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 August 31, 2003 Commission File No. 0-8765
--------------- ------
BIOMERICA, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2645573
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
--------------------------------------------------------------------------------
(Not applicable)
--------------------------------------------------------------------------------
(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 October 13, 2003.
BIOMERICA, INC.
INDEX
PART I
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three Months Ended
August 31, 2003 and 2002..........................................2 & 3
Condensed Consolidated Balance Sheet (unaudited) -
August 31, 2003...................................................4 & 5
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended August 31, 2003 and 2002...........................6
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) - Three Months Ended August 31, 2003...............7
Notes to Consolidated Financial Statements.........................8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................15-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........18
Item 4. Controls and procedures..............................................18
PART II Other Information....................................................19
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities and Use of Proceeds............................19
Item 3. Defaults upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures...........................................................20
i
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended
August 31,
2003 2002
------------ ------------
Net sales .................................................... $ 2,164,360 $ 2,089,507
Cost of sales ........................................... (1,503,564) (1,434,429)
------------ ------------
Gross profit ............................................ 660,796 655,078
------------ ------------
Operating Expenses:
Selling, general and administrative ..................... 897,549 757,759
Research and development ................................ 74,340 47,877
------------ ------------
971,889 805,636
------------ ------------
Operating loss from continuing operations .................... (311,093) (150,558)
------------ ------------
Other Expense (income):
Interest expense ........................................ 10,462 (10,797)
Other income, net ....................................... (7,011) 47,981
------------ ------------
3,451 37,184
------------ ------------
Loss from continuing operations, before minority interest
in net loss of consolidated subsidiaries and income taxes (314,544) (113,374)
Minority interest in net losses of consolidated subsidiaries . 96,580 2,004
------------ ------------
Loss from continuing operations, before income taxes ......... (217,964) (111,370)
Income tax expense ........................................... 0 0
------------ ------------
Net loss from continuing operations .......................... (217,964) (111,370)
2
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
Discontinued operations:
Income (loss) from discontinued operations, net ............. 76 (24,094)
-------------- --------------
Net loss ...................................................... (217,888) (135,464)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on available-for-sale securities ..... 41,503 (1,440)
-------------- --------------
Comprehensive loss ............................................ $ (176,385) $ (136,904)
============== ==============
Basic net loss per common share:
Net loss from continuing operations ...................... $ (.04) $ (.02)
Net loss from discontinued operations .................... .00 (.01)
-------------- --------------
Basic net loss per common share ............................... $ (.04) $ (.03)
============== ==============
Diluted net loss per common share:
Net loss from continuing operations ...................... $ (.04) $ (.02)
Net loss from discontinued operations .................... .00 (.01)
-------------- --------------
Diluted net loss per common share ............................. $ (.04) $ (.03)
============== ==============
Weighted average number of common and common equivalent shares:
Basic and diluted ........................................ 5,716,607 5,249,216
============== ==============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
August 31,
2003
-----------
Assets
Current Assets
Cash and cash equivalents ........................................... $ 287,748
Available for-sale securities ....................................... 54,615
Accounts receivable, less allowance for doubtful accounts of $114,903 1,495,083
Inventories, net .................................................... 2,718,280
Notes receivable .................................................... 2,419
Prepaid expenses and other .......................................... 145,422
-----------
Total Current Assets .......................................... 4,703,567
Inventory, non-current .................................................. 26,000
Property and Equipment, net of accumulated depreciation and amortization 534,525
Intangible assets, net of accumulated amortization ...................... 60,303
Other Assets ............................................................ 56,819
-----------
$5,381,214
===========
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
August 31,
2003
-------------
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit ............................................. $ 421
Accounts payable and accrued liabilities ................... 1,176,826
Accrued compensation ....................................... 425,353
Current portion of shareholder loan ........................ 74,641
Net liabilities from discontinued operations ............... 364,834
-------------
Total Current Liabilities ............................. 2,042,075
Shareholder loan ................................................ 263,194
-------------
Total Liabilities ............................................... 2,305,269
-------------
Minority interest ............................................... 2,051,911
-------------
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 ................................. 17,204,073
Accumulated other comprehensive gain ....................... 31,846
Accumulated deficit ........................................ (16,672,078)
-------------
Total Shareholders' Equity ...................................... 1,024,034
-------------
Total Liabilities and Equity .................................... $ 5,381,214
=============
The accompanying notes are an integral part of these statements.
