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 February 29, 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 April 14, 2004.
1
BIOMERICA, INC.
INDEX
PART I
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three and Nine Months Ended
February 29, 2004 and February 28, 2003...........................3 & 4
Condensed Consolidated Balance Sheet (unaudited) -
February 29, 2004.................................................5 & 6
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended February 29, 2004 and February 28, 2003.............7
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) - Nine Months Ended February 29, 2004..............8
Notes to Consolidated Financial Statements (unaudited).............9-19
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................20-23
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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Nine Months Ended Three Months Ended
February 29, February 29,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ................................................... $ 6,899,088 $ 6,517,414 $ 2,464,873 $ 2,291,377
Cost of sales .......................................... 4,784,264 4,515,017 1,646,437 1,562,663
------------ ------------ ------------ ------------
Gross profit ........................................... $ 2,114,824 $ 2,002,397 818,436 728,714
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative .................... 2,250,086 2,113,020 655,211 655,151
Research and development ............................... 207,123 185,459 65,370 75,253
------------ ------------ ------------ ------------
2,457,209 2,298,479 720,581 730,404
------------ ------------ ------------ ------------
Operating loss from continuing operations ................... (342,385) (296,082) 97,855 (1,690)
------------ ------------ ------------ ------------
Other Expense (income):
Interest expense ....................................... 24,120 25,273 8,744 7,573
Other (income) expense, net ............................ (54,514) (51,108) (21,256) 814
------------ ------------ ------------ ------------
(30,394) (25,835) (12,512) 8,387
------------ ------------ ------------ ------------
Loss from continuing operations, before minority interest
in net (loss) gain of consolidated subsidiary and
income taxes ............................................. (311,991) (270,247) 110,367 (10,077)
Minority interest in net (loss) gain of consolidated
subsidiary ................................................ (48,069) 31,209 45,750 13,343
------------ ------------ ------------ ------------
(Loss) gain from continuing operations, before income taxes . (263,922) (301,456) 64,617 (23,420)
Income tax expense .......................................... 26 3,018 26 1,224
------------ ------------ ------------ ------------
Net (loss) gain from continuing operations .................. (263,948) (304,474) 64,591 (24,644)
3
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
Nine Months Ended Three Months Ended
February 29, February 29,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Discontinued operations:
(Loss) income from discontinued operations, net ............. (4,359) (40,022) (1,415) (1,491)
------------- ------------- ------------- -------------
Net (loss) gain ............................................... (268,307) (344,496) 63,176 (26,135)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on available-for-sale securities ..... 35,580 (2,122) 13,018 (365)
------------- ------------- ------------- -------------
Comprehensive (loss) gain ..................................... $ (232,727) $ (346,618) $ 76,194 $ (26,500)
============= ============= ============= =============
Basic net (loss) gain per common share:
Net (loss) gain from continuing operations ............... $ (.05) $ (.06) $ .01 $ (.00)
Net (loss) from discontinued operations .................. (.00) (.01) (.00) (.00)
------------- ------------- ------------- -------------
Basic net (loss) gain per common share ........................ $ (.05) $ (.07) $ .01 $ (.00)
============= ============= ============= =============
Diluted net (loss) gain per common share
Net (loss) gain from continuing operations ............... $ (.05) $ (.06) $ .01 $ (.00)
Net loss from discontinued operations .................... (.00) (.01) (.00) (.00)
------------- ------------- ------------- -------------
Diluted net loss per common share ............................. $ (.05) $ (.07) $ .01 $ (.00)
============= ============= ============= =============
Weighted average number of common and common equivalent shares: 5,726,993 5,224,867 5,752,431 5,258,475
Basic and diluted ........................................ ============== ============== ============= ==============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
February 29,
2004
-----------
Assets
Current Assets (Notes 2 & 14)
Cash and cash equivalents ............................................. $ 178,923
Available for-sale securities ......................................... 33,577
Accounts receivable, less allowance for doubtful accounts of $165,708 . 1,746,278
Inventories, net of reserve of $227,079 ............................... 2,637,195
Notes receivable ...................................................... 4,119
Prepaid expenses and other ............................................ 152,210
-----------
Total Current Assets ............................................ 4,752,302
Inventory, non-current .................................................... 25,000
Property and Equipment, net of accumulated depreciation and amortization .. 659,340
Intangible assets, net of accumulated amortization ........................ 41,360
Other Assets .............................................................. 62,904
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$5,540,906
-----------
The accompanying notes are an integral part of these statements.
