Exhibit 99.3
BIOMERICA, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Report Of Independent Registered Public Accounting Firm FS-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of May 31, 2009 and 2008 FS-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended May 31, 2009 and 2008 FS-4 - FS-5
Consolidated Statements of Shareholders' Equity for the
Years Ended May 31, 2009 and 2008 FS-6 - FS-9
Consolidated Statements of Cash Flows for the Years
Ended May 31, 2009 and 2008 FS-10 - FS-11
Notes to the Consolidated Financial Statements FS-12 - FS-26
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Biomerica, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
(a Delaware Corporation) and its subsidiary as of May 31, 2009 and 2008 and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for the years ended May 31, 2009 and 2008.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We have conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal controls over financial reporting. Our audits included consideration of
internal controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstance, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. as of May 31, 2009 and 2008, and the results of its consolidated
operations and cash flows for the years ended May 31, 2009 and 2008 in
conformity with accounting principles generally accepted in the United States of
America.
August 28, 2009 /s/ PKF
San Diego California Certified Public Accountants
A Professional Corporation
FS-2
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31, 2009 May 31, 2008
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,595,823 $ 2,022,380
Short-term investment 100,000 --
Available-for-sale securities -- 355
Accounts receivable, less allowance for doubtful accounts
of $86,432 and $84,206, respectively 640,668 614,330
Inventories, net 1,999,463 1,764,202
Deferred tax asset 103,000 35,000
Prepaid Expenses and Other 115,717 101,867
------------ ------------
Total Current Assets 4,554,671 4,538,134
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Equipment 944,646 897,664
Furniture, Fixtures and Leasehold Improvements 190,331 187,873
------------ ------------
Total Property and Equipment 1,134,977 1,085,537
------------ ------------
ACCUMULATED DEPRECIATION (768,158) (715,957)
------------ ------------
Net property and equipment 366,819 369,580
DEFERRED TAX ASSET-LONG-TERM 135,000 135,000
INTANGIBLE ASSETS 30,000 --
OTHER ASSETS 65,582 64,997
------------ ------------
$ 5,152,072 $ 5,107,711
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 263,998 $ 473,539
Accrued compensation 417,307 487,115
Capital lease - short-term portion -- 4,180
Note payable-shareholder -- 95,936
Loan for Equipment Purchase - Current-term 42,254 48,428
------------ ------------
Total Current Liabilities 723,559 1,109,198
LOAN FOR EQUIPMENT PURCHASE - LONG-TERM 80,527 114,565
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 25,000,000 shares authorized;
6,631,039 and 6,489,839 shares and issued and outstanding, respectively 530,482 519,186
Additional paid in capital 17,502,986 17,407,096
Common stock subscribed -- 3,000
Accumulated other comprehensive loss (1,726) (7,398)
Accumulated Deficit (13,683,756) (14,037,936)
------------ ------------
Total Shareholders' Equity 4,347,986 3,883,948
------------ ------------
$ 5,152,072 $ 5,107,711
============ ============
See report of independent registered public accounting firm and
accompanying notes to consolidated financial statements.
FS-3
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED MAY 31 2009 2008
----------- -----------
NET SALES $ 4,934,771 $ 4,926,505
Cost of Sales 2,964,908 2,790,883
----------- -----------
GROSS PROFIT 1,969,863 2,135,622
----------- -----------
OPERATING EXPENSES
Selling, general and administrative 1,443,896 1,367,048
Research and Development 278,308 259,085
----------- -----------
Total Operating Expenses 1,722,204 1,626,133
----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAX 247,659 509,489
OTHER (INCOME) EXPENSE
Interest expense 27,521 49,542
Interest income (29,867) (33,552)
Other Income (17,175) (1,149,545)
----------- -----------
INCOME TAX (BENEFIT) EXPENSE (87,000) (67,000)
----------- -----------
NET INCOME $ 354,180 $ 1,710,044
=========== ===========
BASIC NET INCOME PER COMMON SHARE $ 0.05 $ 0.28
=========== ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.05 $ 0.25
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
Basic 6,619,399 6,125,981
=========== ===========
Diluted 7,007,601 6,978,039
=========== ===========
See report of independent registered public accounting firm and
accompanying notes to consolidated financial statements.
FS-4
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)
YEARS ENDED MAY 31, 2009 2008
----------- -----------
NET INCOME $ 354,180 $ 1,710,044
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax
Unrealized gain on available-for-sale securities -- 673,030
Foreign currency translation (1,726) --
Reclassification Adjustment, Net of Tax -- (450,711)
----------- -----------
COMPREHENSIVE INCOME $ 352,454 $ 1,932,363
=========== ===========
See report of independent registered public accounting firm and
accompanying notes to consolidated financial statements.
