For Defined Benefit Pension and Other Postretirement Plans. Effective in
calendar- year 2006 (with certain exceptions) for public companies and
calendar-year 2007 (with certain exceptions) for private companies, SFAS No. 158
represents the "first phase" of a planned "two-phased" project where the FASB is
working on improving financial reporting related to pension and other
postretirement (OPB) plans. SEC registrants have been required to disclose the
"expected impact" of implementing SFAS No. 158 in filings made after September
30, 2006 and before the effective date of SFAS No. 158. The Company does not
expect the adoption of SFAS No. 158 to have a material impact on the Company's
financial statements.
In July 2006, the FASB issued FIN 48, entitled Accounting for
Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109,
entitled Accounting for Income Taxes. Through the interpretive guidance, the
FASB clarifies the accounting for uncertainty in income taxes, provides
recognition and measurement guidance related to accounting for income taxes, and
provides guidance related to classification and disclosure of income tax-related
financial statement components. The Company has not yet determined the impact,
if any, of adopting FIN 48 on its consolidated financial statements.
15
(12) Financial information about consolidated foreign and domestic operations
and export sales is as follows. The period ended February 28, 2007, includes
nine months of sales for Biomerica. The period ended February 28, 2006 shows
consolidated sales for the nine months ended February 28, 2006, as well as a
breakdown by company:
For the nine months ended 2/28/07: Consolidated Lancer Biomerica
------------ ----------- -----------
Revenues from sales to unaffiliated customers:
United States $ 994,000 -- $ 994,000
Asia 387,000 -- 387,000
Europe 1,854,000 -- 1,854,000
South America 56,000 -- 56,000
Oceania 447,000 -- 447,000
Other 59,000 -- 59,000
----------- ----------- -----------
$ 3,797,000 -- $ 3,797,000
=========== =========== ===========
For the nine months ended 2/28/06: Consolidated Lancer Biomerica
------------ ----------- -----------
Revenues from sales to unaffiliated customers:
United States $ 2,286,000 ($1,584,000) $ 702,000
Asia 267,000 (23,000) 244,000
Europe 2,010,000 (678,000) 1,332,000
South America 441,000 (379,000) 62,000
Oceania 427,000 (17,000) 410,000
Other 286,000 (244,000) 42,000
----------- ----------- -----------
$ 5,717,000 ($2,925,000) $ 2,792,000
=========== =========== ===========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(13) During fiscal 2006 an employee of the Company exercised a stock option for
750 shares at the purchase price of $.20 per share and 750 shares at the
purchase price of $.33 per share. The total proceeds to the Company was $398.
Options for an additional 12,750 shares were exercised at the end of February
2006. Of these shares, 9,000 were at the purchase price of $.20 per share and
3,750 were at a price of $.33 per share. The proceeds to the Company for these
options was $3,038.
In June 2005 the Company granted 111,000 stock options to purchase
shares of common stock at an exercise price of $.53 to several of the Company's
officers. The options vest over four years and have a term of five years.
Management assigned a value of $37,405 to these options.
16
On September 14, 2005, the Company granted 10,000 stock options to
purchase shares of common stock at an exercise price of $.47 to an employee of
the Company. The options vest over four years and have a term of five years.
Management assigned a value of $3,200 to these options.
On February 28, 2006, the Company granted 20,000 stock options to purchase
shares of common stock at an exercise price of $.48 to employees of the Company.
The options vest over four years and have a term of five years. Management
assigned a value of $5,520 to these options.
In May 2006 the Company granted 498,500 stock options to purchase shares of
common stock at an exercise price of $.40 per share to various employees,
consultants, officers and directors. The options vest over three years, and have
a term of five years. Management assigned a value of $118,643 to these options.
In May 2006 the Company granted warrants to purchase 52,000 shares of
restricted common stock at an exercise price of $.65 as part of the private
placement conducted at that time. The options vested immediately and have a term
of five years. Management assigned a value of $9,880 to these warrants.
In July 2006 the board of directors granted a stock option for 10,000
options to an employee of the Company. The options vested one quarter
immediately and then will vest one quarter per year thereafter. The option is at
the exercise price of $.50 per share and expires in five years. Management
assigned a value of $2,830 to this option.
In February 2007 the board of directors granted a stock option for 50,000
options to directors of the Company. The options vested one quarter immediately
and one quarter vesting in May 2007. One quarter will vest each year thereafter
on the grant date. The exercise price is $.57 per share and the option expires
in five years. Management assigned a value of $15,900 to these options.