5
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended August 31, 2003 2002
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations .............................. $(217,964) $(111,370)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................... 27,261 35,887
Realized gain on sale of available for-sale securities ...... --
Minority interest in net loss of consolidated
Subsidiary ................................................ (96,580) (2,004)
Common stock, warrants and options issued for services
rendered .................................................. 48,080 28,599
Provision for losses on accounts receivable ................. (5,142) 1,136
Changes in current assets and liabilities:
Accounts Receivable ....................................... 173,295 145,278
Insurance claim receivable ................................ -- 81,758
Inventories ............................................... (69,348) 62,755
Prepaid expenses and other current assets ................. 23,582 (20,055)
Accounts payable and other accrued liabilities ............ (103,308) (163,142)
Accrued compensation ...................................... 92,453 (15,317)
---------- ----------
Net cash (used in) provided by operating activities .............. (127,671) 43,525
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ......................... (165,330) (2,966)
Other assets ................................................ (13,419) --
---------- ----------
Net cash used in investing activities ............................ (178,749) (2,966)
---------- ----------
Cash flows from financing activities:
Change in minority interest ................................. 2,430 5,252
Increase (decrease) in shareholder loan ..................... 34,285 (37,350)
Private placement, net of offering costs .................... 30,500 --
Exercise of stock options ................................... 2,000 --
Decrease in line of credit .................................. (5) (64,461)
---------- ----------
Net cash provided by (used in) financing activities .............. 69,210 (96,559)
---------- ----------
Net cash used in discontinued operations ......................... (209) (1,795)
---------- ----------
Net decrease in cash and cash equivalents ........................ (237,419) (57,795)
Cash at beginning of period ...................................... 525,167 329,277
---------- ----------
Cash at end of period ............................................ $ 287,748 $ 271,482
========== ==========
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 $ --
========== ==========
The accompanying notes are an integral part of these statements.
6
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 2003
Common Stock
Common Stock Subscribed
--------------------------- ---------------------------
Accumulated
Number Additional Other
of Paid-in Comprehensive Accumulated
Shares Amount Capital Shares Amount Gain (loss) Deficit Total
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
May 31, 2003 5,522,431 $ 441,793 $ 17,117,393 18,000 $ 4,500 $ (9,657) $(16,454,190) $ 1,099,839
Exercise of stock
Options 10,000 800 1,200 2,000
Change in
unrealized
gain on available 41,503 41,503
for sale securities
Net proceeds from
private placement 220,000 17,600 37,400 (18,000) (4,500) 50,500
Compensation
expense related
to the fair
value of common stock
and warrants
issued to employees
in excess of con-
sideration received 48,080 48,080
Net loss (217,888) (217,888)
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at 5,752,431 $ 460,193 $ 17,204,073 -- $ -- $ 31,846 $(16,672,078) $ 1,024,034
August 31, 2003 ============= ============= ============= ============= ============= ============= ============= =============
7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2003
(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, 2003, for a summary of
significant accounting policies utilized by the Company.
(2) As of August 31, 2003, the Company had cash and available-for-sale
securities in the amount of $342,263 and working capital of $2,661,492.
Cash and working capital totaling $287,748 and $2,537,257, 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, Inc. 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 as a going concern.
The Company will continue to have limited cash resources. Although the
Company's management recognizes the imminent need to secure additional
financing there can be no assurance that the Company will be successful in
consummating any such transaction or, if the Company does consummate such
transaction, that the terms and conditions of such financing.
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, 2003, 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 Com- pany 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's shareholder's line of credit
expired September 13, 2003. The unpaid principal and interest of $337,835
was converted into a note payable bearing interest at 8% and payable in
monthly installments of $8,248 over four years.