FS-5
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Common Stock
Common Stock Paid-in Subscribed
Shares Amount Capital Shares Amount
--------- ----------- ----------- ------ -----------
Balances, May 31, 2007 5,944,214 $ 475,535 $17,254,714 -- $ --
Exercise of stock options 545,625 43,651 115,735 12,000 3,000
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
Compensation expense in connection
with options and warrants granted -- -- 36,647 -- --
Net Income -- -- -- -- --
--------- ----------- ----------- ------ -----------
Balances, May 31, 2008 6,489,839 $ 519,186 $17,407,096 12,000 $ 3,000
========= =========== =========== ====== ===========
(Continued)
FS-6
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Accumulated
Common Other
Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Total
---------- ------------ ------------ ------------
Balances, May 31, 2007 -- $ (229,717) $(15,747,980) $ 1,752,552
Exercise of stock options -- -- -- 162,386
Change in unrealized gain (loss) on
available-for-sale securities -- 222,319 -- 222,319
Compensation expense in connection
with options and warrants granted -- -- -- 36,647
Net Income -- -- 1,710,044 1,710,044
--------- ------------ ------------ ------------
Balances, May 31, 2008 -- $ (7,398) $(14,037,936) $ 3,883,948
========= ============ ============ ============
(Continued)
FS-7
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Additional Common Stock
Common Stock Paid-in Subscribed
Shares Amount Capital Shares Amount
--------- ----------- ----------- ------- -----------
Exercise of stock options and warrants 141,200 11,296 25,090 (12,000) (3,000)
Realized loss on available-for-sale
securities -- -- -- -- --
Foreign currency translation -- -- -- -- --
Tax effect of exercise of stock options
and warrants -- -- 17,710 -- --
Compensation expense in connection
with options and warrants granted -- -- 53,090 -- --
NET INCOME -- -- -- -- --
--------- ----------- ----------- ------- -----------
Balances, May 31, 2009 6,631,039 $ 530,482 $17,502,986 -- $ --
========= =========== =========== ======= ===========
(Continued)
FS-8
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Accumulated
Common Other
Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Tota
---------- ----------- ------------ ------------
Exercise of stock options and warrants -- -- -- 33,386
Realized loss on available-for-sale
securities -- 7,398 -- 7,398
Foreign currency translation -- (1,726) -- (1,726)
Tax effect of exercise of stock options
and warrants -- -- -- 17,710
Compensation expense in connection
with options and warrants granted -- -- -- 53,090
Net Income -- -- 354,180 354,180
-------- ------------ ------------ ------------
Balances, May 31, 2009 $ -- $ (1,726) $(13,683,756) $ 4,347,986
======== ============ ============ ============
See report of independent registered public accounting firm and
accompanying notes to consolidated financial statements.
FS-9
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended May 31, 2009 2008
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 354,180 $ 1,710,044
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 88,651 65,827
Provision for losses on accounts receivable 2,226 25,423
Inventory reserve 134,924 29,810
Loss (Gain) or write-down on available-for-sale securities 7,753 (1,147,845)
Tax effect of exercise of stock options and warrants 17,710 --
Compensation expense in connection with options and warrants granted 53,090 36,647
Changes in assets and liabilities:
Accounts receivable (28,564) (134,986)
Inventories (370,185) (332,299)
Prepaid expenses and other (13,850) 27,568
Other assets (585) (31,598)
Accounts payable and other accrued expenses (209,541) (192,710)
Increase in deferred tax asset (68,000) (170,000)
Accrued Compensation (69,808) (80,476)
----------- -----------
Net Cash Used in Operating Activities (101,999) (194,595)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificate of deposit (100,000) --
Proceeds from sale of available-for-sale securities -- 1,780,478
Purchases of property and equipment (85,890) (264,783)
Purchase of Intangible Assets (30,000) --
----------- -----------
Net Cash (Used In) Provided by Investing Activities (215,890) 1,515,695
=========== ===========
(Continued)
FS-10
BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended May 31, 2009 2008
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital leases (4,180) (4,394)
Decrease of shareholder debt (95,936) (61,056)
Payment of common stock subscribed (3,000) --
Exercise of stock options and warrants 36,386 148,507
Borrowings on loan for equipment purchase 133,000 119,530
Payments On Loan for Equipment (173,212) (18,207)
----------- -----------
Net Cash (Used In) Provided by Financing Activities (106,942) 184,380
----------- -----------
Effect of Exchange Rate Changes On Cash (1,726) --
----------- -----------
Net Change in Cash and Cash Equivalents (426,557) 1,505,480
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of year 2,022,380 516,900
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,595,823 $ 2,022,380
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 27,347 $ 53,922
=========== ===========
Income taxes (net of refund) $ 96,092 $ 4,523
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Unrealized (loss) gain on available-for-sale securities $ -- $ 222,319
=========== ===========
Non-cash exercise of warrants and options by reduction of note payable $ -- $ 10,878
=========== ===========
Subscribed stock receivable $ -- $ 3,000
=========== ===========
See report of independent registered public accounting firm and
accompanying notes to consolidated financial statements.
FS-11
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
1. ORGANIZATION
ORGANIZATION
Biomerica, Inc. and Subsidiary (collectively "the Company") are primarily
engaged in the development, manufacture and marketing medical diagnostic kits.
As of May 31, 2009 and 2008 the Company had one operational unit.
