UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2005 COMMISSION FILE NUMBER: 0-8765
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BIOMERICA, INC.
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(Small Business Issuer 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, CA 92663
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (949) 645-2111
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
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NONE OTC-Bulletin Board
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
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COMMON STOCK, PAR VALUE $0.08
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X}
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $9,273,980.
State the aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer (based upon 4,754,160 shares held by non-affiliates
and the closing price of $0.52 per share for Common Stock in the
over-the-counter market as of July 29, 2005): $2,472,163.
Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 27, 2005: 5,753,931.
DOCUMENTS INCORPORATED BY REFERENCE: none
Transitional Small Business Disclosure Format YES [ ] NO [X]
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
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BUSINESS OVERVIEW
THE COMPANY
Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was
incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. We
changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in
November 1987 to Biomerica, Inc. During fiscal 2005 and 2004 we had one
operational subsidiary, Lancer Orthodontics, Inc. ("Lancer"), an international
manufacturer of orthodontics products.
Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. Lancer is engaged in the design, manufacture and distribution of
orthodontic products. As of May 31, 2005, Biomerica's direct ownership
percentage of Lancer was 23.41% and its direct and indirect (via agreements with
certain shareholders/directors) voting control over Lancer was greater than 50%.
As a result of Biomerica's control and ownership, our financial statements are
consolidated with those of Lancer. During the fiscal year ending May 31, 2005,
Biomerica was a party to certain informal agreements with certain of Lancer's
officers and directors, pursuant to which they agreed to vote in the same manner
as Biomerica (and its directors holding shares of Lancer's common stock) on
matters requiring the approval of Lancer's stockholders. Biomerica's percentage
of direct ownership in Lancer has continued to decrease due to Lance's issuance
of additional shares of its common stock. Lancer's private placement of common
stock subsequent to May 31, 2005 (see Note 13) further decreased Biomerica's
percentage of direct ownership. As of the date of this Annual Report,
Biomerica's management has not made any determination whether, commencing with
its current fiscal year ending May 31, 2006, and as a result of Lancer's most
recent equity private placement (or of any subsequent issuances of Lancer's
common stock), Biomerica will continue to consolidate Lancer's financial
statements.
The Company adopted a formal plan in April 2001 to discontinue operations
of its ReadyScript subsidiary. Certain assets were written off during the
closure and subsequently were recorded as losses in the consolidated financial
statements. During the fiscal years ended May 31, 2005 and 2004, certain
liabilities were forgiven and thus ReadyScript recorded a profit for the years
then ended. The subsidiary is being reported in the financial statements as a
discontinued operation because it is no longer an operating entity.
OUR MEDICAL DEVICE BUSINESS
Our existing medical device business is conducted through two companies:
(1) Biomerica, Inc., engaged in the human diagnostic products market and (2)
Lancer Orthodontics, Inc., engaged in the orthodontic products market.
1
BIOMERICA - DIAGNOSTIC PRODUCTS
Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. The Company's medical diagnostic products are sold worldwide in
three markets: 1) clinical laboratories, 2) physicians offices and 3)
over-the-counter (drugstores). Our diagnostic test kits are used to analyze
blood or urine from patients in the diagnosis of various diseases and other
medical complications, or to measure the level of specific hormones, antibodies,
antigens or other substances, which may exist in the human body in extremely
small concentrations.
Technological advances in medical diagnostics have made it possible to
perform diagnostic tests within the home and the physician's office, rather than
in the clinical laboratory. One of our main objectives has been to develop and
market rapid diagnostic tests that are accurate, employ easily obtained
specimens, and are simple to perform without instrumentation. Our
over-the-counter and professional rapid diagnostic products help to manage
existing medical conditions and may save lives through prompt diagnosis and
early detection. Until recently, tests of this kind required the services of
medical technologists and sophisticated instrumentation. Frequently, results
were not available until at least the following day. We believe that rapid point
of care tests are as accurate as laboratory tests when used properly and they
require no instrumentation, give reliable results in minutes and can be
performed with confidence in the home or the physician's office. The majority of
our over-the-counter rapid tests are FDA cleared.
