FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2004 Commission File No. 0-8765
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BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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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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(Not applicable)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has 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 is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,752,431 shares of common
stock as of January 14, 2005.
1
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three and Six Months Ended
November 30, 2004 and 2003........................................3 & 4
Consolidated Balance Sheet (unaudited) -
November 30, 2004.................................................5 & 6
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended November 30, 2004 and 2003...........................7
Consolidated Statement of Changes in Shareholders'
Equity (unaudited) - Six Months Ended November 30, 2004...............8
Notes to Consolidated Financial Statements.........................9-20
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................21-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 24
Item 4. Controls and procedures..............................................24
PART II Other Information....................................................25
Item 1. Legal Proceedings....................................................25
Item 2. Changes in Securities and Use of Proceeds............................25
Item 3. Defaults upon Senior Securities......................................25
Item 4. Submission of Matters to a Vote of Security Holders..................25
Item 5. Other Information....................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................25
Signatures...........................................................26
2
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ................................................... $ 4,346,972 $ 4,434,215 $ 2,162,533 $ 2,269,856
Cost of sales .......................................... 2,935,536 3,137,829 1,429,040 1,611,118
------------ ------------ ------------ ------------
Gross profit ........................................... 1,411,436 1,296,386 733,493 658,738
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative .................... 1,498,333 1,594,873 788,303 720,473
Research and development ............................... 142,507 141,753 71,459 67,412
------------ ------------ ------------ ------------
1,640,840 1,736,626 859,762 787,885
------------ ------------ ------------ ------------
Operating loss from continuing operations ................... (229,404) (440,240) (126,269) (129,147)
------------ ------------ ------------ ------------
Other Expense (income):
Interest expense ....................................... 17,579 15,376 9,428 4,915
Other income, net ...................................... (22,904) (33,258) (9,470) (26,247)
------------ ------------ ------------ ------------
(5,325) (17,882) (42) (21,332)
------------ ------------ ------------ ------------
Loss from continuing operations, before minority interest
in net loss of consolidated subsidiaries and
income taxes ............................................. (224,079) (422,358) (126,227) (107,815)
Minority interest in net losses of consolidated subsidiary .. 100,100 93,819 52,392 2,761
------------ ------------ ------------ ------------
Loss from continuing operations, before income taxes ........ (123,979) (328,539) (73,835) (110,576)
Income tax expense .......................................... 1,600 -- 1,600 --
------------ ------------ ------------ ------------
Net loss from continuing operations ......................... (125,579) (328,539) (75,435) (110,576)
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Discontinued operations:
Income (loss) from discontinued operations, net ............. 6,601 (2,944) 6,601 (3,020)
-------------- -------------- -------------- --------------
Net loss ...................................................... (118,978) (331,483) (68,834) (113,596)
Other comprehensive (loss) gain, net of tax
Unrealized (loss) gain on available-for-sale
securities ................................................. (7,442) 22,362 (1,852) (19,141)
-------------- -------------- -------------- --------------
Comprehensive loss ............................................ $ (126,420) (309,121) (70,686) $ (132,737)
============== ============== ============== ==============
Basic net loss per common share:
Net loss from continuing operations ...................... $ (.02) $ (.06) $ (.01) $ (.02)
Net gain (loss) from discontinued operations ............. .00 (.00) .00 (.00)
-------------- -------------- -------------- --------------
Basic net loss per common share ............................... $ (.02) $ (.06) $ (.01) $ (.02)
============== ============== ============== ==============
Diluted net loss per common share
Net loss from continuing operations ...................... $ (.02) $ (.06) $ (.01) $ (.02)
Net loss from discontinued operations .................... .00 (.00) .00 (.00)
-------------- -------------- -------------- --------------
Diluted net loss per common share ............................. $ (.02) $ (.06) $ (.01) $ (.02)
============== ============== ============== ==============
Weighted average number of common and common equivalent shares:
Basic and diluted ........................................ 5,752,431 5,675,890 5,752,431 5,752,431
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 30,
2004
------------
Assets
Current Assets
Cash and cash equivalents ................................................ $ 223,434
Available for-sale securities ............................................ 18,678
Accounts receivable, less allowance for doubtful accounts of $123,081 .... 1,575,481
Inventories, net of reserve of $250,914 .................................. 2,915,735
Notes receivable ......................................................... 3,219
Prepaid expenses and other ............................................... 216,772
----------
Total Current Assets ............................................... 4,953,319
Inventory, non-current ....................................................... 19,000
Property and Equipment, net of accumulated depreciation and amortization ..... 766,125
Intangible assets, net of accumulated amortization ........................... 16,784
Other Assets ................................................................. 62,240
----------
$5,817,468
==========
The accompanying notes are an integral part of these statements.
5
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
November 30,
2004
-------------
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit ................................................. $ 150,000
Accounts payable and accrued liabilities ....................... 1,135,518
Accrued compensation ........................................... 599,985
Current portion of shareholder loan ............................ 317,318
Net liabilities from discontinued operations ................... 271,951
-------------
Total Current Liabilities ................................. 2,474,772
Minority interest ................................................... 2,547,713
-------------
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares,
subscribed or issued and outstanding 5,752,431 ............... 460,193
Additional paid-in-capital ..................................... 17,120,135
Accumulated other comprehensive gain ........................... 11,024
Accumulated deficit ............................................ (16,796,369)
-------------
Total Shareholders' Equity .......................................... 794,983
Total Liabilities and Equity ........................................ $ 5,817,468
=============
The accompanying notes are an integral part of these statements.
