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Wednesday, August 29, 2007
Form 10KSB for BIOMERICA INC
Form 10KSB for BIOMERICA INC
29-Aug-2007
Annual Report
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA’S RESULTS IN FUTURE PERIODS TO DIFFER FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANYS’ PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB AND IN THE COMPANY’S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
During the first six months of fiscal 2006, Biomerica had one active subsidiary, Lancer Orthodontics, Inc. ("Lancer"), which is engaged in manufacturing, sales and development of orthodontic products. Effective December 1, 2005, Lancer’s financial statements were no longer consolidated with those of Biomerica because Biomerica no longer had direct or indirect control of more than 50% of Lancer’s common stock. As of December 1, 2005, Biomerica held less than 20% of Lancer’s common stock and therefore Biomerica’s investment is accounted for under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.
Fiscal 2007 Compared to Fiscal 2006
IN FISCAL 2006, THE LANCER ORTHODONTICS’ FINANCIAL STATEMENTS WERE ONLY CONSOLIDATED WITH THOSE OF BIOMERICA FOR SIX OF THE TWELVE MONTHS. PLEASE REFER TO FOOTNOTE 10 FOR A BREAKDOWN BY COMPANY OF THE RESULTS OF OPERATIONS FOR FISCAL 2006.
Our consolidated net sales were $5,748,319 for fiscal 2007 compared to $7,184,992 for fiscal 2006. This represents a decrease of $1,436,673, or 20.0% for fiscal 2007. Of the total consolidated net sales for fiscal 2006, $2,925,038 is attributable to Lancer (which was for the first six months of the fiscal year), and $4,259,954 to Biomerica. Fiscal 2007 represents sales of Biomerica alone. Biomerica stand-alone sales increased from $4,259,954 in fiscal 2006 to $5,748,319 in fiscal 2007, an increase of $1,488,365, or 34.9%. The increase was due to increases of sales to foreign distributors as well as increased sales domestically to chain drug stores.
Cost of sales in fiscal 2007 as compared to fiscal 2006 decreased by $1,277,008 or 26.7%. On a stand-alone basis, the cost of sales of Biomerica increased from $2,604,900 (61.1% of sales) to $3,502,607 (60.9% of sales), or $897,707 (34.5%). The dollar increase at Biomerica was primarily due to an increase in sales and an increase in production head count in anticipation of building larger lot sizes. The percentage of cost of goods relative to sales decreased by .2%.
Selling, general and administrative costs decreased in fiscal 2007 as compared to fiscal 2006 by $794,642 or 35.1%. The overall decrease in selling, general and administrative costs from May 31, 2006 to 2007 was a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis, Biomerica had an increase of $234,417, or 19.0%. The increase at Biomerica was primarily due to higher wages and related costs, increased bad debt expense, adoption of SFAS No. 123R on June 1, 2006, which requires employee stock options to be expensed through the income statement, higher bonuses related to the improved performance of the company and higher commissions relating to higher sales. As a percentage of sales, selling, general and administrative expenses decreased by 3.4% from fiscal 2006 to 2007.
Research and development expense was $256,101 in fiscal 2007 as compared to $239,004 in fiscal 2006. On a stand-alone basis Biomerica’s research and development expenses increased from $196,534 to $256,101, or $59,567 (30.3%). This was a result of the expenses for several new products.
Interest expense net of interest income, decreased in fiscal 2007 as compared to fiscal 2006 by $9,739 or 21.7%. The overall decrease in interest expense was a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-along basis Biomerica had increased interest of $4,717, primarily due to interest being charged beginning in the last quarter on the accrued wages balance of $264,549.
Other income decreased by $5,535 or 12.1% in fiscal 2007 as compared to fiscal 2006. The overall decrease in other income was a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis Biomerica had increased other income of $7,064. This increase was primarily a result of income received in fiscal 2007 for the income received on equipment purchased and resold.
Consolidated net income was $536,879 for the year ended May 31, 2007. Prior to recording the expense ($100,000) for employee bonuses according to the Management Incentive Plan, consolidated net income was $636,879. Stand-alone income from diagnostic operations before interest in net loss or income of consolidated subsidiaries and income taxes was $525,779 for fiscal 2007 as compared to $222,041 for fiscal 2006. This represents an increase of $303,738, or 136.8%. The increase was primarily due to increased sales.