The Company 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended May 31, 2009 and 2008
include the accounts of Biomerica, Inc. ("Biomerica") and ReadyScript, Inc. (as
discontinued operations) as well as the Company's newly formed German subsidiary
which has not begun full operations. All significant intercompany accounts and
transactions have been eliminated in consolidation. During fiscal 2009 and 2008
there were no transactions in the discontinued operation and management intends
to formally dissolve the corporation during fiscal 2010.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, short-term investments, accounts receivable, available-for-sale
securities, capital lease, shareholder debt, commercial bank line of credit (of
which the balance was zero at May 31, 2009 and 2008), commercial bank equipment
loan and accounts payable. The carrying amounts of the Company's financial
instruments approximate their fair values at May 31, 2009.
SFAS No. 157, Fair Value Measurement, defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS No. 157
states that a fair value measurement should be determined based on the
assumptions the market participants would use in pricing the asset or liability.
In addition, SFAS No. 157 specifies a hierarchy of valuation techniques based on
whether the types of valuation information ("inputs") are observable or
unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.
FS-12
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
The three broad levels defined by SFAS No. 157 hierarchy are as follows:
Level 1 - quoted prices for identical assets or liabilities in active markets.
Level 2 - pricing inputs are other than quoted prices in active markets, which
are either directly or indirectly observable as of the reported date.
Level 3 - valuations derived from methods in which one or more significant
inputs or significant value drivers are unobservable in the markets. These
financial instruments are measured using management's best estimate of fair
value, where the inputs into the determination of fair value require significant
management judgment to estimation.
Valuations based on unobservable inputs are highly subjective and require
significant judgments. Changes in such judgments could have a material impact on
fair value estimates. In addition, since estimates are as of a specific point in
time, they are susceptible to material near-term changes. Changes in economic
conditions may also dramatically affect the estimated fair values.
The carrying values reflected in the consolidated balance sheet at May 31, 2009
reasonably approximate the fair values for financial instruments in accordance
with SFAS No. 157. In making such assessment, Company has utilized quoted prices
in active markets for identical assets (Level 1). No allowance for potential
credit losses was considered necessary at May 31, 2009.
Fair Value Measurements at Reporting Date Using
Quoted Prices in Active Significant
Markets for Other Significant
Identical Assets Observable Inputs Unobservable Inputs
Description May 31, 2009 (Level 1) (Level 2) (Level 3)
- -------------------------------- ------------ ----------------------- ----------------- --------------------
Short term investment
Certificates of Deposit $100,000 $100,000 $ -- $ --
-------- -------- ------ ------
Total $100,000 $100,000 $ -- $ --
======== ======== ====== ======
CONCENTRATION OF CREDIT RISK
The Company, on occasion, maintains cash balances at certain financial
institutions in excess of amounts insured by federal agencies.
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company's sales are not
materially dependent on a single customer or a small group of customers.
Biomerica had two customers which accounted for 26% of its sales for the fiscal
year ended May 31, 2009 and two customers which accounted for 29% of its sales
for the fiscal year ended May 31, 2008. The Company performs ongoing credit
evaluations of its customers and requires prepayment in some circumstances. The
Company does not obtain collateral with which to secure its accounts receivable.
The Company maintains reserves for potential credit losses based upon the
Company's historical experience related to credit losses. The Company monitors
its accounts receivables balances closely. At May 31, 2009 and 2008, three
customers each accounted for greater than 10% of gross accounts receivable.
For the year ended May 31, 2009 no company accounted for more than 10% of the
purchases of raw materials for Biomerica. For the fiscal year ended May 31, 2008
three companies accounted for more than 30% of the purchases for Biomerica on an
unconsolidated basis.
GEOGRAPHIC CONCENTRATION
As of May 31, 2009 and 2008, respectively, approximately $807,000 and $523,000
of Biomerica's gross inventory and $15,000 and $22,000 of Biomerica's property
and equipment, net of accumulated depreciation and amortization, was located in
Mexicali, Mexico.
FS-13
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and money market accounts
with original maturities of less than three months.
SHORT TERM INVESTMENT
Short term investment held by the Company consisted of a certificate of deposit.
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES." This statement addresses the accounting and
reporting for investments in equity securities which have readily determinable
fair values and all investments in debt securities. The Company's marketable
equity securities are classified as available-for-sale under SFAS 115 and
reported at fair value, with changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-sale securities consist of
common stock of publicly-traded companies and are stated at market value in
accordance with SFAS 115. Cost for purposes of computing realized gains and
losses is computed on a specific identification basis. The proceeds from the
sale of available-for-sale securities during fiscal 2009 was zero and during
fiscal 2008 it was $1,780,478. Accumulated other comprehensive income (loss)
relating to available-for-sale securities for the years ended May 31, 2009 and
2008 was $(7,398) and $0, respectively. The Company wrote off the entire amount
of available-for-sale securities at May 31, 2009.
ACCOUNTS RECEIVABLE
The Company extends credit to its trade accounts receivable 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 $500 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. Management evaluates quarterly what items to charge off. Any charge-offs
are approved by upper level management prior to charging off.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of biological chemicals. Cost includes raw
materials, labor, manufacturing overhead and purchased products. Market is
determined by comparison with recent purchases or net realizable value. Such net
realizable value is based on forecasts for sales of the Company's products in
the ensuing years. The industry in which the Company operates is characterized
by technological advancement and change. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown on the accompanying consolidated balance sheet.