6
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended November 30, 2004 2003
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ......................................... $(125,579) $(328,463)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization .......................................... 85,632 57,449
Minority interest in net loss of consolidated
Subsidiary ........................................................... (100,100) (93,819)
Amortization of warrant expense for extension of loan .................. 10,400 --
Gain on sales of marketable securities ................................. (8,888) --
Common stock, warrants and options issued for services
rendered ............................................................. 243 55,172
Provision for losses on accounts receivable ............................ (49,321) 6,008
Loss on disposal of fixed assets ....................................... 1,258 --
Provision for losses on inventory ...................................... -- 45,000
Changes in current assets and liabilities:
Accounts receivable .................................................. (8,877) 301,354
Inventories .......................................................... (241,893) (51,554)
Prepaid expenses and other current assets ............................ (51,650) (5,766)
Accounts payable and other accrued liabilities ....................... 152,740 (164,932)
Accrued compensation ................................................. 134,062 158,326
---------- ----------
Net cash used in operating activities ....................................... (201,973) (21,225)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment .................................... (121,111) (244,948)
Other assets ........................................................... -- (19,504)
---------- ----------
Net cash used in investing activities ....................................... (121,111) (264,452)
---------- ----------
Cash flows from financing activities:
Change in minority interest ............................................ 45,000 6,180
Sales of available for sale securities ................................. 8,888 --
Increase in shareholder loan ........................................... -- 20,035
Private placement, net of offering costs ............................... -- 30,500
Exercise of stock options .............................................. -- 2,000
Increase (Decrease) in line of credit .................................. 150,000 (426)
---------- ----------
Net cash provided by financing activities ................................... 203,888 58,289
---------- ----------
Net cash used in discontinued operations .................................... (9,744) (840)
---------- ----------
Net decrease in cash and cash equivalents ................................... (128,940) (228,228)
Cash at beginning of period ................................................. 352,374 525,167
---------- ----------
Cash at end of period ....................................................... $ 223,434 $ 296,939
========== ==========
Supplemental disclosures on non-cash financing activity
Issuance of common stock at market value in exchange for
settlement of accrued wages and shareholder loan ....................... $ -- $ 20,000
Change in minority interest due to subsidiary stock issuance .............. (15,512) --
========== ==========
The accompanying notes are an integral part of these statements.
7
BIOMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2004
Common Stock
---------------------------
Accumulated
Number Additional Other
of Paid-in Comprehensive Accumulated
Shares Amount Capital Gain (loss) Deficit Total
------------- ------------- ------------- ------------- ------------- -------------
Balance at
May 31, 2004 5,752,431 $ 460,193 $ 17,125,005 18,466 $(16,677,391) $ 926,273
Change in
unrealized
gain on available
for sale securities (7,442) (7,442)
Expense related to
issuance of warrants
for extension of note 10,400 10,400
Compensation
expense in connection
with options
and warrants
issued 243 243
Issuance of stock
at subsidiary (15,513) (15,513)
Net loss (118,978) (118,978)
------------- ------------- ------------- ------------- ------------- -------------
Balance at 5,752,431 $ 460,193 $ 17,120,135 $ 11,024 $(16,796,369) $ 794,983
November 30, 2004 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2004
(1) Reference is made to Note 2 of the Notes to Consolidated Financial
Statements contained in Biomerica, Inc.'s (the "Company") Annual Report on Form
10-KSB for the fiscal year ended May 31, 2004, for a summary of significant
accounting policies utilized by the Company.
(2) As of November 30, 2004, the Company had cash and available-for-sale
securities in the amount of $242,112 and working capital of $2,478,546. Cash and
working capital totaling $197,808 and $2,671,048, respectively, relates to the
Lancer subsidiary. Lancer's line of credit restricts Biomerica's ability to draw
on Lancer's resources and, as such, said cash, working capital and equity are
not available to Biomerica.
The Company has suffered substantial recurring losses from operations over
the last several years. Biomerica has funded its operations through debt and
equity financings, and may have to do so in the future. ReadyScript operations
were discontinued in May 2001 and Allergy Immuno Technologies, Inc. was sold in
May 2002. ReadyScript and Allergy Immuno Technologies were previously
contributors to the Company's losses. In fiscal years 2004 and 2003, the Company
reduced operating costs through certain cost reduction efforts and plans to
concentrate on its core business in Lancer and Biomerica to increase sales.
There can be no assurance that the Company will be able to become profitable,
generate positive cash flow from operations or obtain the necessary equity or
debt financing to fund operations in the future. Should the Company be unable to
reduce costs or increase sales adequately or should the Company be unable to
secure additional financing, the result for the Company could be the inability
to continue as a going concern.
The Company will continue to have limited cash resources. Biomerica, as a
parent entity, has no open or existing, operating line of credit or loans on
which it can draw any debt financing and we are not currently in negotiations to
obtain such financing. Although the Company's management recognizes the imminent
need to secure additional financing or increase sales, there can be no assurance
that the Company will be successful in doing so or, if the Company does
consummate a financing, that the terms and conditions of such financing will not
be unfavorable to the Company.
Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern for a reasonable period of time, and have, therefore
modified their audit report on the Company's annual consolidated financial
statements as of and for the year ended May 31, 2004, in the form of an
explanatory paragraph describing the events that have given rise to this
uncertainty. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations.
9
Biomerica entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to the
company, as needed, up to $500,000 for working capital needs. The line of credit
bore interest at 8%, was secured by accounts receivable and inventory, and
expired September 13, 2003. 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. A warrant for
40,000 shares of restricted common stock exercisable at a price of $.51 per
share was awarded as compensation for the forbearance. The note payable is
secured by all of the Company's assets except for the Lancer common stock owned
by Biomerica. The note was due September 1, 2004. There was $313,318 of
outstanding principal and $6,003 interest payable under this note payable at
November 30, 2004. On November 19, 2004, the Company entered into an agreement
entitled "Amendment of the Note, Loan and Modification Agreement". This amends
the "Loan Modification, Forbearance and Security Agreement" and "Amended and
Restated Promissory Note" which were included as exhibits to the Form 10QSB
filed April 14, 2004. The Amendment of the Note, Loan and Modification Agreement
was filed as an exhibit to a Form 8K filed November 24, 2004. The agreement
extends the maturity date of the note until August 31, 2005 and allows for
minimum payments of $4,000 per month and additional contingent payments of up to
$3,500 per month based on the Company's quarterly performance. Collateral
remains the same under the amendment.