Our clinical laboratory diagnostic products include tests for thyroid
conditions, food allergies, H. pylori, diabetes and others. These diagnostic
test kits utilize enzyme immunoassay or radioimmunoassay technology. Some of
these products have not yet been submitted for clearance by the FDA for
diagnostic use, but can be sold in various foreign countries.
During fiscal 2003 we entered into an agreement with Sangui Bio Tech, Inc.,
whereby we acquired intellectual assets along with ancillary tangible assets
such as fixed assets and inventory. The intellectual assets consisted of five
clinical laboratory products. Two Sangui employees became employees of
Biomerica.
A large part of Biomerica's manufacturing operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Biomerica maintains its headquarters in Newport Beach,
California where it houses administration, research and development, sales and
marketing, and customer services.
Biomerica has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any material
amount of its assets during the fiscal year ended May 31, 2005.
LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS
Lancer is engaged in developing, manufacturing, and selling orthodontic
products. Its products are sold worldwide through a direct sales force and
distributors. Lancer conducts its operations at two facilities, one of which is
located at 253 Pawnee Street, San Marcos, California 92069-2347 and the other in
Mexicali, Mexico.
2
Lancer's product line includes preformed bands, direct bonding brackets,
buccal tubes, arch wires, lingual attachments and related accessories which are
used by orthodontics and dentists in treating their patients. The foregoing are
assembled to standard prescriptions or the specifications of private label
customers. Lancer also markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics, headgear cases,
retainer cases and preformed arches.
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses administration, engineering, sales and marketing, and
customer services.
Lancer has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any material
amount of its assets during the fiscal year ended May 31, 2005.
DISCONTINUED OPERATIONS
Biomerica's ReadyScript subsidiary was a development-stage enterprise and
required the raising of a significant amount of capital to fund its short-term
working capital needs. The ReadyScript operations were discontinued in May 2001.
The net liabilities and operating results of ReadyScript are shown separately in
the accompanying consolidated financial statements as discontinued operations.
LIQUIDITY AND 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 on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable bearing interest at 8% and payable September 1,
2004. The due date on this note was extended until September 1, 2005 and
subsequent to fiscal year end May 31, 2005, has been extended until September 1,
2006 at the same terms. Minimum payments of $4,000 per month plus an additional
$3,500 per month, depending on quarterly results of the Company, are being made.
Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica has funded its operations through debt and
equity financings, and may have to do so in the future. ReadyScript operations
were discontinued in May 2001 . ReadyScript was a contributor to the Company's
losses in prior fiscal years. During the fiscal years ended May 31, 2005 and
2004, certain liabilities were forgiven and thus income from discontinued
operations for the years then ended was recorded. The subsidiary is being
reported in the financial statements as a discontinued operation because it is
no longer an operating entity.
3
In the last several years the Company has been focusing on reducing costs
where possible and concentrating on its core business in Lancer and Biomerica to
increase sales. Management believes that cash flows from current operations,
coupled with the Lancer line of credit (to be utilized only by Lancer), the
private placement at Lancer in July 2005 and equipment financing at Lancer are
sufficient to enable the Company and the Lancer subsidiary to fund operations
for at least the next twelve months. Should the Company have a downturn in sales
or unanticipated, increased expenses, the result for the Company could be the
inability to continue as a going concern. The Company will continue to have
limited cash resources. Biomerica, as a parent entity, has no open or existing,
operating line of credit or loans on which it can draw any new or additional
debt financing.
Our independent registered public accounting firm has concluded that there
is 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 report 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.
PRODUCTION
Most of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California and in Mexicali, Mexico. During fiscal
2003, the diagnostics division established a manufacturing facility in Mexicali,
Mexico, in a building that we share with Lancer Orthodontics. We have moved a
significant portion of our diagnostic manufacturing to that facility. We
subcontract with Lancer to provide labor and other services. Production of
diagnostic tests can involve formulating component antibodies and antigens in
specified concentrations, attaching a tracer to the antigen, filling components
into vials, packaging and labeling. We continually engage in quality control
procedures to assure the consistency and quality of our products and to comply
with applicable FDA regulations.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control unit that
monitors and evaluates product quality and output. At times we engage the
services of a qualified external quality assurance consultant who monitors
procedures and provides guidance in conforming to the Good Manufacturing
Practices regulations. We either produce our own antibodies and antigens or
purchase these materials from qualified vendors. We have alternate, approved
sources for raw materials procurement and we do not believe that material
availability in the foreseeable future will be a problem.