Options or warrants granted are assigned values according to current market
value, using the Black-Scholes model for option valuation. The term used in the
calculation of the options or warrants is the vesting period. A discount rate
equivalent to five-year (or other life of the option or warrant) Treasury
constant maturity interest rates is utilized. The historical volatility of the
stock is calculated using weekly historical closing prices for the prior year as
reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the
Black-Scholes Model is also used for calculating employee options and warrants
valuations.
When shares are issued for services or other non-cash consideration,
fair value is measured using the current market value on the day of the Board of
Directors approval of such issuance.
During the quarter ended February 28, 2006, the Company recognized an
increase in its accumulated other comprehensive loss in the amount of $236,286
which was a result of the write-down of the stock which the Company owns in
Lancer Orthodontics. This occurred because the Company de-consolidated its
financials from Lancer, as discussed in Note 1, and the investment was written
down to current market value as reported on Yahoo Finance (Lancer is traded on
the Pink Sheets under the symbol LANZ.PK). Previous to that time, the investment
was eliminated in consolidation.
17
(14) Reportable business segments for the nine months and three months ended
February 28, 2007 and 2006 are as follows. THE NINE MONTH FIGURES FOR FISCAL
2006 INCLUDE SIX MONTHS OF SALES FOR LANCER ORTHODONTICS SINCE DECONSOLIDATION
OCCURRED DECEMBER 1, 2005. THE NINE MONTHS ENDED FEBRUARY 28, 2007 AND THE THREE
MONTHS ENDED FEBRUARY 28, 2007 AND 2006 INCLUDE SALES FOR BIOMERICA ONLY.
Nine Months Three Months
Ended February 28, Ended February 28,
--------------------------- ----------------------------
2007 2006 2007 2006
----------- ----------- ------------ -----------
Domestic sales:
Orthodontic products $ -- $ 1,584,000 $ -- $ --
=========== =========== ============ ===========
Medical diagnostic products $ 994,000 $ 702,000 $ 284,000 $ 323,000
=========== =========== ============ ===========
Foreign sales:
Orthodontic products $ -- $ 1,341,000 $ -- $ --
=========== =========== ============ ===========
Medical diagnostic products $ 2,803,000 $ 2,090,000 $ 1,028,000 $ 675,000
=========== =========== ============ ===========
Net sales:
Orthodontic products $ -- $ 2,925,000 $ -- $ --
Medical diagnostic products 3,797,000 2,792,000 1,312,000 998,000
----------- ----------- ------------ -----------
Total $ 3,797,000 $ 5,717,000 $ 1,312,000 $ 998,000
=========== =========== ============ ===========
Operating gain (loss) income:
Orthodontic products $ -- $ (321,000) $ -- $ --
Medical diagnostic products 255,000 158,000 96,000 37,000
----------- ----------- ------------ -----------
Total $ 255,000 $ (163,000) $ 96,000 $ 37,000
=========== =========== ============ ===========
Gain from discontinued segment:
ReadyScript $ 27,869 $ -- $ -- $ --
----------- ----------- ------------ -----------
Total $ 27,869 $ -- $ -- $ --
=========== =========== ============ ===========
18
As of February 28,
2007 2006
---------- ----------
Domestic long-lived assets:
Medical diagnostic products $ 150,000 $ 103,000
---------- ----------
Total $ 150,000 $ 103,000
========== ==========
Foreign long-lived assets:
Medical diagnostic products $ 30,000 $ 20,000
---------- ----------
Total $ 30,000 $ 20,000
========== ==========
Total assets:
Medical diagnostic products $2,807,000 $2,346,000
---------- ----------
Total $2,807,000 $2,346,000
========== ==========
Capital expenditures:
Orthodontics products $ -- $ 575,000
Medical diagnostic products 100,000 33,000
---------- ----------
Total $ 100,000 $ 608,000
========== ==========
The net sales as reflected above consist of sales of unaffiliated
customers only as there were no significant intersegment sales during the nine
months ended February, 2007 and 2006.
(15) In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in Mexicali,
Mexico. The agreement requires reimbursement from Biomerica for discrete
expenses such as payroll, shipping, and customs fees; the lease is $2,335 and
service fees are approximately $2,900 per month.
(16) On July 29, 2005, Biomerica entered into an agreement for the research,
development and transfer of certain technology. The total of the project is
estimated to be $55,000.