During the six months ended November 30, 2004 and 2003, the Company's
operations used cash of $201,973 and $21,225, respectively. Cash provided by
financing activities was $203,888, which resulted from changes in minority
interest in Lancer of $45,000, borrowings on the Lancer line of credit of
$150,000 and sale of marketable securities of $8,888 at Biomerica.
(3) In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure-an amendment to SFAS No. 123". SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company will adopt SFAS No. 123 when required. The implementation of SFAS No.
148 did not have a material effect on the Company's consolidated financial
position or results of operations.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuations models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting period. Adjustments are made for options
forfeited prior to vesting. The effect on compensation expense, net loss, and
net loss per common share had compensation costs for the Company's stock option
plans been determined based on a fair value at the date of grant consistent with
the provisions of SFAS 148, for the quarter ended November 30 is as follows:
Six Months Ended Three Months Ended
November 30, 2004 2003 2004 2003
---------------------------------------------------------------------------------------
Net loss from continuing
operations, as reported $(125,579) $(328,539) $ (75,435) $(110,576)
Plus: Stock-based employee compensation
expense included in reported net loss 243 55,172 243 7,092
Less: Stock-based employee compensation
expense determined using fair value
based method (14,229) (12,575) (7,923) (6,269)
---------------------------------------------------------------------------------------
Net loss from continuing operations,
pro forma $(139,565) $(285,942) $ (83,115) $(109,753)
=======================================================================================
Pro forma net loss from
continuing operations
per share - basic $ (.02) $ (0.03) $ (.01) $ (.02)
=======================================================================================
Pro forma net loss from
continuing operations
per share - diluted $ (.02) $ (0.03) $ (.01) $ (.02)
=======================================================================================
10
(4) The following summary presents the options granted, exercised, expired, and
outstanding as of November 30, 2004:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2004 2,428,808 1,228,829 3,657,637 $2.17
Granted 155,000 14,000 169,000 .33
Exercised -- -- -- --
Expired (61,000) (1,000,000) (1,061,000) 3.00
Cancelled -- -- -- --
--------- ------------ ----------- ----------
Outstanding 2,522,808 242,829 2,765,637 $1.74
November 30, 2004 ========= ============ =========== ==========
(5) The information set forth in these consolidated statements is unaudited and
may be subject to normal year-end adjustments. The information 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., for the
periods indicated. It does not include all information and footnotes necessary
for a fair presentation of financial position, results of operations, and cash
flow in conformity with generally accepted accounting principles.
(6) Consolidated results of operations for the interim periods covered by this
Report may not necessarily be indicative of results of operations for the full
fiscal year.
(7) Reference is made to Note 3 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2004, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 10 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2004, for information on commitments and
contingencies.
(9) Aggregate market value exceeded cost of available-for-sale securities by
approximately $11,024 at November 30, 2004.
(10) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE
("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
11
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
For the Six Months Ended November 30, 2004
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (125,579) - $ (.02)
Gain (loss) from discontinued
operations ..................... 6,601 - .00
------------ ------------ ------------
$ (118,978) 5,752,431 $ (.02)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (118,978) 5,752,431 $ (.02)
============ ============ ============
For the Six Months Ended November 30, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (328,539) - $ (.06)
Gain (loss) from discontinued
operations ..................... (2,944) - (.00)
------------ ------------ ------------
$ (331,483) 5,675,890 $ (.06)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (331,483) 5,675,890 $ (.06)
============ ============ ============
For the Three Months Ended November 30, 2004
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (75,435) - $ (.01)
Gain (loss) from discontinued
operations ..................... 6,601 - .00
------------ ------------ ------------
$ (68,834) 5,752,431 $ (.01)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (68,834) 5,752,431 $ (.01)
============ ============ ============
For the Three Months Ended November 30, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (110,576) - $ (.02)
Gain (loss) from discontinued
operations ..................... ( 3,020) - .00
------------ ------------ ------------
$ (113,596) 5,752,431 $ (.02)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (113,596) 5,752,431 $ (.02)
============ ============ ============
12
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company.
As of November 30, 2004, there was a total of 801,500 potential dilutive
shares of common stock outstanding.
(11) In October 2001, the FASB issued SFAS No. 144, "Accounting for the
impairment or disposal of long-lived assets." SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively. This standard was effective for the Company's consolidated
financial statements beginning June 1, 2002. The implementation of SFAS No. 144
did not have a material impact on the Company's consolidated financial position
or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 44 and
64, Amendment of SFAS No. 13, and Technical Corrections," to update, clarify and
simplify existing accounting pronouncements. SFAS No. 4, which required all
gains and losses from debt extinguishment to be aggregated and, if material,
classified as an extraordinary item, net of related tax effect, was rescinded.
Consequently, SFAS No. 64, which amended SFAS No. 4, was rescinded because it
was no longer necessary. The adoption of this statement did not have a material
effect on the Company's consolidated financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The adoption of this
statement did not have a material effect on the Company's consolidated financial
position or results of operations.