During fiscal 2002, the Lancer facility in Mexico was incorporated as
Lancer Orthodontics de Mexico ("Lancer de Mexico"), a wholly-owned subsidiary of
Lancer. This subsidiary now administers services previously provided by an
independent manufacturing contractor. A lease was negotiated in the name of
Lancer de Mexico, effective April 1, 2001, for the 16,000 square foot facility
already in use for Lancer's Mexican operations. Mexican utility and vendor
obligations were also converted to the Lancer de Mexico name. This conversion
eliminated the expense of an administrative fee and is expected to provide
better control in meeting future obligations. The conversion had no material
effect on manufacturing operations.
4
Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At May
31, 2005, this obligation was approximately $415,000. Such obligation is
contingent in nature and accordingly has not been accrued in either company's
financial statements.
RESEARCH AND DEVELOPMENT
Biomerica is engaged in research and development to broaden its diagnostic
product line in specific areas. Research and development expenses include the
costs of materials, supplies, personnel, facilities and equipment. Lancer is
engaged in development programs to improve and expand its orthodontic products
and production techniques. Lancer consults frequently with practicing
orthodontists.
Consolidated research and development expenses incurred by Biomerica for
the years ended May 31, 2005 and 2004 aggregated $274,288 and $273,981,
respectively. Lancer is also engaged in, and intends to continue development
programs directed toward expanding and improving its orthodontics products and
production techniques. Of the above expenses approximately $96,000 and $116,000
for fiscal 2005 and 2004, respectively, are for Lancer's product development.
MARKETS AND METHODS OF DISTRIBUTION
Biomerica has approximately 450 current customers for its diagnostic
business, of which approximately 100 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and physicians'
offices.
We rely on unaffiliated distributors, advertising in medical and trade
journals, exhibitions at trade conventions, direct mailings and an internal
sales staff to market our diagnostic products. We target three main markets: (a)
clinical laboratories, (b) physicians' offices, and (c) over-the-counter drug
stores. Separate marketing plans are utilized in targeting each of the three
markets.
Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had 9 (7 telesales) sales representatives in the United States and
Mexico, all of whom are employees of Lancer. We believe that all Lancer products
sold in the U.S. comply with FDA regulations.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its products
in certain sales territories in Central America, South America, Europe, Canada
and Australia. The distributors complement the international marketing
department, which was established in 1982 and currently employs 3 people in the
United States and 4 in Mexico.
5
On a consolidated basis no customer accounted for 10% or more of the
consolidated sales in the fiscal years ended May 31, 2005 and 2004. No customer
accounted for 10% or more of Lancer Orthodontics' sales for the fiscal year
ended May 31, 2005 and 2004. On an unconsolidated basis Biomerica has two
customers which account for greater than 10% of its sales for the years ended
May 31, 2005 and one customer which accounted for greater than 10% of its sales
for the year ended May 31, 2004.
BACKLOG
At May 31, 2005 and 2004 Biomerica had a backlog of approximately $203,000
and $92,000 respectively. As of May 31, 2005 and 2004, Lancer had a backlog of
approximately $86,000 and $124,000, respectively. The change in Biomerica's
backlog is primarily attributable to a large order from a new customer that
required some lead time to fill the order. Neither Biomerica nor Lancer's
businesses are subject to significant seasonal fluctuations.
RAW MATERIALS
The principal raw materials utilized by Biomerica consist of various
chemicals, serums, reagents and packaging supplies. Almost all of our raw
materials are available from several sources, and we are not dependent upon any
single source of supply or a few suppliers. No company accounted for more than
10% of purchases for the years ended May 31, 2005 and 2004.
We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Due to a limited shelf life on some products such as the
RIA kits, finished kits are prepared as required for immediate delivery of
pending and anticipated orders. Sales orders are normally processed on the day
of receipt.