5
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
February 29,
2004
-------------
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of term loan .............................. $ 25,004
Accounts payable and accrued liabilities .................. 1,205,018
Accrued compensation ...................................... 472,711
Shareholder loan .......................................... 312,216
Net liabilities from discontinued operations .............. 368,504
-------------
Total Current Liabilities ............................ 2,383,453
Long term portion of term loan ................................. 72,927
Long term portion of shareholder debt .......................... 4,000
-------------
Total Liabilities .............................................. 2,460,380
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Minority interest .............................................. 2,105,742
-------------
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 ................................ 17,211,165
Accumulated other comprehensive gain ...................... 25,923
Accumulated deficit ....................................... (16,722,497)
-------------
Total Shareholders' Equity ..................................... 974,784
-------------
Total Liabilities and Equity ................................... $ 5,540,906
=============
The accompanying notes are an integral part of these statements.
6
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended February 29, 2004 2003
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ................................ $(263,948) $(304,474)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ................................. 95,075 106,138
Realized gain on sale of available-for-sale security .......... 15,115 --
Minority interest in net (loss) gain of consolidated Subsidiary (48,069) 31,209
Common stock, warrants and options issued for services rendered 55,172 67,517
Provision for losses on accounts receivable ................... 45,663 (1,960)
Warrant and options issued for services rendered .............. -- 48,546
Changes in current assets and liabilities:
Accounts Receivable ......................................... (128,705) (32,181)
Inventories ................................................. 12,737 414,240
Prepaid expenses and other current assets ................... 15,094 41,932
Accounts payable and other accrued liabilities .............. (75,116) 49,866
Accrued compensation ........................................ 129,811 17,259
---------- ----------
Net cash (used in) provided by operating activities ................ (147,171) 438,092
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ........................... (339,016) (90,328)
Other assets .................................................. (19,504) (3,651)
Purchases of intangibles ...................................... -- (21,987)
---------- ----------
Net cash used in investing activities .............................. (358,520) (115,966)
---------- ----------
Cash flows from financing activities:
Issuance of shares by subsidiary .............................. 7,750 17,980
Increase (decrease) in shareholder loan ....................... 2,666 --
Private placement, net of offering costs ...................... 50,500 (46,750)
Proceeds from sale of common stock subscribed ................. -- 25,000
Exercise of stock options ..................................... 2,000 --
Decrease in line of credit .................................... (426) (65,191)
Increase in term loan ......................................... 97,931 --
---------- ----------
Net cash provided by (used in) financing activities ................ 160,421 (68,961)
---------- ----------
Net cash used in discontinued operations ........................... (974) (2,295)
---------- ----------
Net (decrease) increase in cash and cash equivalents ............... (346,244) 250,870
Cash at beginning of period ........................................ 525,167 329,277
---------- ----------
Cash at end of period .............................................. $ 178,923 $ 580,147
========== ==========
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.
7
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED February 29, 2004
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 35,580 35,580
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
consideration received 55,172 55,172
Net loss (268,307) (268,307)
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at 5,752,431 $ 460,193 $ 17,211,165 -- $ -- $ 25,923 $(16,722,497) $ 974,784
February 29, 2004 ============= ============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
February 29, 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, 2003, for a summary of
significant accounting policies utilized by the Company.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements, and the report amounts of revenues and expenses
during the reporting period. Significant estimates made by Biomerica's
and Lancer's management include, but are not limited to, allowances for
doubtful accounts, allowances for sales returns, valuation of
inventories, realizability of property and equipment through future
operations and realizability of deferred tax assets. Actual results could
materially differ from those estimates.