In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued. FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a guarantor in
its interim and annual financial statements about the obligations associated
with guarantees issued. The recognition provisions of FIN 45 are effective for
guarantees issued after December 31, 2002, while the disclosure requirements
were effective for financial statements for periods ending after December 15,
2002. The adoption of FIN 45 did not have a material impact on the Company's
consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities". In December 2003, FIN 46 was replaced by FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities." FIN 46R
clarifies some of the provisions of FIN 46 and exempts certain entities from its
requirements. FIN 46R was effective at the end of the first interim period
ending March 15, 2004. Entities that have adopted FIN 46 prior to this date can
continue to apply provisions of FIN 46 until the effective date of FIN 46R or
early election of FIN 46R. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
relating to consolidation of certain entities. FIN No. 46 requires
identification of the Company's participation in variable interests entities
("VIEs"), which are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit them to operate on a
stand-alone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. For entities identified as VIEs, FIN No. 46 sets
forth a model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to its expected
losses, or stands to gain from a majority of its expected returns. FIN No. 46
also sets forth certain disclosures regarding interests in VIE that are deemed
significant, even if consolidation is not required. The adoption of FIN No. 46
did not have a material impact on the Company's financial position or results of
operations.
13
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of this statement did
not have a significant effect on the Company's consolidated financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 provides guidance on how an entity classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Many of these instruments were previously classified as equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement requires cumulative effect
transition for financial instruments existing at the adoption date. The adoption
of this statement did not have a material effect on the Company's consolidated
financial position or results of operations.
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Six Months Ended
11/30/04 11/30/03
-------- --------
Revenues from sales to
unaffiliated customers:
United States $1,962,000 $2,168,000
Asia 114,000 100,000
Europe 1,231,000 1,196,000
South America 166,000 248,000
Oceania 347,000 286,000
Middle East 185,000 148,000
Other 342,000 288,000
---------- ----------
$4,347,000 $4,434,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(13) Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective June
20, 2002, for failure to comply with the net tangible assets or shareholders'
equity requirements as set forth in Marketplace Rule 4310(c)(2)(B). The
Company's securities were immediately eligible to trade on The OTC Bulletin
Board and are traded under the symbol BMRA.OB.
(14) At November 30, 2004, Lancer has a $400,000 line of credit with Community
National Bank, (formerly Cuyamaca Bank)expiring January 8, 2005. Borrowings are
made at prime plus 2.0% (7.0% at November 30, 2004), and are limited to 80% of
accounts receivable less than 90 days old. The outstanding balance at November
30, 2004 was $150,000 and the unused portion available was approximately
$190,000. Lancer requested that Community National Bank reserve $60,000 of its
available credit line as a guarantee of credit with a European supplier.
Lancer is in compliance with its debt covenants at November 30, 2004.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending agreement
for the line of credit requires, among other things, that Lancer maintain a
balance sheet net worth of $2,700,000 and that a zero outstanding balance be
maintained for 30 consecutive days during the term. Proceeds from this line
cannot be used to support the operations of Biomerica.
The Lancer line of credit expired January 8, 2005. The Community National
Bank has verbally agreed to renew the line of credit for a year. The
documentation is currently being prepared for signature.
Lancer also had a term loan for $100,000 with Community National Bank that
was paid off in May 2004. This loan required monthly payments of approximately
$2,300 (principal and interest) at an interest rate of prime plus 2% (6% at May
31, 2004).
14
Biomerica entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to the
Company, as needed, up to $500,000 for working capital needs. The line of credit
bore interest at 8%, was secured by accounts receivable and inventory, and
expired September 13, 2003. 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. A warrant for
40,000 shares of restricted common stock exercisable at a price of $.51 per
share was awarded as compensation for the forbearance. The note payable is
secured by all of the Company's assets except for the Lancer common stock owned
by Biomerica. The note was due September 1, 2004.
There was $313,318 of outstanding principal and $6,003 interest payable
under this note payable at November 30, 2004. On November 19, 2004, the Company
entered into an Agreement entitled "Amendment of the Note, Loan and Modification
Agreement". This amends the "Loan Modification, Forbearance and Security
Agreement" and "Amended and Restated Promissory Note" which were included as
exhibits to the Form 10QSB filed April 14, 2004. The Amendment of the Note, Loan
and Modification Agreement was filed as an exhibit to a Form 8K filed November
24, 2004. The agreement extends the maturity date of the note until August 31,
2005 and allows for minimum payments of $4,000 per month and additional
contingent payments of up to $3,500 per month based on the Company's quarterly
performance. Collateral remains the same under the amendment.
(15) During fiscal 2005, Biomerica granted 169,000 stock options to purchase
shares of common stock at an exercise price of $0.33 to select employees and
consultants of the Company. The options vest over four years, and have a term of
five years. Management assigned a value of $3,500 to these options. These
options were granted under the Company's existing 1995 and 1999 Stock Option and
Restricted Stock Plan. During the quarter ended November 30, 2004 the Company
has recognized an expense of $78 attributable to these options, with the
remaining value of these options to be amortized over the options vesting
period.
During fiscal 2004, the Company sold 202,000 shares of restricted common
stock in a private placement to insiders and qualified investors at a selling
price of $.25 per share. Warrants to purchase 202,000 shares of the Company's
restricted common stock at an exercise price of $.25 were also granted as part
of the private placement. During the three months ended August 31, 2003, $48,080
was recorded as compensation expense for the excess in the market value of the
issued common stock and warrants over the consideration received. The warrants
vest immediately, expire in five years, and are exercisable at $.25 per share.
During fiscal 2004 the Company issued 10,000 shares of its common stock as
the result of the exercise of options granted in prior years. Proceeds to the
Company were $2,000.
Subsidiary Sale of Stock
During the year ended May 31, 2004 the Company recognized a reduction in
its additional paid capital in the amount of $112,719 resulting from a decrease
in its ownership percentage of Lancer as a result of Lancer's sale of common
stock.
During the quarter ended August 31, 2004 the Company recognized a reduction
in its additional paid in capital in the amount of $4,100 resulting from a
decrease in its ownership percentage of Lancer as a result of Lancer issuing
shares of common stock during the quarter.