The principal raw materials used by Lancer in the manufacture of its
products include: stainless steel, which is available from several commercial
sources; nickel titanium, which is available from three sources; and lucolux
translucent ceramic, which is currently only available from one source, General
Electric, and is purchased on open account. Ceramic material similar to General
Electric's lucolux translucent ceramic is available from other sources. Lancer
had no difficulty in obtaining an adequate supply of raw materials during its
2005 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.
COMPETITION
Immunodiagnostic products are currently produced by more than 100
companies. Biomerica is not a significant factor in the market.
Our competitors vary greatly in size. Many are divisions or subsidiaries of
well-established medical and pharmaceutical concerns which are much larger than
Biomerica and expend substantially greater amounts than we do for research and
development, manufacturing, advertising and marketing.
6
The primary competitive factors affecting the sale of diagnostic products
are uniqueness, quality of product performance, price, service and marketing. We
believe we compete primarily on the basis of the uniqueness of our products, the
quality of our products, the speed of our test results, our patent position, our
favorable pricing and our prompt shipment of orders. We offer a broader range of
products than many competitors of comparable size, but to date have had limited
marketing capability. We are working on expanding this capability through
marketing and strategic cooperations with larger companies and distributors.
Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's six major competitors are: Unitek, a
subsidiary or division of 3M; Ormco, a subsidiary or division of Sybron Dental
Specialities; RMO Inc., a private company; American Orthodontics, a private
company; GAC, a division of Dentsply; and Dentaurum, a foreign company. Lancer
estimates that these six competitors account for approximately 70-80% of the
orthodontic products manufactured and sold in the United States. Lancer's
management also believes that each of these six competitors is larger than
Lancer, has more diversified product lines and has financial resources exceeding
those of Lancer. While there is no assurance that Lancer will be successful in
meeting the competition of these six major competitors or other competitors,
Lancer has, in the past, successfully competed in the orthodontic market and has
achieved wide recognition of both its name and its products.
GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS
As part of our diagnostic business, we sell products that are legally
defined to be medical devices. As a result, we are considered to be a medical
device manufacturer, and as such are subject to the regulations of numerous
governmental entities. These agencies include the Food and Drug Administration
(the "FDA"), the United States Drug Enforcement Agency (the "DEA"),
Environmental Protection Agency, Federal Trade Commission, Occupational Safety
and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer
Product Safety Commission. These activities are also regulated by various
agencies of the states and localities in which our products are sold. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture and labeling of medical
devices, the maintenance of certain records and the reporting of potential
product problems and other matters.
The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, pre-market notification and adherence to the Quality
System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling
and other regulatory requirements. Some Class I medical devices are exempt from
the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices
are those devices for which safety and effectiveness can reasonably be ensured
through the use of special controls, such as performance standards, post-market
surveillance and patient registries, as well as adherence to the general
controls provisions applicable to Class I devices. Class III devices are devices
that generally must receive pre-market approval by the FDA pursuant to a
pre-market approval application to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices. However, this classification can also apply to novel
technology or new intended uses or applications for existing devices. The
Company's products are primarily either Class I or Class II medical devices. The
following is a breakdown of the Biomerica products by class:
7
Class I - Fortel(TM) Ovulation test, EZ-LH(TM) Rapid Ovulation test, Strep A
Rapid Test
Class II - GAP(tm) IgG H. Pylori ELISA kit, Anti-thyroglobulin ELISA kit,
anti-TPO ELISA kit, PTH (intact) ELISA kit, Calcitonin ELISA kit, Erythropoietin
ELISA kit, ACTH ELISA kit, Fortel Ultra Midstream (OTC and plastic stick),
EZ-HCG(tm) Rapid Pregnancy test (professional and dipstick), EZ Detect(tm) Fecal
Occult Blood test (Physician's dispenser pack and OTC), Aware(tm) Breast
Self-Examination, drugs of abuse rapid tests, EZ-HP Professional, PTH (intact)
IRMA kit, GAP(tm) IgA H. Pylori ELISA kit, C-Peptide ELISA kit.
