UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2013
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)
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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.)
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: 7,279,214 shares of common stock, par value $0.08, as of October 15, 2013.
BIOMERICA, INC.
INDEX
PART I
Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations and
Comprehensive (Loss) Income (unaudited) – Three Months Ended
August 31, 2013 and 2012......................................... 1
Condensed Consolidated Balance Sheets (unaudited)
August 31, 2013 and (audited) May 31, 2013...................... 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended August 31, 2013 and 2012..................... 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 10
Item 4. Controls and Procedures......................................... 10
PART II Other Information
Item 1. Legal Proceedings............................................... 10
Item 1A. Risk Factors.................................................... 10
Item 2. Unregistered Sales of Equity Securities & Use of Proceeds....... 11
Item 3. Defaults upon Senior Securities................................. 11
Item 4. Mine Safety Disclosures......................................... 11
Item 5. Other Information............................................... 11
Item 6. Exhibits........................................................ 11
Signatures...................................................... 12
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
|
| Three Months Ended | ||||
|
| August 31, | ||||
| 2013 |
| 2012 | |||
|
|
|
|
| ||
|
| |||||
| Net sales | $ | 1,013,739 |
| $ | 1,701,949 |
| Cost of sales |
| (753,448) |
|
| (969,688) |
| Gross profit |
| 260,291 |
|
| 732,261 |
|
|
| ||||
| Operating Expenses: |
| ||||
| Selling, general and administrative | 342,802 |
| 332,130 | ||
| Research and development |
| 91,257 |
|
| 87,980 |
| Total operating expenses |
| 434,059 |
|
| 420,110 |
| (Loss)income from operations |
| (173,768) |
|
| 312,151 |
|
|
| ||||
| Other Income (Expense): |
| ||||
| Dividend and interest income | 6,054 |
| 1,116 | ||
| Interest expense |
| -- |
|
| (308) |
| Total other income |
| 6,054 |
|
| 808 |
|
| |||||
| (Loss) income before income tax | (167,714) |
| 312,959 | ||
| Provision for income taxes |
| -- |
|
| (21,319) |
| Net(loss) income | $ | (167,714) |
| $ | 291,640 |
| Basic net (loss) income per common share | $ | (0.02) |
| $ | 0.04 |
| Diluted net (loss) income per common share | $ | (0.02) |
| $ | 0.04 |
|
| |||||
| Weighted average number of common and |
| ||||
| Common Equivalent Shares: |
| ||||
| Basic |
| 7,280,866 |
|
| 6,952,339 |
| Diluted |
| 7,280,866 |
|
| 7,303,134 |
|
| |||||
| $ | (167,714) |
| $ | 291,640 | |
|
| |||||
| Other comprehensive loss, net of tax: |
| ||||
| Foreign currency translation |
| (91) |
|
| (81) |
| Comprehensive (loss) income | $ | (167,805) |
| $ | 291,559 |
|
|
| ||||
The accompanying notes are an integral part of these statements.
1
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| August 31, |
|
| May 31, | ||
|
|
| 2013 |
|
| 2013 |
|
|
| (unaudited) |
|
| (audited) |
| Assets | |||||
| Current Assets: | |||||
| Cash and cash equivalents | $ | 2,085,463 | $ | 2,469,796 | |
| Accounts receivable, less allowance for doubtful accounts of | |||||
| $120,405 and $115,730 as of August 31, 2013 and May 31, 2013, respectively | 903,249 | 871,660 | |||
| Inventories, net | 1,791,443 | 1,571,221 | |||
| Prepaid expenses and other | 181,151 | 196,678 | |||
| Deferred tax assets, current portion | 144,000 | 144,000 | |||
| Total current assets | 5,105,306 | 5,253,355 | |||
| Property and Equipment, net of accumulated depreciation and amortization | 620,572 | 654,620 | |||
| Deferred Tax Assets, net of current portion | 85,000 | 85,000 | |||
| Investments | 165,324 | 165,324 | |||
| Intangible Assets, net | 157,744 | 165,200 | |||
| Other Assets | 71,388 | 71,388 | |||
| Total Assets | $ | 6,205,334 | $ | 6,394,887 | |
| Liabilities and Shareholders' Equity | |||||
| Current Liabilities: | |||||
| Accounts payable and accrued expenses | $ | 324,652 | $ | 351,917 | |
| Accrued compensation | 211,852 | 207,976 | |||
| Total Current Liabilities | 536,504 | 559,893 | |||
| Commitments and Contingencies (Note 5) | |||||
| Shareholders' Equity: | |||||
| Preferred stock, no par value authorized 5,000,000 shares, none issued | |||||
| and none outstanding at August 31, 2013 and May 31, 2013 | -- | -- | |||
| Common stock, $0.08 par value authorized 25,000,000 shares, issued | |||||
| and outstanding 7,276,714 and 7,274,714 at August 31 and May 31, 2013, respectively | 582,136 | 581,976 | |||
| Additional paid-in-capital | 18,035,877 | 18,034,396 | |||
| Accumulated other comprehensive loss | (9,097) | (9,006) | |||
| Accumulated deficit | (12,940,086) | (12,772,372) | |||
| Total Shareholders' Equity | 5,668,830 | 5,834,994 | |||
| Total Liabilities and Shareholders' Equity | $ | 6,205,334 | $ | 6,394,887 | |
The accompanying notes are an integral part of these statements.
