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 FEBRUARY 29, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
17571 Von Karman Avenue, Irvine, CA
92614
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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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(Former name, former address and former fiscal year, if changed since last report.)
(TITLE OF EACH CLASS)
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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Common, par value $.08
OTC-BULLETIN BOARD
Securities registered pursuant to Section 12(g) of the Act:
(TITLE OF EACH CLASS)
COMMON STOCK, PAR VALUE $0.08
Indicate by check whether the registrant (1) 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 has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the registrant's common stock, as of the latest practicable date: 6,918,339 shares of common stock, par value $0.08, as of April 16, 2012.
BIOMERICA, INC.
INDEX
PART I
Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations and
Comprehensive Income (unaudited) – Nine and Three Months Ended
February 29, 2012 and February 28, 2011.........................
1
Condensed Consolidated Balance Sheets (unaudited)
February 29, 2012 and (audited) May 31, 2011.................... 2-3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended February 29, 2012 and February 28, 2011....... 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 12
Item 4. Controls and Procedures......................................... 12
PART II Other Information
Item 1. Legal Proceedings............................................... 12
Item 1A. Risk Factors.................................................... 12-13
Item 2. Unregistered Sales of Equity Securities & Use of Proceeds....... 13
Item 3. Defaults upon Senior Securities................................. 13
Item 4. Removed and reserved............................................ 13
Item 5. Other Information............................................... 13
Item 6. Exhibits........................................................ 13
Signatures...................................................... 14
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended Three Months Ended
February 29, February 28, February 29, February 28,
2012 2011 2012 2011
------------ ----------- ------------ -----------
Net sales ...................................... $4,538,944 $3,684,454 $ 1,514,673 $1,345,900
Cost of sales .................................. (2,788,276) (2,495,650) ( 947,830) (846,421)
------------ ----------- ------------ -----------
Gross profit ..............................
1,750,668 1,188,804 566,843 499,479
------------ ----------- ------------ -----------
Operating Expenses:
Selling, general and administrative .......
1,038,930 990,654 337,580 329,456
Research and development ..................
266,258 314,980 94,770 97,008
------------ ----------- ------------ -----------
Total Operating Expenses
1,305,188 1,305,634 432,350 426,464
------------ ----------- ------------ -----------
Income (loss) from operations ..................
445,480 (116,830) 134,493 73,015
------------ ----------- ------------ -----------
Other Income (Expense):
Gain on insurance proceeds ................
68,106 -- 68,106 --
Dividend and interest income...............
7,370 5,685 4,591 1,733
Interest expense ..........................
(1,113) ( 5,106) (171) (1,345)
Other income, net .........................
60 177,605 -- --
------------ ----------- ------------ -----------
74,423 178,184 72,526 388
------------ ----------- ------------ -----------
Income before income tax .......................
519,903 61,354 207,019 73,403
------------ ----------- ------------ -----------
Income tax expense .............................
(25,574) -- (25,574) --
------------ ----------- ----------- -----------
Net income ..................................... $ 494,329 $ 61,354 $ 181,445 $ 73,403
============ =========== ============ ===========
Basic net income per common share $ 0.07 $ 0.01 $ 0.03 $ 0.01
============ =========== ============ ===========
Diluted net income per common share
$ 0.07 $ 0.01 $ 0.03 $ 0.01
============ =========== ============ ===========
Weighted average number of common and
Common Equivalent Shares:
Basic ....................................
6,871,532 6,660,839 6,877,954 6,660,839
============ ========== ============ ===========
Diluted ...................................
7,046,458 6,694,375 7,125,560 6,691,475
============ ========== ============ ===========
Net income ..................................... $ 494,329 $ 61,354 $ 181,445 $ 73,403
Other comprehensive income (loss), net of tax:
Foreign currency translation
(1,528) (1,013) 95 (308)
------------ ----------- ------------ -----------
Comprehensive income
$ 492,801 $ 60,341 $ 1 81,540 $ 73,095
============ =========== ============ ===========
The accompanying notes are an integral part of these statements.