Class III - GAP(tm) IgM H. Pylori ELISA kit, Isletest(tm) GAD ELISA kit,
Isletest(tm) ICA ELISA kit, Isletest(tm) IAA ELISA kit, Allerquant(tm) IgG Food
Allergy ELISA kit, Allerquant(tm) Med90G, Allerquant(tm) 14 Foods, Custom Food
Allergy Kit, Candiquant(tm) IgG ELISA kit, Candiquant(tm) IgM ELISA kit,
Candiquant(tm) IgA ELISA kit, Free Alpha Subunit RIA kit, EZ-HP OTC, EZ PSA
(Professional and OTC).
If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed, but approval is required before the
product can be sold for general use in the U.S. In addition to requiring
clearance or approval for new medical devices, FDA rules also require a new
510(k) filing and review period, prior to marketing a changed or modified
version of an existing legally marketed device, if such changes or modifications
could significantly affect the safety or effectiveness of that device. The FDA
prohibits the advertisement or promotion or any approved or cleared device for
uses other than those that are stated in the device's approved or cleared
application.
Pursuant to FDA requirement, we have registered our manufacturing facility
with the FDA as a medical device manufacturer, and listed the medical devices we
manufacture. This registration expires on December 31, 2006. We are also subject
to inspection on a routine basis for compliance with FDA regulations. This
includes the Quality System Requirements, which, requires that we manufacture
our products and maintain our documents in a prescribed manner with respect to
issues such as design controls, manufacturing, testing and validation
activities. Further, we are required to comply with other FDA requirements with
respect to labeling, and the Medical Device Reporting (MDR) regulation which
requires that we provide information to the FDA on deaths or serious injuries
alleged to have been associated with the use of our products, as well as product
malfunctions that are likely to cause or contribute to death or serious injury
if the malfunction were to recur. We believe that we are currently in material
compliance with all relevant QSR and MDR requirements.
In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires that we be in compliance with QSR,
labeling and MDR regulations. Our license expires on March 16, 2006. This
registration expires on December 31, 2006. We also hold two radioactive
materials licenses from the State of California (both expiring on June 20,
2008), and one permit from the USDA, expiring on August 25, 2007. These licenses
are renewed periodically, and to date we have never failed to obtain a renewal.
8
Through compliance with FDA and California regulations, we can market our
medical devices throughout the United States. International sales of medical
devices are also subject to the regulatory requirements of each country. In
Europe, the regulations of the European Union require that a device have a "CE
Mark" in order to be sold in EU countries. The directive went into effect
beginning December 7, 2003. The Company has completed the process for complying
with the "CE Mark" directives, In Vitro Directive 98/79/EC, ISO 13485 for
medical devices, and Medical Device Directive 93/42/EEC. At present the
regulatory international review process varies from country to country. We, in
general, rely upon our distributors and sales representatives in the foreign
countries in which we market our products to ensure that we comply with the
regulatory laws of such countries. We believe that our international sales to
date have been in compliance with the laws of the foreign countries in which we
have made sales. Exports of most medical devices are also subject to certain FDA
regulatory controls.