2
BIOMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | ||||||
|
| 2013 |
|
| 2012 | ||
| Cash flows from operating activities: | ||||||
| Net (loss) income | $ | (167,714) |
|
| 291,640 | |
| Adjustments to reconcile net (loss) income to net cash (used in) | ||||||
| provided by operating activities | ||||||
| Depreciation and amortization |
| 50,235 |
|
| 54,167 | |
| Change in provision for losses on accounts receivable |
| 4,675 |
|
| 2,730 | |
| Inventory reserve | (6,713) |
|
| 24,780 | ||
| Stock option expense | 881 | -- | ||||
| Decrease in deferred rent liability | (1,656) | (108) | ||||
| Changes in assets and liabilities: | ||||||
| Accounts receivable | (36,264) | (175,667) | ||||
| Inventories | (213,509) | (24,457) | ||||
| Prepaid expenses and other assets | 15,527 | (3,760) | ||||
| Accounts payable and other accrued expenses | (25,609) | 89,033 | ||||
| Accrued compensation | 3,876 | 72,047 | ||||
| Net cash (used in) provided by operating activities | (376,271) | 330,405 | ||||
| Cash flows from investing activities: | ||||||
| Purchases of property and equipment | (8,731) | (65,186) | ||||
| Net cash used in investing activities | (8,731) | (65,186) | ||||
| Cash flows from financing activities: | ||||||
| Exercise of stock options | 760 | -- | ||||
| Payments on line of credit or equipment loan | -- | (43,000) | ||||
| Net cash provided by (used in) financing activities | 760 | (43,000) | ||||
| Effect of exchange rate changes in cash | (91) | (81) | ||||
| Net (decrease) increase in cash and cash equivalents | (384,333) | 222,138 | ||||
| Cash and cash equivalents at beginning of period | 2,469,796 | 1,077,342 | ||||
| Cash and cash equivalents at end of period | $ | 2,085,463 | $ | 1,299,480 | ||
| Supplemental Disclosure of Cash-Flow Information: | ||||||
| Cash paid during the period for: | ||||||
| Interest | $ | -- | $ | 308 | ||
| Income taxes | $ | 1,750 | $ | 61,540 | ||
The accompanying notes are an integral part of these statements.
3
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 (collectively 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 flows 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, 2013 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, 2013. 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. as well as its German subsidiary and Mexican subsidiary which have not begun operations. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 usually reserved for unless collection is reasonably assured. Management evaluates quarterly what items to charge off.
Occasionally certain long-standing customers, who routinely place large orders, will have unusually large receivables balances relative to the total gross receivables. Management monitors the payments for these large balances closely and very often requires payment of existing invoices before shipping new sales orders.
Inventories
The Company values inventory at the lower of cost (determined using a combination of specific lot identification and the first-in, first-out methods) 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.
4
Inventories approximate the following at:
| August 31, |
| May 31, | |||
|
| 2013 |
| 2013 | ||
| Raw materials | $ | 908,000 |
| $ | 787,000 |
| Work in progress | 620,000 |
|
| 555,000 | |
| Finished products | 263,000 |
|
| 229,000 | |
| Total | $ | 1,791,000 |
| $ | 1,571,000 |
Reserves for inventory obsolescence are reduced as necessary to reduce obsolete inventory to estimated realizable value or to specifically reserve for obsolete inventory that the Company intends to dispose of.