1
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, May 31,
2012 2011
(unaudited) (audited)
----------- -----------
Assets
Current Assets
Cash and cash equivalents ........................................ $ 898,458 $ 989,270
Accounts receivable, less allowance for doubtful accounts of $69,310
and $32,204 as of February 29, 2012 and May 31, 2011, respectively 1,343,417 747,075
Inventories, net ................................................. 1,862,002 1,785,525
Prepaid expenses and other ....................................... 183,047 237,563
Deferred tax assets, current portion ............................. 127,000 127,000
----------- -----------
Total Current Assets ....................................... 4,413,924 3,886,433
Property and Equipment, net of accumulated depreciation and
amortization ....................................................... 597,100 567,323
Deferred Tax Assets, net of current portion .......................... 111,000 111,000
Investments ..........................................................
165,324 165,324
Intangible Assets, net ...............................................
203,363 177,410
Other Assets ......................................................... 53,548 47,888
------------ -----------
Total Assets ......................................................... $5,544,259 $4,955,378
============ ===========
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - Continued
February 29, May 31,
2012 2011
(unaudited) (audited)
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses ......................... $ 451,828 $ 451,569
Accrued compensation .......................................... 185,555 138,056
Accrued income taxes
25,256 --
Loan for equipment purchase ….................................. -- 35,390
------------ ------------
Total Current Liabilities ................................ 662,639 625,015
Commitments and Contingencies (Note 5)
Shareholders' Equity
Preferred stock, no par value authorized 5,000,000 shares, none issued
and none outstanding at February 29, 2012 and May 31, 2011...
-- --
Common stock, $0.08 par value authorized 25,000,000 shares, issued
and outstanding 6,918,339 and 6,868,339 at February 29, 2012 and
May 31, 2011, respectively .................................. 553,466 549,466
Additional paid-in-capital .................................... 17,697,577 17,643,121
Accumulated other comprehensive loss .......................... (5,988) (4,460)
Accumulated deficit ........................................... (13,363,435) (13,857,764)
------------ ------------
Total Shareholders' Equity ......................................... $ 4,881,620 $ 4,330,363
------------ ------------
Total Liabilities and Shareholders' Equity ......................... $ 5,544,259 $ 4,955,378
============ ============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
February 29, February 28,
2012 2011
------------- -------------
Cash flows from operating activities:
Net income .................................................. $ 494,329 $ 61,354
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 129,798 109,610
Stock option expense ....................................
29,956 18,982
Change in provision for losses on accounts receivable ...
37,106 (8,904)
Inventory reserve........................................
2,692 (5,361)
Write-off of license-related intangible asset ...........
-- 13,982
Changes in assets and liabilities:
Accounts receivable ...................................
(633,448) 33,580
Inventories ........................................... (79,169) (39,409)
Prepaid expenses and other assets .....................
54,516 63,753
Other assets ..........................................
(5,660) 21,579
Accounts payable and other accrued expenses ...........
259 (125,990)
Accrued compensation ..................................
47,499 (77,288)
Income tax payable ....................................
25,256 --
-------------- -------------
Net cash provided by operating activities ....................
103,134 65,888
-------------- -------------
Cash flows from investing activities:
Increase in intangibles.................................. (50,000) (98,774)
Purchases of property and equipment .....................
(135,528) (83,695)
-------------- -------------
Net cash used in investing activities ........................
(185,528) (182,469)
-------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock option...................
28,500 --
Payments on equipment loan ..............................
(35,390) (33,550)
-------------- -------------
Net cash used in financing activities ........................
(6,890) (33,550)
Effect of exchange rate changes in cash.......................
(1,528) (1,013)
-------------- -------------
Net decrease in cash and cash equivalents ....................
(90,812) (151,144)
Cash and cash equivalents at beginning of period .............
989,270 1,055,206
-------------- -------------
Cash and cash equivalents at end of period ...................