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. Please see the Company's
Annual Report on Form 10-KSB for the fiscal year ended May 31, 2003 for
more detailed footnotes.
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.
(2) As of February 29, 2004, the Company had cash and available-for-sale
securities in the amount of $212,500 and working capital of $2,368,849.
Cash and working capital totaling $170,471 and $2,555,175, 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
operations. 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
operating.
9
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 over four years. The Company was making
payments of $7,300 per month towards principal and interest. As of
February 29, 2004 the terms of the loan were still being negotiated. On
March 22, 2004 a Loan Modification, Forbearance and Security Agreement
and an Amended and Restated Promissory Note were finalized. The balance
of interest and principal as of March 22, 2004 was $313,318. The terms of
the agreements are that Janet Moore has agreed to a forbearance of any
payments for the length of the agreement, which expires September 1,
2004. Collateral for the loan is all the assets of the Company except the
Lancer common stock currently owned by Biomerica. A warrant for 40,000
shares of restricted common stock exercisable at a price of $.51 per
share has been awarded as compensation for the forbearance. In addition.
Janet Moore has agreed to defer accrued wages now owed to her and
continue deferring wages earned during this forbearance period.
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 nine and three months ended February 29,
2004 and February 28, 2003 as follows:
Nine Months Ended Three Months Ended
2/29/04 2/28/03 2/29/04 2/28/03
---------------------------------------------------------------------------------------
Net (loss) gain from continuing
operations, as reported $(263,948) $(304,474) $ 64,591 $(24,644)
Plus: Stock-based employee compensation
expense included in reported net gain
(loss) 55,172 67,517 9,684 16,182
Less: Stock-based employee compensation
expense determined using fair value
based method (18,918) (36,308) (6,269) (12,270)
---------------------------------------------------------------------------------------
Net (loss) gain from continuing operations,
pro forma $ (227,694) $(273,265) $ 68,006 $(20,732)
=======================================================================================
Pro forma net (loss) gain from
continuing operations
per share - basic $ (0.04) $ (0.06) $ .01 $ (.00)
=======================================================================================
Pro forma net (loss) gain from
continuing operations
per share - diluted $ (0.04) $ (0.06) $ .01 $ (.00)
=======================================================================================
10
(3) The following summary presents the options granted, exercised, expired,
and outstanding as of February 29, 2004:
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 (2,250) -- (2,250) 0.85
Cancelled (3,000) -- (3,000) 0.40
---------- ---------- ---------- ----------
Outstanding
February 29, 2004 985,136 65,000 1,050,136 $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
February 29, 2004 1,455,688 1,163,746 2,619,434 $2.60
========== ========== ========== ==========
(4) 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.
(5) 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.
(6) Aggregate market value exceeded cost of available-for-sale securities
by approximately $25,923 at February 29, 2004.
11
(7) 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 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 February 29, 2004, there was a total of 3,669,570 potential
dilutive shares of common stock outstanding.
(8) In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS", which requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
in which it is incurred with the associated asset retirement costs being
capitalized as a part of the carrying amount of the long-lived asset.
SFAS No. 143 also includes disclosure requirements that provide a
description of asset retirement obligations and reconciliation of changes
in the components of those obligations. The statement is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143
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," which updates accounting
and reporting standards for personnel and operational restructurings. The
Company was required to adopt SFAS No. 146 for exit, disposal or other
restructuring activities that are initiated after December 31, 2002, with
early application encouraged. The Company adoption of SFAS No. 146 did
not have a material effect on the Company's consolidated financial
position or results of operations.
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.
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee.
12
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are applicable
for financial statements of interim periods ending after December 15,
2002. The adoption of FIN 45 did not have a material impact on the
Company's financial position, results of operations or cash flows.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," relating to consolidation of certain entities. FIN
46 will require 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 operation on a stand-alone basis, or whose equity holders
lack certain characteristics of a controlling financial interest. For
entities indentified as VIEs, FIN 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 46 also sets
forth certain disclosures regarding interests in VIEs that are deemed
significant, even if consolidation is not required. The adoption of FIN
46 did not have a material impact on the Company's financial position,
results of operations or cash flows.