Property and Equipment, net
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. Depreciation and amortization expense on property and equipment and leasehold improvements amounted to $42,779 and $45,387 for the three months ended August 31, 2013 and 2012, respectively.
Intangible Assets, net
Intangible assets include trademarks, product rights, licenses, technology rights and patents, and are accounted for based on Accounting Standards Codification (“ASC”) 350 “Intangibles – Goodwill and Other” (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 $7,456 and $8,780 for the three months ended August 31, 2013 and 2012, 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 (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 forfeiture rate, 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 forfeiture rate is based on historical forfeitures experienced. 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.
5
The following summary presents the options granted, exercised, expired, cancelled and outstanding as of August 31, 2013:
|
|
| Exercise | ||
|
|
| Price | ||
|
|
| Option |
| Weighted |
|
|
| Shares |
| Average |
| Outstanding May 31, 2013 | 846,500 |
| $0.47 | |
| Granted | 20,000 |
| $0.83 | |
| Exercised | (2,000) |
| $0.38 | |
| Cancelled or expired | -- |
| -- | |
| Outstanding August 31, 2013 | 864,500 |
| $0.48 | |
On June 10, 2013, the Board granted a stock option to purchase 20,000 shares of the Company’s common stock at the purchase price of $0.83 per share.
In June 2013, options to exercise 2,000 shares of the Company’s common stock were exercised at the exercise price of $0.38 per share. Net proceeds to the Company were $760.
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 net sales 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 has provided a valuation allowance of $0 as of August 31, 2013 and May 31, 2013. In May 2013, after analyzing the Company’s tax position, operational history and profitability for the past 3 years, management chose to remove all of the remaining allowance for the uncertainty of its future income, as the determination that it was more likely that the deferred tax asset would be realized in the future.
6
The Company did not record any income tax benefit for the three months ended August 31, 2013 as the Company is expected to generate profits in fiscal 2014.
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 loss.
Deferred Rent
Incentive payments received from landlords are recorded as deferred lease incentives and are amortized over the underlying lease term on a straight-line basis as a reduction of rent expense. When the terms of an operating lease provide for periods of free rent, rent concessions, and/or rent escalations, the Company establishes a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized. This deferred rent liability is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.
Net (Loss) Income Per Share
Basic earnings (loss) per share are computed as net loss or income divided by the weighted average number of common shares outstanding for the period. Diluted (loss) income per share reflects the potential dilution that could occur from common shares issuable through stock options using the treasure stock method. The total amount of anti-dilutive options not included in the earnings per share calculation for the three months ended August 31, 2013 and 2012 was 0 and 85,000, 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:
| Three Months | |||||
|
| Ended | ||||
|
| August 31, | ||||
|
|
| 2013 |
|
| 2012 |
| Numerator: | |||||
| (Loss) income from continuing operations | $ | (167,714) | $ | 291,640 | |
| Denominator for basic net income per common | |||||
| share | 7,280,866 | 6,952,339 | |||
| Effect of dilutive securities: | |||||
| Options | -- | 350,795 | |||
| Denominator for diluted net (loss) income | |||||
| per common share | 7,280,866 | 7,303,134 | |||
| Basic net (loss) income per common share | $ | (0.02) | $ | 0.04 | |
| Diluted net (loss) income per common share | $ | (0.02) | $ | 0.04 | |
New Accounting Pronouncements
Management does not believe that any recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.
7
Note 3: Accounts Payable and Accrued Expenses
The Company’s accounts payable and accrued expense balances consist of the following at:
| August 31, |
| May 31, | |||
|
| 2013 |
| 2013 | ||
| Accounts payable | $ | 215,986 | $ | 282,138 | |
| Accrued expenses | 40,543 | -- | |||
| Deferred rent | 68,123 | 69,779 | |||
| Total | $ | 324,652 | $ | 351,917 | |
Note 4: Geographic Information
Financial information about foreign and domestic operations and export sales is approximately as follows:
| Three Months Ended | |||||
|
| August 31, | ||||
|
|
| 2013 |
|
| 2012 |
| Revenues from sales to unaffiliated customers: | |||||
| United States | $ | 255,000 | $ | 280,000 | |
| Asia | 136,000 | 902,000 | |||
| Europe | 604,000 | 508,000 | |||
| South America | 3,000 | -- | |||
| Middle East | 15,000 | 11,000 | |||
| Other | 1,000 | 1,000 | |||
| $ | 1,014,000 | $ | 1,702,000 | ||
No other geographic concentrations exist where net sales exceed 10% of total net sales.