Inventories approximate the following at May 31:
2009 2008
----------- -----------
Raw materials $ 809,000 $ 718,000
Work in progress 818,000 570,000
Finished ProductS 537,000 506,000
----------- -----------
Inventory Reserve (165,000) (30,000)
----------- -----------
Total $ 1,999,000 $ 1,764,000
=========== ===========
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically reserve
for obsolete inventory that the Company intends to dispose of.
FS-14
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
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 are
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 amounted to $88,651 and $65,827 for the years ended May 31, 2009 and
2008, respectively.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation and amortization of such assets over
their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. Management has determined
that there is no impairment of property and equipment at May 31, 2009.
INTANGIBLE ASSETS
On June 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142
requires that the Company's license agreements be tested annually (or more
frequently if impairment indicators arise) for impairment. The Company has
established the date of May 31 on which to conduct its annual impairment test.
Intangible assets are being amortized using the straight-line method over the
useful life, not to exceed 18 years for marketing and distribution rights and
purchased technology use rights, and 17 years for patents. Amortization amounted
to $0 and $2,588 for each of the years ended May 31, 2009 and 2008,
respectively. Intangible assets with indefinite lives such as perpetual licenses
are not amortized but rather tested for impairment at least annually (see Note
3).
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset's balance over its remaining
life can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on fair value and charged to
operations in the period in which the impairment is determined by management.
STOCK-BASED COMPENSATION
All share-based payments to employees, including the grants of employee stock
options, are recognized in the consolidated financial statements based on their
fair values, but only to the extent that vesting is considered probable.
Compensation cost for awards that vest will not be reversed if the awards expire
without being exercised. The fair value of stock options is determined using the
Black-Scholes option-pricing model. Compensation costs for awards are amortized
using the straight-line method. Option pricing model input assumptions such as
expected term, expected volatility and risk-free interest rate impact the fair
value estimate. Further, the forfeiture rate impacts the amount of aggregate
compensation. These assumptions are subjective and generally require significant
analysis and judgment to develop. When estimating fair value, some of the
assumptions are based on or determined from external data and other assumptions
may be derived from the Company's historical experience with share-based
arrangements. The appropriate weight to place on historical experience is a
matter of judgment, based on relevant facts and circumstances.
The Company relies on its historical experience and post-vested termination
activity to provide data for estimating expected term for use in determining the
fair value of its stock options. The Company currently estimates its stock
volatility by considering historical stock volatility experience and other key
factors. The risk-free interest rate is the implied yield currently available on
U.S. Treasury zero-coupon issues with a remaining term equal to the expected
term used as the input to the Black-Scholes model. The Company estimates
forfeitures using its historical experience, which will be adjusted over the
requisite service period based on the extent to which actual forfeitures differ,
or are expected to differ, from such estimates. Because of the significant
amount of judgment used in these calculations, it is reasonably likely that
circumstances may cause the estimate to change. If, for example, actual
forfeitures are lower than the Company's estimate, additional charges to net
income may be required.
FS-15
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
The following assumptions were used within the Black Scholes option-pricing
model for the years ended May 31, 2009 and 2008; risk free interest rates
ranging from 1.16% to 4.89%; dividend yield of 0%; expected life of the options
of 3.5 and 6 years; volatiliy factors of the expected market price of the
Company's common stock ranging from 71.18% to 104.13%.
When shares are issued for services or other non-cash consideration, fair value
is measured using the current market value on the day of the board approval of
such issuance.
MINORITY INTEREST
At May 31, 2009 and 2008, Biomerica owned 88.9% of ReadyScript, which was
discontinued in 2001. During fiscal 2009 and 2008, there were no transactions
relating to the discontinued operations and the remaining balance sheet of the
discontinued operations is de minimus.
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. As of
May 31, 2009 and 2008, the reserve for allowances is $0.
SHIPPING AND HANDLING FEES AND COSTS
The consolidated financial statements reflect, for all periods presented, the
adoption of the classification or disclosure requirements pursuant to Emerging
Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and
Costs." The Company has historically classified income from freight charges to
customers as sales, which has been offset by shipping and handling costs. The
income from freight for the fiscal years 2009 and 2008, respectively, was
$120,728 and $122,668. The financial statements presented herein show the income
from shipping and handling as a component of sales for both periods and the
costs of shipping and handling as a component of cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred. The Company expensed
$278,308 and $259,085 of research and development expenses during the years
ended May 31, 2009 and 2008, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
ADVERTISING COSTS
The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were approximately $6,000 and
$57,000 for the years ended May 31, 2009 and 2008, respectively.
FOREIGN CURRENCY TRANSLATION
The subsidiary located in Germany operates 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.
FS-16
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
RECLASSIFICATION
Certain prior year amounts within the consolidated statement of operations and
comprehensive income and consolidated statement of cash flows have been
reclassified to conform to current year presentation.
NET INCOME PER SHARE
Basic earnings per share is computed as net income 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 years ended May 31, 2009 and 2008 was 586,500 and
150,000, 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.
