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BMRA > SEC Filings for BMRA > Form 10-K on 29-Aug-2013All Recent SEC Filings

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Form 10-K for BIOMERICA INC


29-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS FORM 10-K MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.


EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS. YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.

Overview

Biomerica, Inc. and Subsidiaries develop, manufacture, and market 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, urine or fecal material from patients in the diagnosis of various diseases, food intolerances 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

Our consolidated net sales were $6,472,960 for fiscal 2013 compared to $6,081,131 for fiscal 2012. This represents an increase of $391,829, or 6.4%. The increase was primarily due to increased sales in Europe and Asia. Sales increased for various reasons including increased sales of products not previously purchased in Europe, sales to new Chinese distributor and increased sales to existing distributors in Europe.

Cost of sales in fiscal 2013 as compared to fiscal 2012 increased from $3,783,955 to $4,045,099 or by $261,144. The percentage of cost of sales relative to sales increased from 62.2%, to 62.5%, or by 0.3%, due to various factors which included higher material costs and higher wages and related expenses which was offset by lower scrap and lower expenses in the Mexico facility.

Selling, general and administrative costs increased in fiscal 2013 as compared to fiscal 2012 from $1,445,049 to $1,454,767, or by $9,718. The increase was primarily a result of attending more trade conferences and higher rent which was offset by lower bad debt expense.

Research and development expense was $459,086 in fiscal 2013 as compared to $347,128 in fiscal 2012. This is an increase of $111,958, primarily as a result of increased purchases of research and development materials and wages and related expenses dedicated to research and development.

Interest expense decreased from $1,585 to $302 in fiscal 2013 as compared to fiscal 2012. The change in interest expense resulted from decreased balances pertaining to the equipment loan. Interest and dividend income increased from $8,347 to $10,708 due to higher cash balances and a dividend from the company in which Biomerica has an investment.

Other income decreased from $101,688 to $50, a decrease of $101,638. Most of the decrease in other income in fiscal 2013 as compared to 2012 was a result of insurance proceeds received in fiscal 2012 that did not occur in fiscal 2013.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2013, the Company had cash and cash equivalents in the amount of $2,469,796, as compared to $1,077,342 of cash and cash equivalents as of May 31, 2012. As of May 31, 2013 and 2012, the Company had working capital of $4,693,462 and $3,894,342 respectively.

Operating Activities

During fiscal 2013, cash provided by operations was $1,394,037 as compared to $147,412 in fiscal 2012. The increase of $1,246,625 in fiscal 2013 was primarily due to the collection of accounts receivable totaling $326,317 and increased sales which utilized inventory in the amount of $245,960 as compared to increases in accounts receivable of $534,428 and inventory of $27,706. The changes in certain non-cash items were similar year over year.


Investing Activities

During fiscal 2013, cash used in investing activities was $257,121 as compared to $113,170 in fiscal 2012. Cash of $257,121 and $164,798 was utilized for the purchase of property and equipment in fiscal 2013 and 2012, respectively. In fiscal 2012, the Company received approximately $102,000 as insurance proceeds from water damages sustained. In fiscal 2013, the Company invested $0 into licenses for new products as compared to $50,000 in fiscal 2012.

Financing Activities

Cash provided by financing activities in fiscal 2013 was $258,514 as compared to cash provided by financing activities of $55,400 in fiscal 2012.

During the fiscal year ended May 31, 2013, the Company sold 200,000 shares of its common stock at a price of $1.25 per share to an investor, the new distributor in China, for proceeds of $250,000. This investor has agreed to purchase an additional 200,000 shares of common stock at $1.25 per share at a later date.

Other

On February 13, 2009, the Company entered into a Small Business Banking Agreement with Union Bank for a one year business line of credit (the "Line") in the amount of $400,000. The interest rate for the line of credit was 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 has renewed this line each year. The Line expires February 24, 2014. The Company did not owe any amount on this Line as of May 31, 2013.

OFF BALANCE SHEETS ITEMS

There were no off-balance sheet arrangements as of May 31, 2013.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 of the Consolidated Financial Statements describes the significant accounting policies essential to the consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures.

In general, the critical accounting policies that may require judgments or estimates relate specifically to Revenues, Allowance for Doubtful Accounts, Inventory Reserves, Stock Based Compensation, and Income Taxes.

We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established if necessary for estimated returns as revenue is recognized.

An allowance for doubtful accounts is established for estimated losses resulting from the inability of our customers to make required payments.The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is not probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product.


We measure share-based compensation costs at fair value, including estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to measure the fair value of our stock options. In determining the amount of expense to be recorded, we also estimate forfeiture rates for all awards based on historical experience to reflect the probability that employees will complete the required service period. Employee retention patterns could vary in the future and result in a change to our estimated forfeiture rate which would directly impact share-based compensation expense.

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income. We have determined that it was more likely than not that our deferred tax assets will be realized in the future due to our continuing pre-tax and taxable income. As a result of this determination, we have released our remaining valuation allowance against our deferred tax assets.

FACTORS THAT MAY AFFECT FUTURE RESULTS

You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the 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 recently, 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 or no 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 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; recalls of products; quarterly variations in operating results caused by a number of factors, including business and industry conditions; and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our consolidated financial statements for a listing of adopted and soon to be adopted accounting pronouncements.

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