The following products are FDA-cleared and may be sold to clinical
laboratories, physician laboratories and/or retail outlets in the United States
as well as internationally:
Anti-thyroglobulin ELISA kit
Anti-TPO ELISA Kit
GAP IgG H. Pylori ELISA Kit
PTH(Intact) ELISA Kit
Calcitonin ELISA Kit
Erythropoietin ELISA Kit
ACTH ELISA Kit
Myoglobin ELISA
Troponin I ELISA
HS-CRP ELISA
Midstream Pregnancy Test
EZ-HCG Rapid Pregnancy Test
EZ-LH(tm) Rapid Ovulation Test
EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package)
Strep A Rapid Test
AWARE(tm) Breast Self-Examination Kit
Drugs-of-Abuse Rapid Tests
C-Peptide ELISA KIT
The following products are not FDA-cleared. These are sold internationally
and can be sold in the U.S. "FOR RESEARCH ONLY":
GAP(tm) IgM H. Pylori ELISA Kit
GAP(tm) IgA H. Pylori ELISA Kit
PTH (intact) RIA Kit
Isletest(tm) GAD ELISA Kit
Isletest(tm) ICA ELISA Kit
Isletest(tm) IAA ELISA Kit
Allerquant(tm) IgG Food Allergy ELISA Kit (90-foods, 14-foods, custom kits)
Candiquant(tm) IgG, IgM, and IgA ELISA Kits for Candida Albicans antibodies
Free Alpha Subunit RIA kit
Fortel(tm) Ultra Midstream Pregnancy Test
Fortel(tm) Ovulation Test
EZ-PSA Rapid Test
EZ-H. Pylori Rapid Test
9
Biomerica is licensed to design, develop, manufacture and distribute IN
VITRO diagnostic and medical devices and is subject to the Code of Federal
Regulations, Section 21, parts 800 - 1299. The FDA is the governing body that
assesses and issues Biomerica's license to assure that it complies with these
regulations. Biomerica is currently licensed, and its last assessment was in
April 2002. Biomerica is also registered and licensed with the State of
California's Department of Health Services. The Company believes that all
Biomerica products sold in the U.S. comply with the FDA regulations.
Biomerica's Quality Management System is in compliance with the
International Standards Organization (ISO) EN ISO 13485:2000. EN ISO 13485:2000
is an internationally recognized standard in which companies establish their
methods of operation and commitment to quality.
Effective December 2003, fifteen major European countries require a CE
(European Community) certification to sell products within their countries. The
European Community Directive 98/79/EC is the IN VITRO Device Directive (IVDD),
which regulates the import and sale of IN VITRO devices in the countries that
comprise the European Community. In order for Biomerica's products to be sold
within the European Community with the CE Mark, a Notified Body (TUV Rheinland)
assessed Biomerica's compliance to the IVDD in October of 2003, and the Company
was issued approval according to Annex IV, Article 3 of the IVDD in December
2003. Biomerica completed the translation of all direction inserts into the
native languages of each of the countries in Europe where products are
distributed. The Company is required to pass an annual audit in order to
maintain the license. We are required to comply with new regulations as they are
introduced. Should the Company fail to maintain required licenses, sales could
be adversely affected.
Lancer is licensed to design, manufacture, and sell orthodontic appliances
and is subject to the Code of Federal Regulations, Section 21, parts 800-1299.
The FDA is the governing body that assesses and issues Lancer's license to
assure that it complies with these regulations. Lancer is currently licensed,
and its last assessment was in November 1997. Also, Lancer is registered and
licensed with the state of California's Department of Health Services. The
Company believes that all Lancer products sold in the U.S. comply with FDA
regulations.
In order to obtain the CE certification Lancer retained British Standards
Institution (BSI) to evaluate Lancer's quality system. Lancer's quality system
is imaged under International Standards Organization (ISO) 9002. ISO 9002 is an
internationally recognized standard in which companies establish their methods
of operation and commitment to quality. There are 20 clauses for which Lancer
has developed standard operating procedures in accordance with these ISO 9002
requirements.
EN 46002 is the international standard applicable to the Medical Device
Directive (MDD) for the European Community. Strict standards and clauses within
the MDD are required to be implemented to sell within the European Community. In
order for Lancer's medical devices to be sold within the European Community with
the CE Mark, Lancer must fully comply with the EN 46002 requirements. Lancer has
also constructed a technical file that gives all certifications and risk
assessments for Lancer's products as a medical device (the "Product Technical
Files").
10
With ISO 9002, EN 46002, and the Product Technical Files, Lancer applied
for and was granted certification under ISO 9002, EN 46002, and CE. With the CE
certification, Lancer is now permitted to sell its products within the European
Community. Compliance with and certification to both ISO 9000:2000 and ISO 13485
was implemented in December 2003. Lancer is also required to pass an annual
audit in order to maintain its license.
SEASONALITY OF BUSINESS
The businesses of the Company and its subsidiaries have not been subject to
significant seasonal fluctuations.