For the Years Ended May 31 2009 2008
---------- ----------
Numerator for basic and diluted net income per common share $ 354,180 $1,710,044
========== ==========
Denominator for basic net income per common share 6,619,399 6,125,981
Effect of dilutive securities:
Options and Warrants 388,202 852,058
---------- ----------
Denominator for diluted net income per common share 7,007,601 6,978,039
========== ==========
Basic net income per common share $ 0.05 $ 0. 28
========== ==========
Diluted net income per common share $ 0.05 $ 0. 25
========== ==========
FS-17
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009AND 2008
SEGMENT REPORTING
The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION". SFAS 131 requires public companies to report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company's business segments are disclosed in Note 7.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE INCOME."
This statement establishes standards for reporting the components of
comprehensive income (loss) and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
(loss) be included in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income (loss) includes
net income (loss) as well as certain items that are reported directly within a
separate component of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51. This statement
applies to all entities that prepare consolidated financial statements, except
for non-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for annual periods
beginning December 15, 2008. The Company does not believe that the adoption of
SFAS No. 160 will have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS
141R establishes a defined measurement period that governs the time period
within which the business combination must be reported. In addition, the revised
standard significantly expands the scope of disclosure requirements. SFAS No.
141R is effective for annual periods beginning after December 15, 2008. The
Company does not believe that the adoption of SFAS No. 141R will have a material
impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of FASB Statement No. 133. This
Statement requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issue years and interim periods beginning
after November 15, 2008. The Company does not believe that the adoption of SFAS
No. 161 will have a material impact on its financial statements.
In May, 2009 the FASB issued SFAS No. 165, "Subsequent Events". This statement
established general standards of accounting for disclosure of events that occur
after the balance sheet date but before financial statement are issued or are
available to be issued. It requires the disclosure date through which an entity
has evaluated subsequent events and the basis for that date. This would alert
all users of financial statements that an entity has not evaluated subsequent
events after that in the set of financial statements being presented. This
statement is effective for interim and annual periods ending after June 15,
2009. The Company does not believe that the adoption of SFAS No. 165 will have a
material impact on its financial statements.
The FASB issued SFAS No. 168, "The FASB Accounting Standards Codification
(Codification) and the Hierarchy of Generally Accepted Accounting Principles- a
replacement of Financial Statement No. 162". On the effective date of the
statement, The FASB Accounting Standards Codification will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. This statement is effective
for financial statements issued for interim and periods ending after September
15, 2009. The Company does not believe that the adoption of SFAS No. 168 will
have a material impact on its financial statements.
FS-18
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009AND 2008
3. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the following at
May 31:
2009 2008
--------- ---------
Patents and other intangible $ 36,465 $ 36,465
Less Accumulated Amortization (36,465) (36,465)
--------- ---------
$ -- $ --
========= =========
The amounts included in the table above for the year ended May 31, 2009 exclude
approximately $30,000 related to licenses which have an indefinite life and are
not being amortized.
4. RELATED PARTY TRANSACTIONS
NOTES PAYABLE - SHAREHOLDER
In March 2004 the Company signed a note payable for the principal and interest
due at that time of $313,318 and agreed to a forbearance of any payments for the
length of the agreement. The note payable was secured by all the Company's
assets except for the Lancer common stock owned by Biomerica. The note was due
September 1, 2004. On March 9, 2007 the Company entered into an additional
agreement entitled "Second Amendment of the Note, Loan and Modification
Agreement" which was filed as an exhibit to a Form 10-QSB on April 16, 2007. The
agreement called for payment of overdue principal by August 31, 2007, agreement
by Janet Moore to enter into a Commercial Subordination Agreement, pledge of
additional collateral to Janet Moore (all of which is subordinate to the
Commercial Bank of California) and the reduction of the shareholder note through
payments of $3,500 or (depending on certain quarterly results of the Company)
$2,000 per month. As of May 31, 2009 and 2008 there were $0 and $95,936 payable
on the shareholder note.
During 2009 and 2008, the Company incurred $1,227 and $10,973, respectively, in
interest expense related to the shareholder note.
During 2004, a shareholder/director advanced the Company $4,000. At May 31, 2009
and 2008 $1,659, was owed in interest payable on this loan and a previous loan
of $10,000. This amount was paid in July 2009.
RENT EXPENSE
Biomerica, Inc. currently leases facilities from four individuals, some of whom
are shareholders of the Company. Gross rent expense of approximately $168,000
was incurred during each of the years ended May 31, 2009 and 2008, for this
lease. There was no rent payable at May 31, 2009 or 2008.
ACCRUED COMPENSATION
During fiscal 2002-2005, two officers, who are also shareholders of the Company,
agreed to defer payment of a portion of their salaries. At May 31, 2009 and
2008, $166,768 and $240,118, respectively, of deferred officer's salary is
included in accrued compensation in the accompanying consolidated financial
statements. No interest was accrued on the deferred wages until March 2007. As
of March 1, 2007 the Company began accruing interest at the rate of 8% per year.
In October, 2008 the interest rate was decreased to 4% per year. For the years
ended May 31, 2009 and 2008, $20,187 and $20,299 in interest expense was
incurred, respectively.
Included in accrued compensation as of May 31, 2009 and 2008 is vacation accrual
of $189,916 and $171,998, respectively. Included in the 2009 and 2008 vacation
accrual is approximately $121,000 due to the former chief executive officer's
estate. The Company is disputing the validity of this claim.