During the quarter ended August 31, 2003, the Company's operations used
cash of $127,671. This compares to cash provided by operations of $43,525
in the same period in the prior fiscal quarter. Cash provided by financing
activities was $69,210, which resulted from a private placement at
Biomerica of $30,500.
(3) In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition And Disclosure," which amended FAS No. 123
"Accounting for Stock-Based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
Additionally, the statement amends the disclosure requirements of FAS No.
123 to require prominent disclosures in the annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial statements for fiscal years ending
after December 15, 2002. In compliance with FAS No. 148, we have elected to
continue to follow the intrinsic value method in accounting for our
stock-based employee compensation plan as defined by APB No. 25,
"Accounting for Stock Issued to employees."
8
The Black Sholes 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 August 31 is as follows:
AUGUST 31, 2003 2002
--------------------------------------------------------------------------------
Net loss from continuing
operations, as reported $ (217,964) $ (111,370)
Plus: Stock-based employee compensation
expense included in reported net loss 48,080 16,182
Less: Stock-based employee compensation
expense determined using fair value
based method (73,304) (28,643)
--------------------------------------------------------------------------------
Net loss from continuing operations, pro forma $ (243,188) $ (123,831)
================================================================================
Pro forma net loss from
continuing operations
per share - basic $ (0.04) $ (0.02)
================================================================================
Pro forma net loss from
continuing operations
per share - diluted $ (0.04) $ (0.02)
================================================================================
Net income (loss) from discontinued
operations, as reported $ 76 (24,094)
Plus: Stock-based employee compensation
expense included in reported net loss -- --
Less: Stock-based employee compensation
expense determined using fair value
based method -- --
--------------------------------------------------------------------------------
Net loss from discontinued operations, pro forma $ 76 $ (24,094)
================================================================================
Pro forma net loss from
discontinued operations
per share - basic $ (0.00) $ (0.01)
================================================================================
Pro forma net loss from
discontinued operations
per share - diluted $ (0.00) $ (0.01)
================================================================================
(4) The following summary presents the options granted, exercised, expired, and
outstanding as of August 31, 2003:
Weighted
Average
Number of Options Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2003 990,386 75,000 1,065,386 $0.99
Granted -- -- -- $0.00
Exercised -- (10,000) (10,000) $0.20
Expired -- -- -- $0.00
---------- ---------- ---------- ----------
Outstanding
August 31, 2003 990,386 65,000 1,055,386 $1.00
========== ========== ========== ==========
Weighted
Average
Number of Warrants Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2003 1,285,688 1,131,746 2,417,434 $2.79
Granted 170,000 32,000 202,000 $0.25
Exercised -- -- -- $0.00
Expired -- -- -- $0.00
---------- ---------- ---------- ----------
Outstanding
August 31, 2003 1,455,688 1,163,746 2,619,434 $2.60
========== ========== ========== ==========
9
(5) The information set forth in these condensed 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, 2003, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 11 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, 2003, for information on commitments and
contingencies.
(9) Aggregate market value exceeded cost of available-for-sale securities by
approximately $31,846 at August 31, 2003.
(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.
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
EPS computations.
For the Three Months Ended August 31, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (217,964) - $ (.04)
Gain (loss) from discontinued
operations ..................... 76 - .00
------------ ------------ ------------
$ (217,888) 5,716,607 $ (.04)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (217,888) 5,716,607 $ (.04)
============ ============ ============
10
For the Three Months Ended August 31, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (111,370) - $ (.02)
Loss from discontinued
operations ...................... (24,094) - (.01)
------------ ------------ ------------
$ (135,464) 5,249,216 $ (.03)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders $ (135,464) 5,249,216 $ (.03)
============ ============ ============
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 August 31, 2003, there was a total of 3,674,820 potential dilutive shares
of common stock outstanding.
(11) In August 2001, the FASB issued Statement of Financial Accounting Standards
FAS No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations."