$ 898,458 $ 904,062
============== =============
Supplemental Disclosure of Cash-Flow Information:
Cash paid during the period for:
Interest ................................................
$ 1,018 $ 4,917
============== =============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The information set forth in these condensed consolidated statements is unaudited and 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. and subsidiaries (the “Company”), 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.
The unaudited Condensed 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 condensed consolidated balance sheet data as of May 31, 2011 was derived from audited financial statements. The accompanying interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended May 31, 2011. The results of operations for our interim periods are not necessarily indicative of results to be achieved for our full fiscal year.
Note 2: Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Biomerica, Inc. and ReadyScript, Inc. (as discontinued operations) as well as the Company’s German subsidiary and Mexican subsidiary which have not begun operations. All significant intercompany accounts and transactions have been eliminated in consolidation. During the first nine months of fiscal 2012 and during fiscal 2011 there were no transactions from discontinued operations. Management has submitted paperwork to the State to dissolve the discontinued corporation.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market accounts with original maturities of less than three months.
Accounts Receivable
The Company extends unsecured credit to its customers on a regular basis. International accounts are required to prepay until they establish a history with the Company and at that time, they are extended credit at levels based on a number of criteria. Credit levels are approved by designated upper level management. Domestic customers are extended initial credit limits until they establish a history with the Company or submit credit information. All increases in credit limits are also approved by designated upper level management. Management evaluates receivables on a quarterly basis and adjusts the reserve for bad debt accordingly. Balances over ninety days old are reserved for unless collection is reasonably assured. Management evaluates quarterly what items to charge off. Any charge-offs are approved by upper level management prior to charging off.
Occasionally certain long-standing customers, who routinely place large orders, will have unusually large receivables balances relative to the total gross receivables. One such customer who placed a large order at the end of February 2012, had a balance that comprised 46.7% and 10% of the gross receivables at February 29, 2012 and May 31, 2011, respectively. Management monitors the payments for these large balances closely and very often requires payment of existing invoices before shipping new sales orders. Management evaluates the reserve for bad debt on a quarterly basis and adjusts the reserve if necessary after its analysis of all factors relevant.
5
Inventories
The Company values inventory at the lower of cost (determined using the first-in, first-out method) or market. Management periodically reviews inventory for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. The reserve is adjusted based on such evaluation, with a corresponding provision included in cost of sales. Abnormal amounts of idle facility expenses, freight, handling costs and wasted material are recognized as current period charges and the allocation of fixed production overhead is based on the normal capacity of the Company’s production facilities.
Inventories approximate the following:
February 29, May 31,
2012 2011
-------------- --------------
Raw materials $ 893,000 $ 737,000
Work in progress 623,000 718,000
Finished products
346,000 331,000
-------------- --------------
Total $ 1,862,000 $ 1,786,000
============== ==============
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation or amortization is removed from the accounts, and gains or losses from retirements and dispositions are credited or charged to income. Depreciation and amortization are provided over the estimated useful lives of the related assets, ranging from 5 to 10 years, using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease.
Intangible Assets
Intangible assets include trademarks, product rights, licenses, technology rights and patents, and are accounted for based on Accounting Standards Codification (ASC) 350 “Intangibles” (ASC 350). In that regard, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets are being amortized using the straight-line method over the useful life; not to exceed 18 years for marketing and distribution rights, 10 years for purchased technology use rights, licenses, and 17 years for patents.
Amortization amounted to $8,571 and $6,724 for the quarters ended February 29, 2012 and February 28, 2011, respectively, and $24,047 and $10,980 for the nine months ended February 29, 2012 and February 28, 2011, respectively.
Stock-Based Compensation
The Company follows the guidance of the accounting provisions of ASC 718 “Share-based Compensation” (ASC 718), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants and options). The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on weighted averages of the historical volatility of the Company’s stock and other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as historically the Company had limited activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.
In January 2012 the Board of Directors granted stock options for 402,500 options to employees and directors of the Company. The options are at an exercise price of $0.43 per share and expire in five years. Management assigned a value of $100,192 to these options.