(17) In August 2006, the Company and the holder of the Note payable- shareholder
agreed to the extension of the note due date until September 1, 2007, at the
same terms and conditions as the previous agreement except that additional
payments of $3,500 per month, contingent upon certain earnings, have been
reduced to $2,000 per month.
19
(18) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has no
liabilities recorded for these agreements as of February 28, 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 February 28, 2007. As a result
of the Company's deconsolidation of Lancer which occurred December 1, 2005, both
companies have been required to purchase their own Directors' and Officers'
insurance, rather than have a combined policy.
(19)Commitments and Contingencies
The Company entered into an agreement with the Commercial Bank of
California for a commercial line of credit dated February 20, 2007. The maximum
principal amount on the line of credit is $200,000. The principal balance owed
on the loan will be due September 1, 2008 with monthly interest payments of all
unpaid accrued interest at the rate of 9.75%. The loan is collateralized by all
assets of the Company. The Company has not yet borrowed any funds on this line
of credit.
The Company entered into an agreement with the Commercial Bank of
California for an equipment line of credit dated February 20, 2007. The maximum
principal amount on this line of credit shall be $200,000. Nine monthly
consecutive interest payments, beginning April 1, 2007, with an initial interest
rate of 9.500% shall be due on the loan balance. For a balance of $200,000 forty
seven monthly consecutive principal and interest payments in the initial amount
of $5,038.21 each, beginning January 1, 2008 will be due. The line of credit
shall be used for equipment. As of April 16, 2007 the Company has drawn $61,670
on this line which has been used as a down-payment on equipment which will be
delivered later in the year.
The Company also signed a Subordination Agreement dated February 20, 2007
wherein the Company and the Company's existing note payable holder agreed that
the collateral for the note payable of $234,426 will be subordinate to the
$200,000 line of credit with the Commercial Bank of California.
The Company signed a Second Amendment of the Note, Loan and Modification
Agreement with a shareholder/officer/director ("Moore") dated February 20, 2007,
wherein Moore agreed to enter into the Subordination Agreement with the
Commercial Bank of California, and the Company agreed to increase the existing
collateral to include the Lancer common stock (all of which is subordinated to
the bank per the Subordination Agreement). In addition, the Company agreed to
bring the past due amounts on the existing note payable agreement up to date by
August 31, 2007. Moore also was granted the right to approve of any increase in
the line of credit which may be offered in the future (while the shareholder
note payable is unpaid). Amounts due on the note that are contingent upon
certain performance by the Company have been reduced from $3,500 per month to
$2,000.
20
According to the terms of the agreement with Commercial Bank of California,
the Company must comply with the following financial covenants and ratios:
Cash flow/Current Maturity (LTD) Ratio: Maintain a ratio of Cash Flow/Current
Maturity (LTD) in excess of 1.300 to 1.000.
Debt/Worth Ratio: Maintain a ratio of Debt/Worth not in excess of 2.000 to
1.000.
(20) 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.
The preparation of these consolidated 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 recognition of revenue, the Allowance for
Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market
Value, Impairment of Long-Lived Assets, Stock Based Compensation and Deferred
Income Tax Valuation, Valuation of Available-for-sale Securities and Allowances.
We recognize product revenues when an arrangement exists, delivery has occurred,
the price is determinable and collection is reasonably assured.
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 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.
In the past we have been in a loss position for tax purposes, 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 full benefit of our deferred tax assets. Predicting
future taxable income is difficult, and requires the use of significant
judgment. At February 28, 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.
We have provided a full valuation reserve related to our substantial deferred
tax assets. In the future, if sufficient evidence of our ability to generate
sufficient future taxable income in certain tax jurisdictions becomes apparent,
we may be required to reduce our valuation allowances, resulting in income tax
benefits in our consolidated statement of operations. We evaluate the
realizability of the deferred tax assets and assess the need for valuation
allowance quarterly. The utilization of the net operating loss carryforwards
could be substantially limited due to restrictions imposed under federal and
state laws upon a change of ownership.
(21) Risks and Uncertainties
License Agreements - Certain of the Company's sales of products are governed by
license agreements with outside third parties. All of such license agreements to
which the Company currently is a party, are for fixed terms which will expire
after ten years from the commencement of the agreement or upon the expiration of
the underlying patents. After the expiration of the agreements or the patents,
the Company is free to use the technology that had been licensed. There can be
no assurance that the Company will be able to obtain future license agreements
as deemed necessary by management. The loss of some of the current licenses or
the inability to obtain future licenses could have an adverse affect on the
Company's financial position and operations. Historically, the Company has
successfully obtained all the licenses it believed necessary to conduct its
business.