As of May 31, 2007 Biomerica had federal and state income tax net operating loss carry forwards of approximately $2,519,000 and $456,000, respectively, and research and development tax credit carry forwards of approximately $90,000 and $42,000, respectively. The federal net operating loss carry forwards begin to expire in 2008. The state net operating loss carry forwards started to expire in 2006. The federal research and development tax credit carry forwards begin to expire in 2009 and the California credits carry forward indefinitely.
Liquidity, Capital Resources and Going Concern
As of May 31, 2007, we had cash and current available for sale securities of $517,432 (see Note 2 of Notes to Consolidated Financial Statements) and working capital of $1,198,844. The Company also has $410,137 of long term available-for-sale securities. During 2006, cash used in operations was $384,369 as compared to cash provided by operations in fiscal 2007 of $463,708. The increase in cash provided by operations was mainly due to increased income from continuing operations of $509,010 and partly due to the deconsolidation of Lancer as of December 1, 2005. During fiscal 2007, cash used in investing activities was $62,695 as compared to $251,743. Both years the cash used in investing activities was primarily for the purchase of property and equipment, however in fiscal 2006, of the $252,428 in equipment purchases, $211,353 related to Lancer. Cash used in financing activities in fiscal 2007 was $4,027 as compared to cash provided by financing activities of $538,948 in fiscal 2006. During fiscal 2006 Lancer conducted a private placement which contributed $469,800 to Lancer Orthodontics. During fiscal 2007 Biomerica repaid shareholder debt $93,072 as compared to $40,145 in fiscal 2006, which was offset by funds received from the equipment line of credit of $61,670, that was used as deposit for equipment ordered for delivery in fiscal 2008. The change in cash and cash equivalents at May 31, 2007 compared to May 31, 2006 was an increase of $396,986.
Until three 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. ReadyScript operations were discontinued in May 2001. ReadyScript was a contributor to the Company’s losses in prior fiscal years. During the fiscal years ended May 31, 2007 and 2006, certain ReadyScript liabilities were forgiven and thus income from discontinued operations for the years then ended 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 increasing efficiencies where possible and concentrating on its core business to increase sales. As a result, sales of medical diagnostic products increased from the fiscal year ended May 31, 2006 to 2007 by approximately $1,488,000, or 35%.
In February 2007 the Company obtained a $200,000 working capital line of credit and was approved for a $200,000 equipment loan with Commercial Bank of California. The credit line and loan are collateralized by substantially all of the assets of the Company. As of May 31, 2007 $61,670 was owed on the equipment line of credit and there was no outstanding balance due on the working capital line of credit. Due to the increased sales and profitability, in particular during the fourth quarter of fiscal 2007, the Company had $516,900 in cash and equivalents as of May 31, 2007 as compared to $119,914 on May 31, 2006. Payments on the shareholder’s note payable have been made during fiscal 2007 according to the agreement for repayment (payments that were delinquent have been brought up toedate) and, as a result, the balance on the note at May 31, 2007 was $167,870 as compared to $260,942 at May 31, 2006.
For the fiscal years ended May 31, 2003 through 2006 Biomerica’s independent auditors had concluded that there was substantial doubt as to the Company’s ability to continue as a going concern for a reasonable period of time and thus rendered a “going concern” opinion on the audited financial statements. Because the Company has had an upturn in sales and profitability and has an improved working capital condition, among other factors, the audited financial statements for the fiscal year ended May 31, 2007, do not contain such a “going concern” opinion. However, there is no assurance that the Company will be able to sustain such results in future years.
SUBSEQUENT EVENTS
During August 2007 the due date on the note payable was extended until September 1, 2008. The terms of the note payable are the same.
On June 6, 2007, Biomerica received income of $697,034 on the sale of Hollister-Stier Laboratories securities it held for investment. The Hollister-Stier securities were held as an option to purchase shares in Hollister-Stier Laboratories, LLC and were carried on Biomerica’s balance sheet at a zero value as Hollister-Stier is a private company. The acquisition of Hollister-Stier Laboratories by Jubilant Organosys Ltd. closed on June 1, 2007.