For the nine months ended February 29, 2012 and February 28, 2011, the Company incurred $29,956 and $18,982 stock based compensation expense, respectively. For the three months ended February 29, 2012 and February 28, 2011, the Company incurred $18,924 and $7,266, respectively.
6
The following summary presents the options and warrants granted, exercised, expired, cancelled and outstanding as of February 29, 2012:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
---------- ------------- ---------- ----------
Outstanding
May 31, 2011
1,000,250 -- 1,000,250 $ 0.57
Granted 402,500 -- 402,500 0.43
Exercised
(50,000) -- (50,000) 0.57
Cancelled or expired
(47,000) -- (47,000) 0.52
---------- ------------- ---------- ----------
Outstanding February 29, 2012
1,305,750 -- 1,305,750 $ 0.53
========== ============= ========== ==========
Revenue Recognition
Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established when necessary for estimated returns as revenue is recognized. In conjunction with sales to certain customers, the Company provides free products upon attaining certain levels of purchases by the customer. The Company accounts for these free products in accordance with ASC 605-50 “Revenue Recognition – Customer Payments and Incentives” and recognizes the cost of the product as part of cost of sales.
Investments
From time-to-time, the Company makes investments in privately-held companies. The Company determines whether the fair values of any investments in privately-held entities have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, and the overall health of the investee’s industry), a write-down to estimated fair value is recorded. The Company currently has not written down the investment and no events have occurred which could indicate the carrying value to be less than the fair value. Investments represent the Company’s investment in a Polish distributor which is primarily engaged in distributing medical devices. The Company owns approximately 6% of the investee, and accordingly, applies the cost method to account for the investment. Under the cost method, investments are recorded at cost, with gains and losses recognized as of the sale date, and income recorded when received.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are classified as revenue, and shipping and handling costs are classified as cost of sales. The Company included shipping and handling fees billed to customers in net sales. The Company included shipping and handling costs associated with inbound freight and unreimbursed shipping to customers in cost of sales.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (ASC 740). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. These temporary differences are measured using enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to the extent that management considers it is more likely than not that a deferred tax asset will not be realized. In determining the valuation allowance, management considers factors such as the reversal of deferred income tax liabilities, projected taxable income, and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
7
Foreign Currency Translation
The subsidiary located in Germany is accounted for primarily using local functional currency. Accordingly, assets and liabilities of this subsidiary are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting adjustments are presented as a separate component of accumulated other comprehensive income (loss).
Deferred Rent
Rent is being amortized on a straight-line basis at $19,580 per month for the eighty-four month term of the lease. The excess of rent accrued each month over the amount paid per month is being accrued as a liability on the Company’s balance sheet. Because three months of rent was abated at the beginning of the lease, all of the rent for those three months and straight-line adjustments were accrued as deferred rent and is included as a liability in accounts payable and accrued expenses.
Net Income Per Share
Basic earnings per share is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The total amount of anti-dilutive warrants or options not included in the earnings per share calculation for the three and nine months ended February 29, 2012 and February 28, 2011 was 460,250 and 598,249, respectively.
The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Nine Months Three Months
Ended Ended
February 29, February 28, February 29, February 28,
2012 2011 2012 2011
__________ _________ _________ __________
Numerator:
Income from continuing operations
$ 494,329 $ 61,354 $ 181,445 $ 73,403
========== ========= ========= ==========
Denominator for basic net income per common
share
6,871,532 6,660,839 6,877,954 6,660,839
Effect of dilutive securities:
Options and warrants
174,926 33,536 247,606 30,636
__________ _________ _________ __________
Denominator for diluted net income
per common share
7,046,458 6,694,375 7,125,560 6,691,475
========== ========= ========= ==========
Basic net income per common share
$ 0.07 $ 0.01 $ 0.03 $ 0.01
========== ========= ========= ==========
Diluted net income per common share
$ 0.07 $ 0.01 $ 0.03 $ 0.01
========== ========= ========= ==========
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives; present items in net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The Company is currently evaluating which presentation alternative it will utilize.