This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal operations of
long-lived assets, except for certain obligations of leases. This statement
is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The adoption of SFAS 143 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
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 our consolidated
financial statements.
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. 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 SFAS
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, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 did not have a significant effect On
the Company's consolidated financial position, results of operations, or cash
flows.
11
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Three Months Ended
8/31/03 8/31/02
------- -------
Revenues from sales to unaffiliated customers:
United States $1,128,000 $1,253,000
Asia 45,000 66,000
Europe 529,000 362,000
South America 146,000 97,000
Middle East 60,000 74,000
Oceania 132,000 101,000
Other 124,000 137,000
---------- ----------
$2,164,000 $2,090,000
========== ==========
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) Lancer has a $400,000 line of credit with a financial institution, expiring
October 24, 2003. Borrowings are made at prime plus 2.0%, in no event less
than 8.0%, (8.0% at August 31, 2003) and are limited to 80% of accounts
receivable less than 90 days old with a liquidity factor of 94%. The
outstanding balance at August 31, 2003 was $421 and the unused portion
available was approximately $271,000. Future financing options are being
explored.
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 tangible net worth ratio of $2,100,000, which was met, and that
receivables' payments be sent to a controlled lockbox. In addition to
interest, a management fee of .25% of the average monthly outstanding loan
balance and an unused balance fee of .0425% on the average monthly unused
portion available are required. Lancer is not required to maintain
compensating balances in connection with this lending agreement. Proceeds
from this line cannot be used to support the operations of Biomerica.
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. The outstanding principal and
interest on September 12, 2003 was $337,835, including principal of
$288,050 and interest of $48,985, all of which was converted into a note
payable bearing interest at 8% with interest and principal due monthly of
$8,248. The remaining unpaid principal and interest, if any, are due
September 12, 2007. The note is secured by inventory and receivables of
Biomerica.
(15) In June 2003, the Company issued 202,000 shares of restricted common stock
in a private placement to insiders and qualified investors. The stock was
sold at $.25 per share and had one warrant for the purchase of restricted
common stock attached to each share of common stock purchased. 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.
On June 2, 2003, Lancer granted 52,500 stock options to purchase shares of
Lancer common stock at an exercise price of $.43 per share to directors of
the Lancer for services rendered. The options vest over two years and have
a term Of five years.
On June 2, 2003, Lancer granted 75,000 stock options to purchase shares of
Lancer common stock at an exercise price of $.43 per share to its Chief
Executive Officer in lieu of salary. The options vest over three years and
have a term of five years.
12
On June 2, 2003, the Company granted 120,000 stock options to purchase
shares of the Lancer's common stock at an exercise price of $.43 per share
as pursuant to terms of the Employment agreement between Lancer and Dan
Castner, the Vice President of Sales and Marketing. The options vest over
four years and have a term of five years.
(16) Reportable business segments for the quarter ended August 31, 2003 and 2002
are as follows:
2003 2002
------------------------------------------------------------
Domestic sales:
Orthodontic products $ 734,000 $ 755,000
============================================================
Medical diagnostic products $ 394,000 $ 498,000
============================================================
Foreign sales:
Orthodontic products $ 584,000 $ 531,000
============================================================
Medical diagnostic products $ 452,000 $ 306,000
============================================================
Net sales:
Orthodontic products $1,318,000 $ 1,286,000
Medical diagnostic products 846,000 804,000
------------------------------------------------------------
Total $2,164,000 $ 2,090,000
============================================================
Operating loss:
Orthodontic products $(146,000) $ (46,000)
Medical diagnostic products (165,000) (105,000)
------------------------------------------------------------
Total $(311,000) $ (151,000)
============================================================
Operating loss from discontinued segment:
AIT $ -- $ --
ReadyScript 76 (24,000)
------------------------------------------------------------
Total $ 76 $ (24,000)
============================================================
Domestic long-lived assets:
Orthodontic products $ 279,000 $ 91,000
Medical diagnostic products 151,000 197,000
------------------------------------------------------------
Total $ 430,000 $ 288,000
============================================================
Foreign long-lived assets:
Orthodontic products $ 86,000 $ 23,000
Medical diagnostic products 18,000 --
------------------------------------------------------------
Total $ 104,000 $ 23,000
============================================================
Total assets:
Orthodontic products $3,502,000 $ 3,467,000
Medical diagnostic products 1,879,000 1,447,000
------------------------------------------------------------
Total $5,381,000 $ 4,914,000
============================================================
13
Depreciation and amortization
expense:
Orthodontic products $ 12,000 $ 24,000
Medical diagnostic products 15,000 12,000
------------------------------------------------------------
Total $ 27,000 $ 36,000
============================================================
Capital expenditures:
Orthodontic products $ 147,000 $ 2,000
Medical diagnostic products 18,000 1,000
------------------------------------------------------------
Total $ 165,000 $ 3,000
============================================================
The net sales as reflected above consist of sales of unaffiliated customers only
as there were no significant intersegment sales during the quarter ended August
31, 2003 and 2002.