Effective July 16, 2007 the Board of Directors of Biomerica, Inc. voted to elect John Roehm to serve on the board of directors of the Company. Mr. Roehm currently serves as President and CEO of Mollen Immunization Clinics of North America. From 1989 to 2006, Mr. Roehm served in a broad range of leadership positions with Albertsons/American Stores (Sav-on & Osco), including as its Director of Pharmacy Marketing since 1999. Mr. Roehm holds a B.S. degree in Pharmacy from Massachusetts College of Pharmacy.
On June 28, 2007 an employee exercised stock options for 7,500 shares. The total proceeds to the Company were approximately $2,588. On August 15, 2007 three employees exercised stock options for a total of 24,500 shares. The total proceeds to the Company were $7,435.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Note 2 of the Notes to Consolidated Financial Statements describes the significant accounting policies essential to the consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures.
We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ from our estimates.
In general, the critical accounting policies that may require judgments or estimates relate specifically to the Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived Assets, Stock Based Compensation, and Income Tax Accruals.
Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established if necessary for estimated returns as revenue is recognized.
The Allowance for Doubtful Accounts is established for estimated losses resulting from the inability of our customers to make required payments. The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required
Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product.
Historically we were in a loss position for tax purposes, and established a valuation allowance against deferred tax assets, as we did not believe it was likely that we would generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. Although the Company has achieved net income in increasing amounts over the last three fiscal years, predicting future taxable income is difficult, and requires the use of significant judgment. Due to the fact that many factors can influence profitability, management determined at May 31, 2007, that all of our deferred tax assets should remain reserved. Management will re-evaluate this determination periodically.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the 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, Inc. and are not meant to be an exhaustive discussion of risks that apply to companies such as Biomerica, Inc. Like other businesses, Biomerica, Inc. is susceptible to macroeconomic downturns in the United States or abroad, as were experienced in fiscal year 2002, that may affect the general economic climate and performance of Biomerica, Inc. or its customers.
Aside from general macroeconomic downturns, the additional material factors that could affect future financial results include, but are not limited to: Terrorist attacks and the impact of such events; diminished access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship out products to end users; inability to successfully control our margins which are affected by many factors including competition and product mix; protracted shutdown of the U.S. border due to an escalation of terrorist or counter terrorist activity; any changes in our business relationships with international distributors or the economic climate they operate in; any event that has a material adverse impact on our foreign manufacturing operations may adversely affect our operations as a whole; failure to manage the future expansion of our business could have a material adverse affect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, some of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or medical professionals alleging harm caused by the use of or exposure to our products; quarterly variations in operating results caused by a number of factors, including business and industry conditions and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period.
INSURANCE COVERAGE
Biomerica currently carries various insurance policies including products liability ($2,000,000), general liability ($2,000,000), property insurance (personal property-$1,824,979), business income insurance ($800,000), employee benefit errors or omissions liability insurance ($1,000,000), commercial crime insurance ($100,000), crime insurance (pension plan) ($300,000), employee theft ($100,000), depositor’s forgery ($100,000), commercial auto ($1,000,000), umbrella liability insurance ($1,000,000), workman’s compensation insurance ($1,000,000), directors and officers’ insurance ($3,000,000), group health, disability and life insurance Biomerica’s workman’s compensation policies covers injuries to employees as a result of accidental contamination from or by hazardous materials.
RECENT ACCOUNTING PRONOUNCEMENTS:
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.
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 SFAS 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 adoption of this standard did not 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.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company is required to adopt this statement as of June 1, 2007. The Company 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. The adoption of SFAS No. 158 did not have a material impact on the Company’s financial statements.
In July 2006, the FASB issued FIN 48, entitled Accounting for Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109, entitled Accounting for Income Taxes. Through the interpretive guidance, the FASB clarifies the accounting for uncertainty in income taxes, provides recognition and measurement guidance related to accounting for income taxes, and provides guidance related to classification and disclosure of income tax-related financial statement components. The Company has not yet determined the impact, if any, of adopting FIN 48 on its consolidated financial statements.