In September 2011, the FASB issued an amendment to ASC 350, “Intangibles—Goodwill and Other”, which simplifies how entities test goodwill for impairment. Previous guidance under ASC 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than
8
its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 and 350-20-35-9 under ASC 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its financial statements.
Other recent Accounting Standard Updates (“ASU”) issued by the FASB and guidance issued by the SEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.
Note 3: Accounts Payable and Accrued Expenses
The Company’s accounts payable and accrued expense balances consist of the following at February 29, 2012 and May 31, 2011:
February 29, May 31,
2012 2011
-------------- --------------
Accounts payable $ 376,865 $ 246,346
Accrued expenses
-- 127,156
Deferred rent
74,963 73,517
Other
-- 4,550
-------------- --------------
Total $ 451,828 $ 451,569
============== ==============
Note 4: Geographic Information
Financial information about foreign and domestic operations and export sales is as follows:
Nine Months Ended Three Months Ended
2/29/12 2/28/11 2/29/12 2/28/11
----------- ----------- ---------- ----------
Revenues from sales to unaffiliated customers:
United States $ 855,000 $ 867,000 $ 328,000 $ 317,000
Asia 1,814,000 837,000 527,000 378,000
Europe 1,835,000 1,886,000 652,000 622,000
South America 2,000 26,000 -- 6,000
Middle East
17,000 39,000 7,000 14,000
Other 16,000 29,000 1,000 9,000
=========== =========== =========== ===========
$ 4,539,000 $ 3,684,000 $ 1,515,000 $ 1,346,000
=========== =========== =========== ===========
No other geographic concentrations exist where net sales exceed 10% of total net sales.
Note 5: Commitments and Contingencies
On June 10, 2011, the Company renewed the line of credit (the “Line”) with its bank which has a borrowing limit in the amount of $400,000. The Line is secured by substantially all of the Company’s assets, bears interest at 1.0% plus prime, and expired on February 24, 2012. The Company renewed this line of credit through February 24, 2013. The balance at May 31, 2011 and February 29, 2012 was zero.
On February 13, 2009, the Company entered into a loan agreement with its bank for an equipment loan (“Loan”) for $133,000 at an interest rate of 6.50%. The related equipment serves as collateral for the Loan. The Loan is payable in thirty-six monthly payments of approximately $4,000. The loan payable balance at May 31, 2011 and February 29, 2012 relating to this equipment loan is $35,390 and $0, respectively.
On June 18, 2009, the Company entered into an agreement to lease a building in Irvine, California. The lease commenced September 1, 2009 and ends August 31, 2016. The initial base rent was set at $18,490 per month with scheduled annual increases through the end of the lease term.
Note 6: Other Income
During the quarter ended February 29, 2012, the Company experienced water damage from a burst pipe. Expenses of $33,522 were incurred as a result of this. Property and equipment amounting to $68,106 were purchased to replace damaged, fully depreciated equipment and fixtures. The Company’s
9
insurance company reimbursed the Company $101,628, which covered approximately all its expenses plus cost of replacement. The net gain of $68,106 is reflected under other income and expense as gain from insurance proceeds.
On October 29, 2010, the Company was notified that it was awarded a total cash grant of approximately $357,000 under the Qualifying Therapeutic Discover Project program administered under section 48D of the Internal Revenue Code. The Company has recognized the portion of the grant related to qualifying expenses that have previously been incurred and approved by the U.S. government, totaling $173,648 during the nine months ended February 28, 2011 as a component of other income and expenses.
Note 7: Subsequent Events
On March 22, 2012, the Company borrowed $53,000 on its line of credit for the purchase of new equipment.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
OVERVIEW
Biomerica, Inc. and Subsidiaries ("Biomerica", the "Company", "we" or "our") develops, manufactures, and markets medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. Our medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores). Our diagnostic test kits are used to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations.