During the quarter ended November 30, 2004 the Company recognized a
reduction in its additional paid in capital in the amount of $11,413 resulting
from a decrease in its ownership percentage of Lancer as a result of Lancer
issuing shares of Common stock during the quarter.
Subsidiary Options, Warrants and Stock Activity
During the year ended May 31, 2004, Lancer granted 120,000 options to
purchase shares of Lancer's common stock at an exercise price of $0.38 per share
as pursuant to terms of the employment agreement between Lancer and Dan Castner,
the Vice President of Sales and Marketing at Lancer. The options vest over four
years and have a term of five years. Management assigned a value of $0 to the
options.
During the year ended May 31, 2004, Lancer granted 52,500 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.38 per share
to directors of the Lancer for services rendered. The options vest over two
years and have a term of five years. Management assigned a value of $0 to the
options.
15
During the year ended May 31, 2004, Lancer granted 75,000 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.38 per share
to its Chief Executive Officer in lieu of salary. The options vest over three
years and have a term of five years. Management assigned a value of $0 to the
options.
During the year ended May 31, 2004, Lancer granted 8,000 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.50 to an
employee of Lancer for services rendered. The options vest over 3 years
beginning June 30, 2004 and have a term of five years. Management assigned a
value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 40,000 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.57 to an
employee of Lancer for services rendered. The options vest over four years and
have a term of five years. Management assigned a value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 17,500 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.60 to a new
member of its Board of Directors for services to be rendered. The options vest
over 2 years and have a term of five years. Management assigned a value of $0 to
the options.
During fiscal 2004, Lancer issued 91,346 shares of its common stock valued
at $29,000 to its Chief Executive Officer for services rendered from January
2002 to December 2003. At May 31, 2003, 69,471 of these shares were reported as
subscribed stock.
During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
stock to the Chairman of the Board of Lancer for services rendered from January
2004 to May 2004 and 31,250 shares of common stock to the Chief Executive
Officer for services rendered per agreement.
During fiscal 2004 the Board of Directors of Lancer approved a private
offering of common stock, effective March 23, 2004 and ending April 12, 2004.
The offering, to officers, board members, and key employees resulted in the sale
of 450,000 new shares at $.60 per share with total proceeds received of
$270,000. In addition, one warrant exercisable for each share purchased (450,000
warrants) was issued at $.85 per share. These warrants shall be exercisable
until April 12, 2009.
During fiscal 2005 the Board of Directors of Lancer approved the issuance
of 6,258 shares of common stock to a consultant. To date these shares have not
been issued or subscribed.
On November 19, 2004, the Board of Directors of Lancer granted 27,500 stock
options to purchase shares of Lancer's common stock at an exercise price of $.75
to certain employees of Lancer for services rendered. The options vest over four
years and have a term of ten years. Management assigned a value of $0 to the
options.
During fiscal 2005 the Board of Directors of Lancer approved the issuance
of 62,500 shares of its restricted common stock valued at $37,500 to its Chief
Executive Officer for services rendered during the current fiscal year.
(16) Reportable business segments for the six months and quarter ended November
30, 2004 and 2003 are as follows:
Six Months Three Months
Ended November 30, Ended November 30,
------------------ ------------------
2004 2003 2004 2003
---------------------------------------------------------------------------------------
Domestic sales:
Orthodontic products $1,563,000 $1,518,000 $ 733,000 $ 784,000
=======================================================================================
Medical diagnostic products $ 399,000 $ 650,000 $ 201,000 $ 256,000
=======================================================================================
Foreign sales:
Orthodontic products $1,328,000 $1,366,000 $ 677,000 $ 782,000
=======================================================================================
Medical diagnostic products $1,057,000 $ 900,000 $ 552,000 $ 448,000
=======================================================================================
16
Six Months Three Months
Ended November 30, Ended November 30,
------------------ ------------------
2004 2003 2004 2003
---------------------------------------------------------------------------------------
Net sales:
Orthodontic products $2,891,000 $2,884,000 $1,410,000 $1,566,000
Medical diagnostic products 1,456,000 1,550,000 753,000 704,000
---------------------------------------------------------------------------------------
Total $4,347,000 $4,434,000 $2,163,000 $2,270,000
=======================================================================================
Operating (loss) income:
Orthodontic products $ (161,000) $(147,000) $ (80,000) $ (2,000)
Medical diagnostic products (68,000) (293,000) (46,000) (127,000)
---------------------------------------------------------------------------------------
Total $ (229,000) $(440,000) $ (126,000) $ (129,000)
=======================================================================================
Gain (loss) from discontinued segment:
ReadyScript $ 6,601 $ (2,944) $ 6,601 $ (3,020)
---------------------------------------------------------------------------------------
Total $ 6,601 $ (2,944) $ 6,601 $ (3,020)
=======================================================================================
As of November 30,
2004 2003
Domestic long-lived assets:
Orthodontic products $ 532,000 $ 317,000
Medical diagnostic products 115,000 137,000
---------------------------------------------------
Total $ 647,000 $ 454,000
===================================================
Foreign long-lived assets:
Orthodontic products $ 106,000 $ 122,000
Medical diagnostic products 13,000 17,000
---------------------------------------------------
Total $ 119,000 $ 139,000
===================================================
Total assets:
Orthodontic products $4,299,000 $3,622,000
Medical diagnostic products 1,518,000 1,632,000
-----------------------------------------------------------------------
Total $5,817,000 $5,254,000
=======================================================================
Depreciation and amortization expense:
Orthodontic products $ 50,000 $ 25,000
Medical diagnostic products 35,000 32,000
-----------------------------------------------------------------------
Total $ 85,000 $ 57,000
=======================================================================
Capital expenditures:
Orthodontic products $ 112,000 $ 227,000
Medical diagnostic products 9,000 18,000
---------------------------------------------------
Total $ 121,000 $ 245,000
===================================================
The net sales as reflected above consist of sales of unaffiliated customers
only as there were no significant intersegment sales during the quarter ended
November 30, 2004 and 2003.