21
Distribution - The Company 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. The
Company 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.
Government Regulations - The Company's products are subject to regulation by the
FDA under the Medical Device Amendments of 1976 (the "Amendments"). The Company
has registered with the FDA as required by the Amendments. There can be no
assurance that the Company will be able to obtain regulatory clearances for its
current or any future products in the United States or in foreign markets.
European Community - The Company is required to obtain certification in the
European Community to sell products in those countries. The certification
requires the Company to maintain certain quality standards. The Company has been
granted certification on certain products. The Company recently had its yearly
CE Mark Surveillance Audit and has been notified that it has been recommended
for recertification. There is no assurance that the Company will be able to
retain its certification in future years.
Risk of Product Liability - Testing, manufacturing and marketing of the
Company's products entail risk of product liability. The Company currently has
product liability insurance. There can be no assurance, however, that the
Company will be able to maintain such insurance at a reasonable cost or in
sufficient amounts to protect the Company against losses due to product
liability. An inability to maintain such insurance at a reasonable cost or in
sufficient amounts could prevent or inhibit the commercialization of the
Company'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.
Subsequent Events
On March 13, 2007 the Company made a commitment of $181,200 to purchase
equipment to be utilized in production. An initial down-payment of $61,670 was
made with the order, with another 50% due upon acceptance of the equipment and
15% due twenty days after delivery. The equipment line of credit with Commercial
Bank of California may be used to fund this purchase.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
ITEM 2.
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 OF 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 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
Nine and Three Months Comparison for the period ended February 28, 2007
versus 2006.
LANCER ORTHODONTICS WAS DECONSOLIDATED FROM BIOMERICA ON DECEMBER 1, 2005.
THEREFORE, THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2006 INCLUDES SIX MONTHS OF
RESULTS FOR LANCER ORTHODONTICS (JUNE 1, 2005 THROUGH NOVEMBER 30, 2005). THE
THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006 INCLUDES RESULTS FROM BIOMERICA
DIAGNOSTICS ONLY.
Consolidated net sales for Biomerica were $3,797,051 for the nine
months ended February, 2007 as compared to $5,717,260 for the same period in the
prior fiscal year. This represents a decrease of $1,920,209, or 33.6% for the
nine month period. The overall decrease in sales from February 28, 2007 compared
to February 28, 2006 is a result of the deconsolidation of Lancer as of December
1, 2005. On a stand-alone basis, the sales of Biomerica increased from
$2,792,222 to $3,797,051, or $1,004,829 (36.0%) for the nine months ended
February 28, 2007 as compared to 2006. For the three months ended February 28,
2007 and 2006, sales increased by $313,539, or 31.4%. Sales increased due to
higher sales to foreign distributors, as well as increased sales of certain
product lines.
For the nine months of fiscal 2007 compared to 2006, cost of sales as a
percentage of sales decreased from 66.8% of sales to 63.9% of sales. For the
nine months of fiscal 2007 compared to 2006, Biomerica on a stand-alone basis
had an increase from 58.9% to 63.9%. For the three months ended February 28,
2007 compared to 2006, cost of goods as a percentage of sales decreased from
65.1% to 63.8%. This decrease was primarily due to the higher sales volume
relative to some fixed costs.
Selling, general and administrative costs decreased by $922,869, or
49.4% for the nine months ended 2007. The overall decrease in selling, general
and administrative costs from February 28, 2006 to 2007 is a result of the
deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis the
selling, general and administrative expenses of Biomerica increased from
$837,411 to $943,601, which represents an increase of $106,190, or 12.7%.
Selling, general and administrative expenses increased by $35,513 for the
quarter ended February 28, 2007. The increases at Biomerica for the nine and
three month periods were attributable to increased wages and advertising.
Research and development expenses decreased by $22,601, or 11.7%, for
the nine months ended February 28, 2007. The overall decrease in research and
development expenses from February 28, 2006 to 2007 is a result of the
deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis, the
research and development expenses of Biomerica increased by $19,869, primarily
due to materials and personnel required for new research projects. For the three
months ended February 28, 2007 research and development expenses increased by
$32,467 (83.7%) for the same reason that these expenses increased for the nine
months.