Technological advances in medical diagnostics have made it possible to perform diagnostic tests within the home and the physician's office (the point of care), rather than in the clinical laboratory. One of our objectives has been to develop and market rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation. Our over-the-counter and professional rapid diagnostic products help to manage existing medical conditions and may save lives through early detection and prompt diagnosis. Frequently, results were not available until at least the following day. We believe that rapid point of care tests may be as accurate as laboratory tests when used properly and they require no instrumentation, give reliable results in minutes and can be performed with confidence in the home or the physician's office.
Our clinical laboratory diagnostic products include tests for bone and anemia conditions, gastrointestinal diseases, food intolerance, diabetes and others. These diagnostic test kits utilize enzyme immunoassay technology. Some of these products have not yet been submitted for clearance by the FDA for diagnostic use, but can be sold in various foreign countries.
Biomerica maintains its headquarters in Irvine, California where it houses administration, research and development, sales and marketing, customer services and some manufacturing operations. In July 2010 the Company eliminated its dedicated research department in order to follow its current strategy of licensing technology from other institutions. A part of Biomerica's manufacturing and assembly operations is located in Mexicali, Mexico, under a Mexico maquiladora in order to reduce the cost of manufacturing and compete more effectively worldwide. The Company established a subsidiary in Mexicali for future use.
10
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $4,538,944 for the first nine months of fiscal 2012 as compared to $3,684,454 for the same period in the previous year. This represents an increase of $854,459 or 23.2%. For the quarter ended February 29, 2012, net sales were $1,514,673 as compared to $1,345,900 for the same period in the previous year. This represents an increase of $168,773, or 12.5%. The increase for the nine months was primarily due to the increase of sales in Asia and the increase for the quarter was a result of increases in sales to Asia, Europe and the United States. The increases for the quarter were due to larger sales to existing customers as well as new customers for certain ELISA kits.
For the nine months ended February 29, 2012 as compared to February 28, 2011, cost of sales decreased as a percentage of sales from $2,495,650 or 67.7% of sales, to $2,788,276, or 61.4% of sales. For the three month period then ended, cost of sales decreased as a percentage of sales from $846,421, or 62.9% of sales, to $947,830, or 62.6% of sales. Cost of sales as a percentage of sales decreased primarily due to an increase in sales compared to relatively constant fixed expenses and the increase in sales of higher margin products.
For the nine months ended February 29, 2012 compared to February 28, 2011, selling, general and administrative costs increased by $48,276, or 4.9%. For the three months then ended, these expenses increased by $8,124, or 2.5%. For the nine months ended February 29, 2012, the bad debt reserve was increased by $37,106.
For the nine months ended February 29, 2012 compared to February 28, 2011, research and development expenses decreased by $48,723, or 15.4% and for the comparable three months, decreased by $2,238, or 2.3%. The decrease for the nine and three months was primarily due to the completion of development of some of the newly licensed products as well as the reduction in dedicated research personnel in fiscal 2012 as compared to 2011.
During the quarter ended February 29, 2012, the Company experienced water damage from a burst pipe. Expenses of $33,522 were incurred as a result of this. Property and equipment amounting to $68,106 were purchased to replace damaged, fully depreciated equipment and fixtures. The Company’s insurance company reimbursed the Company $101,628, which covered approximately all its expenses plus cost of replacement property and equipment. The net gain is reflected under other income and (expense) as gain from insurance proceeds.
For the nine months ended February 29, 2012 compared to February 28, 2011, dividend and interest income increased from $5,685 to $7,370 and for the three months then ended, increased from $1,733 to $4,591. The increase was due to a small dividend from the Company’s investment which was offset by lower interest rates on a lower amount of cash investments. For the nine months interest expense decreased from $5,106 to $1,113 and for the three months decreased from $1,345 to $171 due to lower interest rates and our paydowns on our debt balances. Other income decreased for the nine months from $177,605 to $60 due to a research grant obtained in fiscal 2011 ($217,076 less consulting expenses of $43,428) which did not reoccur in fiscal 2012.