17
(17) Pursuant to the terms of the employment agreement between Lancer and Dan
Castner, the Vice President of Sales and Marketing of Lancer, dated May 20,
2003, Lancer agreed to pay Mr. Castner an annual base salary of $135,000.
In addition, Lancer granted Mr. Castner stock options on June 2, 2003, to
purchase an aggregate of 120,000 shares of Lancer's common stock at an
exercise price of $.43 per share. The stock options have a term of five
years and will vest over four years as follows: (i) 25% vesting on the
first anniversary of the date of grant; (ii) 25% vesting on the second
anniversary of the date of grant; (iii) the remaining 50% vesting as to
one-twenty fourth (1/24th) per month each month thereafter for the next two
years. Should Lancer be purchased by an affiliated third party, the options
shall vest 100%.
On November 29, 2004, the Board of Directors of Lancer approved a new
employment agreement and the promotion of Mr. Castner to President. The
agreement is for a term of two years. Mr. Castner's salary shall be
$155,000 for the first year with a possible merit increase after the first
year. Mr. Castner shall also receive a stock option for 100,000 shares at
fair market value at the time of grant to be granted no later than May 31,
2005. The agreement was filed as an exhibit to a Form 8-K filed by Lancer
November 30, 2004.
(18) On November 19, 2004 the Board of Directors at Lancer resolved that
effective January 1, 2005 , the compensation for the Company's Chairman
shall be reduced to $30,000 per year. The Directors also resolved that
effective December 1, 2004, the Company's Chief Executive Officer's
compensation is to be reduced from 31,250 shares of common stock per
quarter to 20,000 shares per quarter.
(19) In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in
Mexicali, Mexico. The agreement requires reimbursement from Biomerica for
discrete expenses such as payroll, shipping, and customs fees; the lease is
$2,000 and service fees are approximately $2,900 per month.
(20) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The
maximum potential amount of future payments the Company could be required
to make under these indemnification agreements is unlimited. However, the
Company has a directors and officer liability insurance policy that limits
its exposure and enables it to recover a portion of any future amounts
paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has
no liabilities recorded for these agreements as of November 30, 2004. The
Company enters into indemnification provisions under (i) its agreements
with other companies in its ordinary course of business, typically with
business partners, contractors, and customers, landlords and (ii) its
agreements with investors. Under these provisions the Company generally
indemnifies and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities
or, in some cases, as a result of the indemnified party's activities under
the agreement. These indemnification provisions often include
indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. In addition, in
some cases, the Company has agreed to reimburse employees for certain
expenses and to provide salary continuation during short-term disability.
The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements
as of November 30, 2004."
(21) The Chief Executive Officer and Chief Financial Officer of Biomerica are
not currently taking a cash salary. Their wages are being recorded as an
administrative expense and reported as part of accrued wages on the balance
sheet. The balance due them as of November 30, 2004 was $239,026.
18
(22) Included in accounts payable is $111,464 to a related party, due for rental
of the Company's facilities according to the terms of the lease. All of
this amount is past due.
(23) 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. The preparation of these consolidated financial
statements requires estimates and assumptions that affect the reported
amounts and disclosures.
We believe the following to be critical accounting policies as they require
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments
and estimates are appropriate and correct, actual future results may differ
from our estimates.
In general the critical accounting policies that may require judgments or
estimates relate specifically to the recognition of revenue, the Allowance
for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in
Market Value, Impairment of Long-Lived Assets, Stock Based Compensation and
Deferred Income Tax Valuation and Allowances.
We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments.
The assessment of specific receivable balances and required reserves is
performed by management and discussed with the audit committee. We have
identified specific customers where collection is probable and have
established specific reserves, but to the extent collection is made, the
allowance will be released. Additionally, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on
hand to management's forecast of customer demand. Customer demand is
dependent on many factors and requires us to use significant judgment in
our forecasting process. We must also make assumptions regarding the rate
at which new products will be accepted in the marketplace and at which
customers will transition from older products to newer products. Once a
reserve is established, it is maintained until the product to which it
relates is sold or otherwise disposed of, even if in subsequent periods we
forecast demand for the product.
In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in
future periods to realize the benefit of our deferred tax assets.
Predicting future taxable income is difficult, and requires the use of
significant judgment. At November 30, 2004, all of our deferred tax assets
were reserved. Accruals are made for specific tax exposures and are
generally not material to our operating results or financial position, nor
do we anticipate material changes to these reserves in the near future.
We have provided a full valuation reserve related to our substantial
deferred tax assets. In the future, it sufficient evidence of our ability
to generate sufficient future taxable income in certain tax jurisdictions
becomes apparent, we may be required to reduce our valuation allowances,
resulting in income tax benefits in our consolidated statement of
operations. We evaluate the realizability of the deferred tax assets and
assess the need for valuation allowance quarterly. The utilization of the
net operating loss carryforwards could be substantially limited due to
restrictions imposed under federal and state laws upon a change of
ownership.
19
(24) Risks and Uncertainties
License Agreements - Certain of the Company's sales of products are
governed by license agreements with outside third parties. All of such
license agreements to which the Company currently is a party, are for fixed
terms which will expire after ten years from the commencement of the
agreement or upon the expiration of the underlying patents. After the
expiration of the agreements or the patents, the Company is free to use the
technology that had been licensed. There can be no assurance that the
Company will be able to obtain future license agreements as deemed
necessary by management. The loss of some of the current licenses or the
inability to obtain future licenses could have an adverse affect on the
Company's financial position and operations. Historically, the Company has
successfully obtained all the licenses it believed necessary to conduct its
business.