(9) Financial information about foreign and domestic operations and export
sales is as follows:
For the Nine Months Ended
2/29/04 2/28/03
-------- --------
Revenues from sales to unaffiliated customers:
United States $3,229,000 $3,453,000
Asia 157,000 166,000
Europe 2,063,000 1,614,000
South America 330,000 283,000
Oceania 377,000 325,000
Other 743,000 676,000
---------- ----------
$6,899,000 $6,517,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(10) 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.
(11) At February 29, 2004, Lancer has a $400,000 line of credit with Cuyamaca
Bank, which expires January 8, 2005. Borrowings are made at prime plus
2.0% (6% at February 29, 2004, and are limited to 80% of accounts
receivable less than 90 days old. The outstanding balance at February 29,
2004 was $0 and the unused portion available was approximately $400,000.
Lancer was in compliance with its debt covenants at February 29, 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 tangible net worth ratio of $2,700,000 and a zero
balance be maintained for 30 consecutive days during the term. 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.
13
Lancer also has a term loan for $100,000 with Cuyamaca Bank that matures
January 8, 2008. This loan requires 48 monthly payments of approximately
$2,300 (principal and interest) at an interest rate of prime plus 2% (6%
at February 29, 2004). The outstanding balance at February 29, 2004 was
approximately $98,000, with approximately $25,000 classified as a current
liability. The term loan is for the purchase of new equipment but is
collateralized by substantially all of the assets of the corporation.
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.
The Company was paying $7,300 per month toward interest and principal. As
of February 29, 2004 the terms of the loan were still being negotiated.
On March 22, 2004 a Loan Modification, Forbearance and Security Agreement
and an Amended and Restated Promissory Note were finalized. The balance
of interest and principal as of March 22, 2004 was $313,318. The terms of
the agreements are that Janet Moore has agreed to a forbearance of any
payments for the length of the agreement, which expires September 1,
2004. Collateral for the loan is all the assets of the Company except the
Lancer common stock currently owned by Biomerica. A warrant for 40,000
shares of restricted common stock exercisable at a price of $.51 per
share have been awarded as compensation for the forbearance. In addition.
Janet Moore has agreed to defer accrued wages now owed to her and
continue deferring wages earned during this forbearance period.
(12) 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 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.
On June 2, 2003, Lancer 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.
(13) Subsequent Events
On March 23, 2004, in order to strengthen its balance sheet the board of
directors of Lancer approved a private placement with the intent of
raising between $150,000 and $350,000. The price of the restricted shares
was $.60 per share with one warrant exercisable at $.85 per share for
each share purchased. A total of 450,000 shares of restricted common
stock were subscribed to, raising a total of $270,000.
On April 12, 2004, an agreement was signed between Lancer Orthodontics
("Lancer") and Allen Barbieri ("Barbieri") wherein Barbieri will serve as
the part-time interim Chief Executive Officer of Lancer for a period of
two years or less. He shall receive as compensation 62,500 shares of
Lancer restricted common stock for every six months of employment with
Lancer. At the beginning of each quarter 31,250 shares shall vest.
Barbieri shall not be entitled to any other form of cash or equity
compensation, unless determined otherwise in the future.
On March 31, 2004, a warrant for 40,000 shares of restricted common stock
was issued to The Janet Moore Trust for the forbearance of payments on
the note payable to the Company in the amount of $313,318. The warrants
are at the exercise price of $.51, have an expiration of five years, and
are fully vested at the date of grant. The Company recorded a noncash
expense of $20,800 representing the full value of the warrants in March
of 2004.