FS-19
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
5. SHAREHOLDERS' EQUITY
1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS
In January 1996, the Company adopted a stock option and restricted stock plan
(the "1995 Plan") which provided that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 500,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. Options granted under the 1995 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock and expire not
more than 10 years after the date of grant. The 1995 plan expired in 2006. No
option grants have occurred since 2006, however there are still some outstanding
options.
In August 1999, the Company adopted a stock option and restricted stock plan
(the "1999 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 1,000,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. As of January 1, of each calendar year, commencing January 1, 2000,
this amount is subject to automatic annual increases equal to the lesser of 1.5%
of the total number of outstanding common shares, assuming conversion of
convertible securities, or 500,000. Options granted under the 1999 Plan may be
granted at prices not less than 85% of the then fair market value of the common
stock and expire not more than 10 years after the date of grant.
The Company has 201,999 warrants outstanding at May 31, 2009, which are included
in the table below. The warrants were issued in transactions related to
financing, primarily as a component of private placements. The warrants are for
restricted stock and have expiration dates ranging from five to ten years from
date of issue. Purchase prices for warrants range from $0.65 to $3.00.
Activity as to stock options and warrants granted are as follows:
NUMBER WEIGHTED
OF STOCK AVERAGE
OPTIONS AND PRICE RANGE EXERCISE
WARRANTS PER SHARE PRICE
-----------------------------------------
Options and warrants outstanding at May 31, 2007 2,053,249 $0.20 - $3.00 $ 0.48
Options granted 41,000 $0.78 - $1.30 $ 0.98
Options and warrants exercised (557,625) $0.20 - $0.73 $ 0.29
Options and Warrants Canceled or Expired (34,500) $0.33 - $0.80 $ 0.69
--------- ------------- --------
Options and warrants outstanding at May 31, 2008 1,502,124 $0.25 - $3.00 $ 0.76
Options granted 378,500 $0.45 - $0.75 $ 0.57
Options and warrants exercised (129,200) $0.25 - $0.40 $ 0.26
Options and Warrants Canceled or Expired (76,750) $0.25 - $1.30 $ 0.62
--------- ------------- --------
Options and Warrants Outstanding At May 31, 2009 1,674,674 $0.30 - $3.00 $ 0.77
--------- ------------- --------
The weighted average fair value of options and warrants granted during 2009 and
2008 was $0.57 and $0.98, respectively. The aggregate intrinsic value of options
exercised during fiscal 2009 and 2008 was approximately $3,900 and $295,000,
respectively. The aggregate intrinsic value of options outstanding at May 31,
2009 was approximately $273,000. The aggregate intrinsic value of options vested
and exercisable at May 31, 2009 was approximately $214,000.
At May 31, 2009 total compensation cost related to nonvested stock option awards
not yet recognized totaled $104,435. The weighted-average period over which this
amount is expected to be recognized is 2.5 years.
The weighted average remaining contractual term of options and warrants that
were exercisable at May 31, 2009 was 2.13 years.
FS-20
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009AND 2008
The following summarizes information about all of the Company's stock options
and warrants outstanding at May 31, 2009. These options and warrants are
comprised of those granted under the 1995 and 1999 plan and those granted
outside of these plans.
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
PRICES MAY 31, 2009 LIFE IN YEARS PRICE MAY 31, 2009 PRICE
- -----------------------------------------------------------------------------------------------------------
$0.30 - $0.60 1,036,175 2.54 $0.45 812,300 $0.43
$0.65 - $0.80 484,499 4.19 $0.75 326,374 $0.75
$1.30 - $3.00 154,000 0.12 $2.96 152,000 $2.98
STOCK ACTIVITY
In July 2007 the Board of Directors granted a stock option for 25,000 options to
a new Company director. The options vested one half immediately and then will
vest one quarter per year thereafter. The option is exercisable at a price of
$0.78 per share and expires in five years. Management assigned a value of
$10,541 to this option.
In November 2007 the Board of Directors granted stock options for 16,000 options
to employees of the Company. The options vested one quarter immediately and then
will vest one quarter per year thereafter. The options are at the exercise price
of $1.30 and expire in five years. Management assigned a value of $10,952 to
these options.
In October 2008 the Board of Directors granted stock options for 100,000 options
to outside directors of the Company. The options vested one quarter immediately
and then will vest one quarter per year thereafter. The options are at the
exercise price of $0.75 and expire in ten years. Management assigned a value of
$58,834 to these options.
In January 2009 the Board of Directors granted stock options for 168,500 options
to employees of the Company. The options vested one quarter immediately and then
will vest one quarter per year thereafter. The options are at the exercise price
of $0.45 and expire in five years. Management assigned a value of $38,270 to
these options.
In March 2009 the Board of Directors granted stock options for 110,000 options
to employees of the Company. The options vested one quarter immediately and then
will vest one quarter per year thereafter. The options are at the exercise price
of $0.60 and expire in five years. Management assigned a value of $35,938 to
these options.
During the fiscal year ended May 31, 2008, options and warrants to purchase
557,625 shares were exercised at prices ranging from $0.20 to $0.73. Total
proceeds to the Company were $162,386.