LIQUIDITY AND CAPITAL RESOURCES
As of February 29, 2012 and May 31, 2011, the Company had cash and cash equivalents in the amount of $898,458 and $989,270 and working capital of $3,751,285 and $3,261,418, respectively.
During the nine months ended February 29, 2012 the Company’s operations generated cash of $103,134 compared to $65,888 in the same period of the prior year. Cash provided by operations in fiscal 2012 was a result of net income of $494,329 and noncash items such as depreciation, amortization, and stock option expense. This was offset by an increased balance in inventory of $79,169 and increased accounts receivable of $633,448 as a result of the Company extending credit to its customers. Cash used in investing activities in fiscal 2012 was $185,528 compared to the same period in 2011 of $182,469. There was $135,528 and $83,695 of cash used to purchase property and equipment in fiscal 2012 and 2011, respectively. Cash used in financing activities in fiscal 2012 was $6,890 as compared to $33,550 in fiscal 2011. In fiscal 2012 the outflow was less due to funds received in the amount of $28,500 for the exercise of stock options.
On February 13, 2009, the Company entered into a Small Business Banking Agreement with Union Bank for a one year business line (the "Line") of credit in the amount of $400,000. The interest rate for the Line is the prime rate in effect on the first day of the billing period, as published in the Wall Street Journal Prime West Coast Edition, plus a spread of 1.00%. Minimum monthly payments will be the sum of (i) the amount of interest charge for the billing period, plus (ii) any amount past due, plus (iii) any fees, late charges and/or out-of-pocket expenses assessed. If the Line is not renewed as of the last day of the term of the Line, the entire unpaid balance of the Line, including unpaid fees and charges will be due and payable. The Company has granted the bank security interest in the assets of the Company as collateral. In February 2010, this line was extended for one more year and in June 2011 it was extended until February 2012. In February 2012 this line was renewed for one more year.
11
The Company did not owe anything on this Line as of February 29, 2012.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, bad debts, inventory overhead application, and inventory reserve. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. CONTROLS AND PROCEDURES
Our management evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives and the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the "reasonable assurance" level. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file and submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms; and (2) accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
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 recent history that may affect the general economic climate and performance of Biomerica, Inc. or its customers.
12
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. REMOVED AND RESERVED.
Item 5. OTHER INFORMATION. None.
Item 6. EXHIBITS.
The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:
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13
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.
BIOMERICA, INC.
Date: April 16, 2012
By: /S/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
(Principal Executive Officer)
Date: April 16, 2012
By: /S/ Janet Moore
-----------------------
Janet Moore
Chief Executive Officer
(Principal Financial Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Zackary S. Irani, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Biomerica, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects, the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of our internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or other persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 16, 2012
/s/ Zackary S. Irani
------------------------
Zackary S. Irani
Chief Executive Officer
(Principal Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Janet Moore, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Biomerica, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects,
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of our internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or other persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 16, 2012
/s/ Janet Moore
-----------------------
Janet Moore
Chief Financial Officer
(Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Biomerica, Inc. (the "Company") on
Form 10-Q for the period ending February 29, 2012, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Zackary Irani,
Chief Executive Officer of the Company, certify, to the best of my knowledge,
Pursuant to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of 2002,
i. The Report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934, and
ii. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Zackary S. Irani
-----------------------
Zackary S. Irani
Chief Executive Officer
Date: April 16, 2012
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Biomerica, Inc. (the "Company") on
Form 10-Q for the period ending February 29, 2012, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Janet Moore, Chief
Financial Officer of the Company, certify, to the best of my knowledge, Pursuant
to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes Oxley Act of 2002,
i. The Report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934, and
ii. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Janet Moore
-----------------------
Janet Moore
Chief Financial Officer
Date: April 16, 2012
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| Geographic Information [Text Block] | Note 4: Geographic Information
Financial information about foreign and domestic operations and export sales is as follows:
No other geographic concentrations exist where net sales exceed 10% of total net sales.
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