14
(14) Reportable business segments for the nine months and quarter ended February
29 30, 2004 and 2003 are as follows:
Nine Months Three Months
Ended February 29, Ended February 29,
2004 2003 2004 2003
---------------------------------------------------------------------------------------
Domestic sales:
Orthodontic products $2,351,000 $2,323,000 $ 833,000 $ 756,000
=======================================================================================
Medical diagnostic products $ 878,000 $1,130,000 $ 228,000 $ 335,000
=======================================================================================
Foreign sales:
Orthodontic products $2,172,000 $1,975,000 $ 806,000 $ 752,000
=======================================================================================
Medical diagnostic products $1,498,000 $1,089,000 $598,000 $ 448,000
=======================================================================================
15
Nine Months Three Months
Ended February 29, Ended February 29,
2004 2003 2004 2003
---------------------------------------------------------------------------------------
Net sales:
Orthodontic products $4,523,000 $4,298,000 $1,639,000 $1,508,000
Medical diagnostic products 2,376,000 2,219,000 826,000 783,000
---------------------------------------------------------------------------------------
Total $6,899,000 $6,517,000 $2,465,000 $2,291,000
=======================================================================================
Operating (loss) income:
Orthodontic products $ ( 92,000) $ ( 1,000) $ 56,000 $ 22,000
Medical diagnostic products (250,000) (297,000) 42,000 (24,000)
---------------------------------------------------------------------------------------
Total $ (342,000) $ (296,000) $ ( 98,000) $ (2,000)
=======================================================================================
Operating loss from discontinued segment:
ReadyScript $ 4,359 $ 40,022 $ 1,415 $ 1,491
---------------------------------------------------------------------------------------
Total $ 4,359 $ 40,022 $ 1,415 $ 1,491
=======================================================================================
Depreciation and amortization
expense:
Orthodontic products $ 48,000 $ 64,000 22,000 16,000
Medical diagnostic products 44,000 42,000 11,000 18,000
----------------------------------------------------------------------------------------
Total $ 92,000 $ 106,000 33,000 34,000
========================================================================================
Domestic long-lived assets:
Orthodontic products $ 387,000 $ 92,000
Medical diagnostic products 134,000 156,000
---------------------------------------------------
Total $ 521,000 $ 248,000
===================================================
Foreign long-lived assets:
Orthodontic products $ 121,000 $ 16,000
Medical diagnostic products 17,000 3,600
---------------------------------------------------
Total $ 659,000 $ 267,000
===================================================
Total assets:
Orthodontic products $ 3,837,000 $3,568,000
Medical diagnostic products 1,704,000 1,545,000
-----------------------------------------------------------------------
Total $ 5,541,000 $5,113,000
=======================================================================
Capital expenditures:
Orthodontic products $ 297,000 $ 75,000
Medical diagnostic products 18,000 15,000
---------------------------------------------------
Total $ 315,000 $ 90,000
===================================================
16
The net sales as reflected above consist of sales of unaffiliated
customers only as there were no significant intersegment sales during the
quarter ended and nine months ended February 29, 2004 and February 28,
2003.
(15) 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%.
(16) 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; and service fees of approximately $2,900 per month.
(17) 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 February 29, 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. 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 February
29, 2004."
(18) The Chief Executive Officer and Chief Financial Officer of Biomerica are
currently deferring their cash wages. Their wages are being recorded as
an administrative expense and reported as part of accrued wages on the
balance sheet.
(19) Included in accounts payable at February 29, 2004 is $126,768 due for
rental of the Company's facilities according to the terms of the lease.
All of this amount is past due and the Company is in default of the
lease.
17
(20) 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.
18
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. However,
there is no assurance that the Company will be able to retain its
certification in the future.
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.
19
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.
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 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 February 29, 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 adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for Disclosure purposes. Under SFAS No. 123, we measure compensation for
our stock- based employee compensation plan using the intrinsic value
method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related
interpretations. We provide pro forma disclosure of the effect on net
income or loss as if the fair value based method prescribed in SFAS No.
123 has been applied in measuring compensation expense.
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 realizeability 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.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $6,899,088 for the nine months
ended February 29, 2004 as compared to $6,517,414 for the same period in
the prior fiscal year. This represents an increase of $381,674 or 6% for
the nine-month period. Of this increase $224,692 was attributable to an
increase in sales at Lancer. Consolidated net sales for the quarter then
ended were $2,464,873 as compared to $2,291,377 for the same period in
the previous year. This represents an increase of $173,496, or 8%. Of
this quarterly increase $131,336 was attributable to sales at Lancer.