During the fiscal year ended May 31, 2009, options and warrants to purchase
141,200 shares were exercised at prices ranging from $0.20 to $0.40. Total
proceeds to the Company were $36,386.
FS-21
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
6. INCOME TAXES
Income tax (benefit) expense from continuing operations for the years ended May
31, 2009 and 2008 consists of the following current (benefit) provisions:
May 31, 2009 2008
--------- ---------
Current:
U.S. Federal $ -- $(149,000)
State and Local 37,000 82,000
--------- ---------
37,000 (67,000)
Deferred:
U.S. Federal (68,000) --
State and Local (56,000) --
--------- ---------
(124,000) --
--------- ---------
$ (87,000) $ (67,000)
========= =========
Income tax benefit expense from continuing operations differs from the amounts
computed by applying the U.S. Federal income tax rate of 35 percent to pretax
loss as a result of the following:
May 31, 2009 2008
--------- ---------
Computed "expected" tax expense (benefit) $ 93,000 $ 575,000
Increase (reduction) in income taxes resulting from:
True up of carryforwards and other items (43,000) 148,000
Change in valuation allowance (93,000) (731,000)
State income taxes, net of federal benefit 15,000 94,000
Tax benefit from the release of deferred tax allowance (58,000) (170,000)
Other (1,000) 17,000
--------- ---------
$ (87,000) $ (67,000)
========= =========
The tax effect of significant temporary differences are presented below.
May 31, 2009 2008
--------- ---------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and sales returns $ 35,000 $ 34,000
Inventory valuation 67,000 --
Compensated absences and deferred payroll 166,000 196,000
Net operating loss carryforwards 314,000 391,000
Tax credit carryforwards 18,000 6,000
Accumulated depreciation of property and equipment (9,000) 16,000
Other 62,000 93,000
Less Valuation Allowance (415,000) (566,000)
--------- ---------
Net deferred tax asset $ 238,000 $ 170,000
========= =========
FS-22
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
The Company has provided a valuation allowance for $415,000 and $566,000 as of
May 31, 2009 and 2008, respectively. Although the Company has achieved net
income over the last four fiscal years, predicting future taxable income is
difficult and influenced by many factors. After analyzing our tax position,
Management has provided such allowance to provide for future income.
At May 31, 2009 and 2008, the Company has federal income tax net operating loss
carryforwards of approximately $1,100,000 and $1,119,000, respectively. Of the
reported net operating loss carryforwards, approximately $211,000 are related to
windfall tax benefits from the exercise of the Company's stock options by
certain employees. Pursuant to SFAS No. 165, Share-Based Payments, the federal
benefit of approximately $74,000 associated with this portion of the net
operating loss will be credited to additional paid in capital when the tax
benefits are actually realized. The federal net operating loss carryforwards
begin to expire in 2021. The federal credits begin to expire in 2015.
At May 31, 2009 and 2008, the Company has federal research and development tax
credit carryforward of approximately $18,000 and $6,000, respectively. The
federal credits begin to expire in 2009.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss ("NOL") and credit carryforwards may be limited by
statute because of a cumulative change in ownership of more than 50%. Pursuant
to Sections 382 and 383 of the Code, the annual use of the Company's NOLs would
be limited if there is a cumulative change of ownership (as that term is defined
in Section 382(g) of the Code) of greater than 50% in a three year period. Based
on management's analysis the Company does not believe that a cumulative change
in ownership of greater than 50% has taken place.
In June 2006, the FASB issued Interpretation No. 48, or FIN 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FAS 109. FIN 48 provides
clarification for the financial statement measurement and recognition of tax
positions that are taken or expected to be taken on a tax return. For the fiscal
year ended May 31, 2009 and 2008 the Company did an analysis of its FIN 48
position and has not identified any uncertain tax positions as defined under FIN
48. Should such position be identified in the future and should the Company owe
interest and penalties as a result of this, these would be recognized as income
taxes in the financial statements.
7. BUSINESS SEGMENTS
Reportable business segments are identified by product line and for the years
ended May 31, 2009 and 2008 and approximate the following:
2009 2008
-------- --------
Domestic long-lived assets, net:
Medical diagnostic products $352,000 $348,000
======== ========
Foreign long-lived assets, net:
Medical diagnostic products $ 15,000 $ 22,000
======== ========
The Company operates in one business segment, Medical Diagnostic Products.
Identifiable assets by business segment are those assets that are used in the
Company's operations in each industry. Identifiable assets are held primarily in
the United States.
FS-23
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
The net sales as reflected above consist of sales to unaffiliated customers only
as there were no significant intersegment sales during fiscal years 2009 and
2008. Biomerica had two customers which accounted for 26% of its sales for the
fiscal year ended May 31, 2009 and two customers which accounted for 29% of its
sales for the fiscal year ended May 31, 2008.