Distribution - The Company has entered into various exclusive and
non-exclusive distribution agreements (the "Agreements") which generally
specify territories of distribution. The agreements range in term from one
to five years. The Company may be dependent upon such distributors for the
marketing and selling of its products worldwide during the terms of these
agreements. Such distributors are generally not obligated to sell any
specified minimum quantities of the Company's product. There can be no
assurance of the volume of product sales that may be achieved by such
distributors.
Government Regulations - The Company's products are subject to regulation
by the FDA under the Medical Device Amendments of 1976 (the "Amendments").
The Company has registered with the FDA as required by the Amendments.
There can be no assurance that the Company will be able to obtain
regulatory clearances for its current or any future products in the United
States or in foreign markets.
European Community - The Company is required to obtain certification in the
European Community to sell products in those countries. The certification
requires the Company to maintain certain quality standards. The Company has
been granted certification on certain products. The Company recently had
its yearly CE Mark Surveillance Audit and has been notified that it has
been recommended for recertification. There is no assurance that the
Company will be able to retain its certification in future years.
Risk of Product Liability - Testing, manufacturing and marketing of the
Company's products entail risk of product liability. The Company currently
has product liability insurance. There can be no assurance, however, that
the Company will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect the Company against losses due to product
liability. An inability could prevent or inhibit the commercialization of
the Company's products. In addition, a product liability claim or recall
could have a material adverse effect on the business or financial condition
of the Company.
(25) Subsequent Events
On December 7, 2004 the Company entered into an agreement with an
investment banking company to raise financing of between one million and
two million dollars in the form of debt on a best effort basis. There can
be no assurance that the Company will be successful in raising such funds.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
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 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.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $4,346,972 for the six months
ended November 30, 2004 as compared to $4,434,215 for the same period in the
prior fiscal year. This represents a decrease of $87,243, or 2.0% for the six
month period. Lancer had an increase for the six months of $7,092. Biomerica had
a decrease of $94,335, which resulted from a screening program sale in the prior
year only. Consolidated net sales for the quarter then ended were $2,162,533 as
compared to $2,269,856 for the same period in the previous year. This represents
a decrease of $107,323, or 4.7%. Lancer had a sales decrease of $155,663. The
decrease in sales at Lancer was primarily attributable to decreased sales in
Europe and South America. Increases in sales of $48,340 for the quarter at
Biomerica were a result of sales of new products and sales to a new distributor.
Cost of sales as a percentage of sales decreased from 70.8% to 67.5% for
the six months and decreased from 71.0% to 66.1% for the quarter. Lancer's cost
of sales as a percentage of sales decreased from 72% to 70.6% for the six months
and for the quarter decreased from 70.3% to 68.8%. The decreases at Lancer were
attributable to a domestic selling price increase which was partially offset by
increased production costs. Biomerica's cost of sales as a percentage of sales
decreased for the six months from 68.4% to 62.5%. For the quarter Biomerica's
cost of sales decreased from 72.4% to 62.2%. The decreases at Biomerica were
primarily due to the manufacturing at the Mexico facility which was not complete
in the prior fiscal year.
Selling, general and administrative costs decreased by $96,540, or 6.1% for
the six months and increased by $67,830, or 9.4% for the quarter. Lancer had
increased selling, general and administrative costs of $63,827 for the six
months and $57,246 for the quarter. The increase at Lancer was a result of costs
for product promotion, increased professional fees and the stock expense for
stock to be issued to the Chief Executive Officer and Chairman of the Board. For
the six months Biomerica had decreased selling and administrative expenses of
$32,713 due to expense related to the issuance of stock in the private placement
and higher commissions in the prior fiscal year. For the three months Biomerica
had increased expenses of $10,584.
Research and development increased by $754, or .5% for the six months and
by $4,047, or 6.0% for the quarter. Lancer had a decrease in research and
development costs of $8,984 and $3,588 for the six and three months,
respectively, due to a decrease in labor costs charged to research and
development. Biomerica had increased costs of $9,738 and increased costs of
$7,635 for the six and three months, respectively. The increased costs were a
result of higher outside services.
For the six months ended November 30, 2004, other income decreased $10,354
compared to the prior year and by $16,777 for the three months. The decrease was
primarily due to the sale of marketable securities in the prior year.
Interest expense increased by $2,203 (14.3%) for the six months compared to
the previous year and by $4,513 for the quarter. Lancer had increased interest
expense of $1,438 for the six months and quarter due to borrowing against the
line of credit to finance new equipment.
Please refer to Note 3 in the Notes to the Consolidated Financial
Statements in the Company's report on Form 10-KSB for the year ended May 31,
2004, for a more in-depth discussion of subsidiaries.
21
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2004, the Company had cash and available-for-sale
securities in the amount of $242,112 and working capital of $2,478,546. Cash and
working capital totaling $197,808 and $2,671,048 respectively, relates to the
Lancer subsidiary. Lancer's line of credit restricts Biomerica's ability to draw
on Lancer's resources and, as such, said cash, working capital and equity are
not available to Biomerica.
The Company has suffered substantial recurring losses from operations over
the last couple of years. The Company has funded its operations through debt and
equity financings, and may have to do so in the future. ReadyScript operations
were discontinued in May 2001 and Allergy Immuno Technologies was sold in May
2002. ReadyScript and Allergy Immuno Technologies were previously contributors
to the Company's losses. The Company has reduced operating costs through certain
cost reduction efforts and plans to concentrate on its core business in Lancer
and Biomerica to increase sales. There can be no assurance that the Company will
be able to become profitable, generate positive cash flow from operations or
obtain the necessary equity or debt financing to fund operations in the future.
Should the Company be unable to reduce costs adequately or should the Company be
unable to secure additional financing, the result for the Company could be the
inability to continue operations.