The nine-month increase in sales at Lancer was primarily attributable to
increases in sales in Europe and South America and the three-month
increase was due to increases in Europe. Increases in sales at Biomerica
were a result of sales of new products and an increase in foreign sales.
Cost of sales as a percentage of sales remained constant for the nine
months at 69.3% and decreased from 68.2% to 66.5% for the quarter.
Lancer's cost of sales as a percentage of sales increased from 71.2% to
71.3% for the nine months and for the quarter decreased from 71.9% to
70.1%. The Lancer percentage decrease in cost of goods sold was
attributable to an increase in selling prices for the three months then
ended. Biomerica's cost of sales as a percentage of sales increased for
the nine months from 65.5% to 65.6%. For the quarter Biomerica's cost of
sales increased from 60.2% to 61.1%. For the three months the increase
was primarily due to higher material costs due to product mix and
expenses in the Mexico facility.
Selling, general and administrative costs increased by $137,066, or 6%
for the nine months and by $60, or 0% for the quarter. Lancer had
increased selling, general and administrative costs of $132,824 for the
nine months and $39,657 for the quarter. Lancer had decreased labor and
professional fees in the administrative area and had increased sales and
marketing due to increased labor and advertising costs offset by a
decrease in trade show costs.
Research and development increased by $21,664, or 11.7% for the nine
months and decreased by $9,883 for the three months. Lancer had an
increase in research and development costs of $21,214 and decreased
costs of $7,465 for the nine and three months, respectively. This
increase for the nine months expenses was attributable to the
development of a new product line. Biomerica had costs consistent with
the prior year for the nine-month period and decreased costs of $2,418
for the three months due to lower wages.
20
For the nine months ended February 29, 2004, other income of $54,514
was realized as compared to $51,108 in the prior year. In the prior
year Lancer had proceeds from an insurance claim. In this fiscal year
Biomerica realized proceeds from the sale of marketable securities. For
the three months, other income was $21,256 as compared to $814. The
increase was primarily due to the sale of securities by Biomerica.
Interest expense decreased by $1,153 (5%) for the nine months compared
to the previous year and increased by $1,171 for the quarter. The
decrease was primarily due to the lower loan balance at Biomerica,
whereas the quarterly increase was due to an increase of borrowing at
Lancer.
The following is a breakdown of the three and six month income
statement by company for continuing operations:
3 MONTHS ENDED FEBRUARY 29, 2004
Biomerica Lancer Total
Sales $ 825,911 $1,638,962 $2,464,873
Cost of goods (497,371) (1,149,066) (1,646,437)
----------- ----------- -----------
Gross profit 328,540 489,896 818,436
Selling, general & administrative 248,497 406,714 655,211
Research & development 37,993 27,377 65,370
----------- ----------- -----------
Total operating expenses 286,490 434,091 720,581
Operating profit 42,050 55,805 97,855
Other (income) expenses
Interest 8,119 625 8,744
Misc income (9,990) (11,266) (21,256)
----------- ----------- -----------
Total other (income) expenses (1,871) (10,641) (12,512)
Gain before interest in subsidiary 43,921 66,446 110,367
9 MONTHS ENDED FEBRUARY 29, 2004
Sales $2,376,367 $4,522,721 $6,899,088
Cost of goods (1,558,581) (3,225,683) (4,784,264)
----------- ----------- -----------
Gross profit 817,786 1,297,038 2,114,824
Selling, general & administrative 948,787 1,301,299 2,250,086
Research & development 119,885 87,238 207,123
----------- ----------- -----------
Total operating expenses 1,068,672 1,388,537 2,457,209
Operating loss (250,886) (91,499) (342,385)
Other (income) expenses
Interest 23,234 886 24,120
Misc income (31,890) (22,624) (54,514)
----------- ----------- -----------
(8,656) (21,738) (30,394)
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 February 29, 2004, the Company had cash and available-for-sale
securities in the amount of $212,500 and working capital of $2,368,849.
Cash and working capital totaling $170,471 and $2,555,175,
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.