Note 5: Commitments and Contingencies
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. The rent is currently set at $20,810.
Note 6: Subsequent Events
In September 2013, options to exercise 2,500 shares of the Company’s common stock were exercised at the exercise prices of $0.38 and $0.45 per share. Net proceeds to the Company were $1,020.
8
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.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $1,013,739 for the three months ended August 31, 2013 as compared to $1,701,949 for the same period in the previous year. This represents a decrease of $688,210. The decrease was primarily due to the decrease of sales in Asia which was a result of the restructuring of the Company’s distribution channel in China which is negatively impacting sales in the near term. Management believes that this new strategic focus will result in both higher sales and higher margins in the future.
For the three months ended August 31, 2013 as compared to August 31, 2012, cost of sales increased as a percentage of sales from $969,688 or 57.0% of sales, to $753,448, or 74.3% of sales. Cost of sales as a percentage of sales increased primarily due to a decrease in sales without a corresponding decrease in expenses due to certain fixed costs. Because produced units were lower, the Company did not realize the benefits of economies of scale.
For the three months ended August 31, 2013 compared to 2012, selling, general and administrative costs increased by $10,672, or 3.2%, which were primarily due to slightly higher wages, commissions and rent.
For the three months ended August 31, 2013 and 2012, research and development expenses were $91,257 as compared to $87,890, an increase of $3,277, or 3.7%. The increase was primarily due to materials purchased to be used in development of new and improvement of existing products in the gastroenterology area.
For the three months ended August 31, 2013 as compared to August 31, 2012, dividend and interest income and interest expense increased from $1,116 to $6,054, primarily due to a dividend of approximately $4,700 received from the Company’s investment in one of its European distributors.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2013 and May 31, 2013, the Company had cash and cash equivalents in the amount of $2,085,463 and $2,469,796 and working capital of $4,568,802 and $4,793,462, respectively.
During the three months ended August 31, 2013 the Company’s operations used cash of $376,271 compared to cash provided of $330,405 in the same period of the prior fiscal year. Cash used in operations in fiscal 2014 was primarily a result of net loss of $167,714 and an increase in inventory of $213,509. Inventory increased due to the purchase of raw materials as well as higher amounts of labor and overhead capitalized in inventory due to increased production costs per unit for the quarter. Cash used in investing activities in the three months ended August 31, 2013 was $8,731 compared to the three months ended August 31, 2012 of $65,186. Cash provided by financing activities in the three months ended August 31, 2013 was $760 as compared to cash used of $43,000 in the three months ended August 31, 2012.
9
On June 10, 2011, the Company renewed the line of credit (the "Line") with its bank which has a borrowing limit of $400,000. The Line is secured by substantially all of the Company’s assets, bears interest at 1.0% plus the Wall Street Journal Prime West Coast Edition prime rate and expires February 24, 2013. The balance at August 31, 2013 and May 31, 2013 was $0.
Off Balance Sheet Arrangements – None.
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.
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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.
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 effect on our revenues and profitability; possible costs or difficulty 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; high balances carried on accounts receivables from concentrated customers; and the costs of recalls, should such occasion arise. 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. MINE SAFETY DISCLOSURES. None.
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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| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Zackary S. Irani | |||
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| 31.2 | * |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Janet Moore | |||
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| 32.1 | * |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act — Zackary S. Irani | |||
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| 32.2 | * |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act — Janet Moore | |||
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| 101 Interactive data files pursuant to Rule 405 Regulation S-T, as follows: | |||||
| 101.INS-XBRL Instance Document | |||||||
| 101.SCH-XBRL Taxonomy Extension Schema Document 101.CAL-XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF–XBRL Taxonomy Extension Definition Linkbase Document 101.LAB-XBRL Taxonomy Extension Label Linkbase Document 101.PRE-XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
*Filed herewith.
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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.
BIOMERICA, INC.
Date: October 15, 2013
By: /S/ Zackary S. Irani
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Zackary S. Irani
Chief Executive Officer
(Principal Executive Officer)
Date: October 15, 2013
By: /S/ Janet Moore
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Janet Moore
Chief Executive Officer
(Principal Financial Officer)
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