Geographic information regarding net sales is approximately as follows:
2009 2008
---------- ----------
Net sales:
Europe $2,631,000 $2,549,000
United States 1,198,000 1,359,000
Asia 956,000 854,000
South America 92,000 70,000
Middle East 40,000 57,000
Other foreign 18,000 38,000
---------- ----------
Total net sales $4,935,000 $4,927,000
========== ==========
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is currently leasing its facilities on a month-to-month basis. The
facilities are owned and operated by four individuals, some of whom are
shareholders and one of whom is an officer and director. Effective May 1, 2007,
the monthly rent was set at $14,000 and has not increased. Management believes
there would be no significant difference in the terms of the property rental if
the Company leased from a third party. Total rent expense for this facility was
approximately $168,000 during each of the years ended May 31, 2009 and 2008.
Biomerica has various insignificant leases for office equipment.
RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute to
the plan up to the maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The
Company, at the discretion of its Board of Directors, may make contributions to
the plan in amounts determined by the Board each year. No contributions by the
Company have been made since the plan's inception.
LITIGATION
The Company is, from time to time, involved in legal proceedings, claims and
litigation arising in the ordinary course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows. There were
no legal proceedings pending as of May 31, 2009, except for proceedings related
to the collection of accounts receivable which have been previously reserved
for.
FS-24
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
CONTRACTS
During the first quarter of fiscal 2006 the Company entered into an agreement
with another company for the purpose of developing certain technology for
Biomerica. The total amount of the contract was for $55,000, with a 40% down
payment required and milestone payments for the balance of the contract. The
balance due at May 31, 2007 was $16,500. On June 5, 2006, a milestone payment of
$16,500 was made which was included in payables as of May 31, 2006. The
remaining $16,500 has not been recorded as a liability at May 31, 2009 due to
the fact that payment of it is contingent upon performance of certain functions
by the contractor. The Company has not and does not expect to make the final
payment in the future on this contract because complete performance of the
contract has not been achieved and the contract has been discontinued.
Biomerica has two royalty agreements in which it has obtained rights to
manufacture and market certain products for the life of the products. Royalty
expense of approximately $106,300 and $118,500 is included in cost of sales for
these agreements for the years ended May 31, 2009 and 2008, respectively. Sales
of products manufactured under these agreements comprise approximately 16.4% and
17.6% of total sales for the fiscal years ended May 31, 2009 and 2008,
respectively. Biomerica may license other products or technology in the future
as the Company deems necessary for conducting business.
On March 27, 2009 the Company signed an Asset Purchase Agreement with a European
company for the purchase of certain technology related to the manufacture of
certain medical diagnostic tests. Consideration for this purchase was a nominal
deposit upon signing the agreement and a nominal transfer fee upon successful
commencement of production of the products. A royalty shall be paid for five
years beginning on the date of first sale of finished product derived from the
purchased assets. These purchased assets did not constitute a business under FAS
141(R). Royalty payments of 10% of sales are due on these products for a period
of five years.
9. DEBT
In February 2007 the Company entered into a Commercial Security Agreement, two
Promissory Notes, a Subordination Agreement and a Business Loan Agreement. These
agreements pertain to a $200,000 working capital line of credit and a $200,000
equipment loan with Commercial Bank of California and were collateralized by
substantially all of the assets of the Company. In February 2009 the equipment
loan was paid off through proceeds from the loan obtained from Union Bank (see
below). The line of credit was discontinued in November 2008.
On February 13, 2009, the Company entered into a Small Business Banking
Agreement with Union Bank of California for a one year business line (the
"Line") of credit in the amount of $400,000. The interest rate for the line of
credit 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.
The Company must maintain for not less than thirty consecutive days in every
calendar year, a period in which all amounts due under the revolving credit
agreements with the bank are at a zero balance. The Company did not owe anything
on this line of credit as of May 31, 2009.
On February 13, 2009, the Company entered into a Small Business Bank Agreement
with Union Bank for a business loan ("Loan") for $133,000 and an interest rate
of 6.50%. Loan proceeds were disbursed in one single funding on March 5, 2009.
The Loan was used for the purpose of paying off the business loan, which had
been established with Commercial Bank. The fixed asset serves as collateral for
the loan.
The Loan is payable in thirty-six monthly payments of approximately $4,000.
FS-25
BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2009 AND 2008
Future maturity of the commercial line of credit is as follows:
Year Ended May 31,
2010 $ 42,254
2011 45,084
2012 35,443
--------
Total obligation 122,781
Less Current Portion 42,254
--------
Long-term portion $ 80,527
========
10. DISCONTINUED OPERATIONS
The following summarizes the net liabilities of the discontinued operations of
ReadyScript, as of May 31, 2009 and 2008. There was no operational activity for
the years ended May 31, 2009 and 2008.
Balance Sheet Items:
May 31, 2009 2008
------ ------
Assets:
Miscellaneous receivable $5,304 $5,304
Less liabilities:
Accrued Expenses 4,709 4,709
------ ------
Net liabilities $ 595 $ 595
====== ======
11. SUBSEQUENT EVENTS
On June 18, 2009, the Company entered into an agreement to lease a building in
Irvine, California, commencing September 1, 2009 and ending August 31, 2016. The
initial base rent is set at $18,490 with a security deposit of $22,080. The sum
of $40,568 was due upon execution of the lease. Management is currently working
on plans for the relocation of the Company which should take place by the end of
the calendar year.
FS-26