21
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. 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 installments over four
years. The Company was making payments of $7,300 per month towards
principal and interest. As of February 29, 2004 the terms of the loan
were still being negotiated. On March 22, 2004 a Loan Modification,
Forbearance and Security Agreement and an Amended and Restated
Promissory Note were finalized. The balance of interest and principal
as of March 22, 2004 was $313,318. The terms of the agreements are that
the lender has agreed to a forbearance of any payments for the length
of the agreement, which expires September 1, 2004. Collateral for the
loan is all the assets of the Company except the Lancer common stock
currently owned by Biomerica. A warrant for 40,000 shares of restricted
common stock exercisable at a price of $.51 per share have been awarded
as compensation for the forbearance. In addition. Janet Moore has
agreed to defer accrued wages now owed to her and continue deferring
wages earned during this forbearance period.
22
During the nine months ended February 29, 2004, the Company operations
used cash of $149,352. This compares to cash provided by operations of
$438,092 in the same period in the prior fiscal year. The Lancer
subsidiary used cash in operations of $117,909 during this fiscal year
and provided cash of $583,384 in the last fiscal year. Cash provided by
financing activities was $162,602, which resulted from a private
placement of $50,500, increase in shareholder loan of $2,666, change in
minority interest of $9,931 and an increase in the term loan at Lancer
of $97,931 and exercise of stock option of $2,000.
The Company purchased $339,016 in fixed assets during the first nine
month of this fiscal year. Of this, $314,447 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.
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 February 29, 2004, Lancer has a $400,000 line of credit with
Cuyamaca Bank, which expires January 8, 2005. Borrowings are made at
prime plus 2.0% (6% at February 29, 2004, and are limited to 80% of
accounts receivable less than 90 days old. The outstanding balance at
February 29, 2004 was $0 and the unused portion available was
approximately $400,000. Lancer was in compliance with its debt
covenants at February 29, 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 tangible net worth ratio of $2,700,000 and a zero
balance be maintained for 30 consecutive days during the term. 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.
Lancer also has a term loan for $100,000 with Cuyamaca Bank that
matures January 8, 2008. This loan requires 48 monthly payments of
approximately $2,300 (principal and interest) at an interest rate of
prime plus 2% (6% at February 29, 2004). The outstanding balance at
February 29, 2004 was approximately $98,000, with approximately $25,000
classified as a current liability. The term loan is for the purchase of
new equipment but is collateralized by substantially all of the assets
of the corporation.
On March 23, 2004, in order to strengthen its balance sheet, the board
of directors of Lancer approved a private placement with the intent of
raising between $150,000 and $350,000. The price of the restricted
shares was $.60 per share with one warrant exercisable at $.85 per
share for each share purchased. A total of 450,000 shares of
restricted common stock were subscribed to, raising a total of
$270,000.
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. The Company was paying $7,300 per month
toward interest and principal. As of February 29, 2004 the terms of the
loan were still being negotiated. On March 22, 2004 a Loan
Modification, Forbearance and Security Agreement and an Amended and
Restated Promissory Note were finalized. The balance of interest and
principal as of March 19, 2004 was $313,318. The terms of the
agreements are that Janet Moore has agreed to a forbearance of any
payments for the length of the agreement, which expires September 1,
2004. Collateral for the loan is all the assets of the Company except
the Lancer common stock currently owned by Biomerica. A warrant for
40,000 shares of restricted common stock exercisable at a price of $.51
per share have been awarded as compensation for the forbearance. In
addition, Janet Moore has agreed to defer accrued wages now owed to her
and continue deferring wages earned during this forbearance period.
23
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 officer,
respectively) have concluded, based on their evaluation as of February
29, 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 February 29, 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.
24
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 nine months Ended
February 29, 2004:
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. Inapplicable.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
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.
99.2 Warrant Agreement dated March 31, 2004.
99.3 Amended and Restated Promissory Note dated March 19, 2004.
99.4 Loan Modification, Forbearance and Security Agreement dated March 19,
2004.
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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: April 14, 2004
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary S. Irani
Chief Executive Officer
26