23
For the nine months ended February 28, 2007, other income decreased
from $45,575 to $40,040, compared to the same period in the prior year. The
overall decrease in other income from February 28, 2006 to 2007 is a result of
the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis,
Biomerica's other income increased by $11,781 due to the non-sale income
realized from a contract with a customer in fiscal 2006 as compared to the one
time sale of some equipment which had been purchased in fiscal 2007. For the
three months ended February 28, 2007, other income increased by $39,275, which
was due to the one time sale of equipment which had been purchased in fiscal
2007.
Interest expense decreased by $14,125 (38.4%) for the nine months ended
February 28, 2007 compared to the previous year. On a stand-alone basis,
Biomerica had increased interest expense of $331. For the three months ended
February 28, 2007 as compared to 2006 interest expense decreased by $863, which
was due to the reduced shareholder note payable which was offset by the small
equipment leases.
Net income from continuing operations for the nine months ended February
28, 2007 was $264,521 as compared to $94,809 for the same period in the prior
fiscal year. On a stand-alone basis, net income for the nine month period was
$264,521 as compared to $162,285, an increase of $102,236, or 63.0%. Net income
from continuing operations for the three months ended February 2007 was $121,370
as compared to $29,615 for the three months ended February 2006. This represents
an increase of $91,755, or 309.8%.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2007 the Company had cash and available-for-sale
securities in the amount of $67,079 and working capital of $766,922. The Company
also has $375,959 of long term available-for-sale securities of Lancer Ortho-
dontics. This stock is restricted and should the Company desire to sell this
stock on the open market, it may be subject to certain trading restrictions as
imposed by the Federal Securities Act of 1933.
These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has had operating
and liquidity concerns due to historically reporting net losses and negative
cash flows from operations. Biomerica's shareholder's line of credit expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable in the amount of $313,318 bearing interest at 8%
and payable September 1, 2004. The due date on this note has been extended each
year and is currently due September 1, 2007. This loan has been subordinated to
the Commercial Bank of California loans dated February 20, 2007. Minimum
payments are $4,000 per month plus an additional $2,000 per month (as revised
from $3,500 per month), depending on quarterly results of the Company. The
Company is currently out of compliance with this agreement due to the fact that
of the additional payments due for fiscal 2006 and 2007, only $5,250 has been
paid. As of February 28, 2007, $234,426 in principal was owed.
Until two years ago Biomerica had suffered substantial recurring losses
from operations. Biomerica has funded its operations through profits as well as
debt and equity financings for the past three years and has recently obtained a
commercial line of credit from a bank which will help fund operations and
growth. Operations of ReadyScript, which was a contributor to the Company's
consolidated losses in prior fiscal years, were discontinued in May 2001. Since
then, certain ReadyScript liabilities were forgiven and thus income from
discontinued operations was recorded. The subsidiary is being reported in the
financial statements as a discontinued operation because it is no longer an
operating entity.
In the last several years the Company has been focusing on reducing
costs where possible and concentrating on its core business to increase sales.
Management believes that cash flows from current operations will be sufficient
to fund operations for at least the next twelve months. Should the Company have
a downturn in sales or unanticipated, increased expenses, the result for the
Company could be the inability to continue as a going concern.
Our independent registered public accounting firm has concluded that
there is substantial doubt as to the Company's ability to continue as a going
concern for a reasonable period of time, and have, therefore modified their
report in the form of an explanatory paragraph describing the events that have
given rise to this uncertainty. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
24
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 February 28, 2007,
that the design and operation of the Company's "disclosure controls and
procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the Company's management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the quarter ended February 28, 2007, there were no changes in
the Company's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(a) Exhibits
31.1 Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO 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 CFO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Business Loan Agreement dated February 20, 2007 with Commercial
Bank of California.
99.2 Commercial Security Agreement (loan #0100000250) dated February
20, 2007 with Commercial Bank of California.
99.3 Promissory Note (loan #0100000250) dated February 20, 2007 with
Commercial Bank of California.
99.4 Promissory Note (loan #0100000251) dated February 20, 2007 with
Commercial Bank of California.
99.5 Subordination Agreement (loan #0100000250) dated February 20, 2007
with Commercial Bank of California and Janet Moore Trust.
99.6 Second Amendment of the Note, Loan and Mofication Agreement dated
March 9, 2007 between Biomerica and Janet Moore Trust.
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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: April 13, 2007
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
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