(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%.
(18) 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; lease and
security deposits of approximately $2,000 and $1,100 per month,
respectively; and service fees of approximately $2,900 per month.
(19) 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 August 31, 2003. 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 August 31, 2003."
14
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 ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS
TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $2,164,360 for the first quarter of
fiscal 2004 as compared to $2,089,507 for the same period in the previous year.
This represents an increase of $74,853, or 3.6%. Of the total consolidated net
sales for fiscal 2004, $1,318,107 is attributable to Lancer, and $846,253 to
Biomerica. Lancer sales increased by $32,608 over the previous fiscal year due
to increases in Lancer's international sales. Biomerica sales increased by
$42,245 primarily due to sales of new products and increased foreign sales.
Cost of sales as a percentage of sales increased from 68.6% to 69.6%. Lancer's
cost of sales as a percentage of sales increased from 71.9% to 74.0%. This
increase was attributable to an increase in scrap and a change in the product
mix. Biomerica's costs decreased from 63.5% of sales to 62.4% due to a change in
the product mix.
Selling, general and administrative costs increased by $139,790, or 18.4%.
Lancer had increased selling, general and administrative costs of $63,601
primarily due to increases in payroll and advertising costs in the sales and
marketing department. Biomerica had an increase of $76,189, which was due to
higher commissions as well as compensation expense recorded in connection the
issuance of common stock and warrants to employees.
Research and development increased by $26,463, or 55.3%. Lancer had an
increase in research and development costs of $17,316 due to the resumption of
product development. Biomerica had increased costs of $9,147 primarily due to
higher wages and related costs.
For the three months ended August 31, 2003, other income of $7,011 was
realized as compared to $47,981 in the prior year which was a result of the
insurance claim settlement of $47,981 for the theft of inventory at the Lancer
Orthodontics Inc.'s Mexicali facility.
Interest expense increased by $21,259 compared to the previous year due to
increased borrowings at Biomerica and lower balances on the line of credit at
Lancer.
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, 2003, for a more
in-depth discussion of subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2003, the Company had cash and available-for-sale securities in
the amount of $342,263 and working capital of $2,661,492. Cash and working
capital totaling $287,748 and $2,537,257, 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.
15
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 as a going concern.
The Company will continue to have limited cash resources. Although the Company's
management recognizes the imminent need to secure additional financing there can
be no assurance that the Company will be successful in consummating any such
transaction or, if the Company does consummate such transaction, that the terms
and conditions of such financing will not be unfavorable to us.
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, 2003 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's shareholder's line of credit expired
September 13, 2003. The unpaid principal and interest of $337,835 was converted
into a note payable bearing interest at 8% and payable in monthly of $8,248
installments over four years.
During the quarter ended August 31, 2003, the Company operations used cash of
$127,671. This compares to cash provided by operations of $43,525 in the same
period in the prior fiscal year. Of this there was cash used in operations of
$72,243 and cash provided of $146,368 at the Lancer subsidiary. Cash provided by
financing activities was $69,210, which resulted from a private placement of
$30,500.