The Company will continue to have limited cash resources. On December 7,
2004 the Company entered into an agreement with an investment banking company to
raise financing of between one million and two million dollars in the form of
debt on a best effort basis. There can be no assurance that the Company will be
successful in raising such funds or in consummating any other funding
transaction in the future, or if the Company does consummate such transactions,
that the terms and conditions of such financing will not be unfavorable to the
Company.
Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern for a reasonable period of time, and have, therefore
modified their audit report on the Company's annual consolidated financial
statements as of and for the year ended May 31, 2004 in the form of an
explanatory paragraph describing the events that have given rise to this
uncertainty. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations.
Biomerica entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to the
Company, as needed, up to $500,000 for working capital needs. The line of credit
bore interest at 8%, was secured by accounts receivable and inventory, and
expired September 13, 2003. 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. A warrant for
40,000 shares of restricted common stock exercisable at a price of $.51 per
share was awarded as compensation for the forbearance. The note payable is
secured by all of the Company's assets except for the Lancer common stock owned
by Biomerica. The note was due September 1, 2004. There was $313,318 of
outstanding principal and $6,003 interest payable under this note payable at
November 30, 2004. On November 19, 2004, the Company entered into an agreement
entitled "Amendment of the Note, Loan and Modification Agreement". This amends
the "Loan Modification, Forbearance and Security Agreement" and "Amended and
Restated Promissory Note" which were included as exhibits to the Form 10QSB
filed April 14, 2004. The Amendment of the Note, Loan and Modification Agreement
was filed as an exhibit to a Form 8K filed November 24, 2004. The agreement
extends the maturity date of the note until August 31, 2005 and allows for
minimum payments of $4,000 per month and additional contingent payments of up to
$3,500 per month based on the Company's quarterly performance. Collateral
remains the same under the amendment.
22
During the six months ended November 30, 2004, the Company operations used
cash of $201,973. This compares to cash used by operations of $21,225 in the
same period in the prior fiscal year. The Lancer subsidiary used cash in
operations of $144,405 during the six months ended November 30, 2004 and $53,281
in the same period in the prior fiscal year. Cash provided by financing
activities was $203,888, which was a result of an increase in borrowings on the
line of credit at Lancer of $150,000, change in minority interest of $45,000 and
sale of marketable securities of $8,888 at Biomerica.
The Company purchased $121,111 in fixed assets during the first six month
of this fiscal year. Of this, $111,932 was a result of expenditures at the
Lancer subsidiary.
The Chief Executive Officer and Chief Financial Officer of Biomerica are
not currently taking a cash salary. Their wages are being recorded as an
administrative expense and reported as part of accrued wages on the balance
sheet. The amount owed for this as of November 30, 2004 is $239,026.
Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective June
20, 2002, for failure to comply with the net tangible assets or shareholders'
equity requirements as set forth in Marketplace Rule 4310(c)(2)(B). The
Company's securities were immediately eligible to trade on the OTC Bulletin
Board and are traded under the symbol BMRA.OB.
At November 30, 2004, Lancer has a $400,000 line of credit with Community
National Bank, (formerly Cuyamaca Bank)expiring January 8, 2005. Borrowings are
made at prime plus 2.0% (7.0% at November 30,2004), and are limited to 80% of
accounts receivable less than 90 days old. The outstanding balance at November
30, 2004 was $150,000 and the unused portion available was approximately
$190,000. Lancer requested that Community National Bank reserve $60,000 of its
available credit line as a guarantee of credit with a European supplier. Lancer
is in compliance with its debt covenants at November 30, 2004.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending agreement
for the line of credit requires, among other things, that Lancer maintain a
balance sheet net worth of $2,700,000 and that a zero outstanding balance be
maintained for 30 consecutive days during the term. Proceeds from this line
cannot be used to support the operations of Biomerica.
The Lancer line of credit expired January 8, 2005. The Community National
Bank has verbally agreed to renew the line of credit for a year. The
documentation is currently being prepared for signature.
Lancer also had a term loan for $100,000 with Community National Bank that
was paid off in May 2004. This loan required monthly payments of approximately
$2,300 (principal and interest) at an interest rate of prime plus 2% (6% at May
31, 2004).
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors discussed
elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
abroad, that may affect the general economic climate and performance of
Biomerica 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 our 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 operation as a whole; failure to manage the future
expansion of our business could have an adverse affect on our revenues and
profitability; possible costs in complying with government regulations and the
delays in receiving required regulatory approvals or the enactment of new
adverse regulations or regulatory requirements; numerous competitors, most of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or medical professionals
alleging harm caused by the use of or exposure to our products; quarterly
variations in operating results caused by a number of factors, including
business and industry conditions and other factors beyond our control. All of
these factors make it difficult to predict operating results for any particular
period.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the
Company's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of November 30, 2004,
that the design and operation of the Company's "disclosure controls and
procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") are effective to ensure that information
required to be disclosed by the Company in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the Company's management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
During the quarter ended November 30, 2004, there were no changes in the
Company's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2004 Annual Meeting of the Company's stockholders was held on
November 19, 2004. The only matter voted upon at the meeting, as set
forth in the proxy statement dated September 28, 2004, as filed with
the Securities and Exchange Commission pursuant to Rule 14 under the
Securities Act of 1934, was the election of directors. The following
summarizes the voting:
Proposal No. 1: Election of Directors
Name For Votes Withheld
---- --- --------------
Barbieri 4,955,821 18,315
Cano 4,961,121 13,015
Irani 4,957,371 16,765
Moore 4,957,721 16,415
All directors were elected.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Reports on Form 8-K were filed by
Biomerica on June 3 and 8, September 24 and November 24, 2004. Lancer
filed reports on Form 8-K on June 3 and 8, September 24 and November
30, 2004.
(a) Exhibits
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 302
and 906 of the Sarbanes-Oxley Act of 2002.
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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.
Date: January 14, 2005
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary S. Irani
Chief Executive Officer
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