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 August 31, 2003, Lancer had a $400,000 line of credit with a financial
Institution, through October 24, 2003. Borrowings are made at prime plus 2.0%
(8.0% at August 31, 2002) and are limited to 80% of accounts receivable less
than 90 days old with a liquidity factor of 94%. The outstanding balance at
August 31, 2003 was $421 and the unused portion available was approximately
$271,000.
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 tings, that Lancer maintain a tangible net
worth ratio of $2,100,000, which was met, and that receivables' payments be sent
to a controlled lockbox. In addition to interest, a management fee of .25% of
the average monthly outstanding loan balance and an unused balance fee of .0425%
on the average monthly unused portion available are required. Lancer is not
required to maintain compensating balances in connection with this lending
agreement. Proceeds from this line cannot be used to support the operations of
Biomerica.
16
Biomerica, Inc. entered into 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 expired September
12, 2003. The outstanding principal and interest on September 12, 2003 was
$337,835, including principal of $288,850 and interest of $48,985, all of which
was converted into a note payable bearing interest at 8% with interest and
principal due monthly of $8,248. The remaining principal and interest, if any,
are due September 12, 2007. The note is secured by inventory and receivables of
Biomerica.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Note 2 of the Notes to Consolidated Financial Statements contained in the
Company's annual report on Form 10KSB for the period ended August 31, 2003,
describes the significant accounting policies essential to the consolidated
financial statements. The preparation of these financial statements requires
estimates and assumptions that affect the reported amounts and disclosures.
We believe the following to be critical accounting policies as they require more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Although we believe that our judgments and estimates are
appropriate and correct, actual future results may differ from our estimates.
In general the critical accounting policies that may require judgments or
estimates relate specifically to the Allowance for Doubtful Accounts, Inventory
Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived
Assets, Stock Based Compensation and Income Tax Accruals.
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 probably and have established specific reserves,
but to the extent collection is made, the allowance will be released.
Additionally, of 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 August 31, 2003,
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.
Please refer to the annual report on Form 10-KSB for the period ended May 31,
2003 for an in-depth discussion of risk factors.
17
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, as were experiences in fiscal year 2002, 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 offier, respectively) have
concluded, based on their evaluation as of August 31, 2003, 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 August 31, 2003, 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.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The following shares of
Restricted common stock were issued during the three months Ended
August 31, 2003:
Class or Persons Price
Date Title Amount Sold to Per Share Total
---- ----- ------ ------- --------- -----
6/5/03 common 46,000 qualified investors $.25 $11,500
6/6/03 common 8,000 qualified investor $.25 2,000
6/9/03 common 8,000 qualified investor $.25 2,000
6/17/03 common 100,000 qualified investor $.25 25,000
and insider
6/23/03 common 20,000 qualified investor $.25 5,000
6/26/03 common 20,000 qualified investor $.25 5,000
The exemption relied upon for the issuance of the unregistered shares
was that the shares were issued to qualified investors within the
meaning of Securities and Exchange Commission Rule 501, Regulation D.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2002 Annual Meeting of the Company's stockholders was held on
September 2, 2003. Two matters were voted on at the meeting, as set
Forth in the proxy statement dated June 26, 2003, as filed with the
Securities and Exchange Commission pursuant to Rule 14 under the
Securities Act of 1934. The following summarizes the voting:
Proposal No. 1: Election of Directors
Name For Votes Withheld
---- --- --------------
Barbieri 4,745,095 230,842
Cano 4,745,095 230,842
Irani 4,744,305 232,184
Moore 4,744,705 231,232
Orlando 4,745,095 230,842
All directors were elected.
Proposal No. 2: Proposal to Ratify and Approve the Company's 2002
Stock Incentive Plan
For Against Abstain
--- ------- -------
1,870,275 400,481 70,483
Proposal No. 2 did not receive a plurality of the votes and therefore
was not approved.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(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.
19
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: October 20, 2003
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary S. Irani
Chief Executive Officer
20