INTERNATIONAL BUSINESS
Most of Biomerica's property and equipment are located within southern
California. The Company currently has a minor amount of property and equipment
located in Mexico. Lancer has a greater number of property and equipment located
there due to their larger manufacturing volume in Mexico at this time. The
following table sets forth the dollar volume of revenue attributable to sales to
domestic customers and foreign customers during the last two fiscal years for
Biomerica and its consolidated subsidiaries:
Year Ended May 31,
------------------
2005 2004
---- ----
U.S. Customers $3,874,000/41.8% $4,279,000/46.7%
Asia 256,000/2.8% 207,000/2.3%
Europe 3,075,000/33.1% 2,711,000/29.6%
Middle East 370,000/4.0% 311,000/3.4%
Oceania 678,000/7.3% 518,000/5.6%
S. America 423,000/4.6% 428,000/4.7%
Other foreign 598,000/6.4% 715,000/7.7%
--------- ------------
Total Revenues $9,274,000/100% $9,169,000/100%
We recognize that our foreign sales could be subject to some special or
unusual risks, which are not present in the ordinary course of business in the
United States. Changes in economic factors, government regulations, terrorism
and import restrictions all could impact sales within certain foreign countries.
Foreign countries have licensing requirements applicable to the sale of
diagnostic products, which vary substantially from domestic requirements;
depending upon the product and the foreign country, these may be more or less
restrictive than requirements within the United States. We cannot predict the
impact that conversion to the Euro in the European countries may have on
Biomerica or Lancer, if any.
11
Foreign diagnostic sales at Biomerica are made primarily through a network
of approximately 100 independent distributors in approximately 60 countries.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its products
in certain sales territories in Central America, South America, Europe, Canada
and Australia. The distributors complement the international marketing
department, which was established in 1982 and currently employs 3 people in the
United States and 4 in Mexico.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks and
trade secrets as critical to our future success. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
most of our fulfillment partners and strategic partners to limit access to and
disclosure of proprietary information. We cannot be certain that these
contractual arrangements or the other steps taken by us to protect our
intellectual property will prevent misappropriation of our technology. We have
licensed in the past, and expect that we may license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our product brands is
maintained by such licensees, we cannot be certain that such licensees will not
take actions that might hurt the value of our proprietary rights or reputation.
BRANDS, TRADEMARKS, PATENTS
We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with
the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZ-Detect, "Candiquant," "Candigen," "EZ-H.P." and "EZ-PSA." A
trademark for "Aware" was issued and assigned in January, 2002. Biomerica holds
patents on its diagnostic test for Islet Cell Autoantibodies and has co-patent
rights to the EZ-Dectect Fecal Occult Blood Test (FOBT). In addition, Biomerica
holds the following patents: Immunotherapy agents for treatment of IgE mediated
allergies, U.S. Patent #5,116,612 issued May 6, 1992; Liposome containing
immunotherapy agents for treatment if IgE mediated allergies, U.S. Patent
#5,049,390, issued September 17, 1991; Immunotherapy agents for treatment of IgE
mediated allergies, U.S. Patent #4,946,945, issued August 7, 1990; and
Allergen-thymic hormone conjugates for treatment of IgE mediated allergies, U.S.
Patent #5,275,814, issued January 4, 1994. Biomerica has obtained the rights to
manufacture and sell certain products. In some cases royalties are paid on the
sales of these products. Biomerica anticipates that it will license or purchase
the rights to other products or technology in the future.
12
On April 4, 1989, Lancer was granted a patent on its Counter Force design
of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted
a patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances. On
March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method
of mounting. All of the patents are for a duration of 17 years. Lancer has
entered into license agreements expiring in 2006 whereby, for cash
consideration, the counter party has obtained the rights to manufacture and
market certain products patented by Lancer. Lancer has also entered into a
number of license and/or royalty agreements pursuant to which it has obtained
rights to certain of the products which it manufactures and/or markets. The
patents and agreements have had a favorable effect on Lancer's image in the
orthodontic marketplace and Lancer's sales. Lancer has license agreements as a
licensee with three products. As a licensor Lancer has licenses on the design of
a nickel titanium orthodontic archwire. All but one of the agreements requires
royalty payments on a percentage of net sales dollars sold over a specified
period. One specific license specifies a royalty payment based upon the number
of units sold.
Lancer has made a practice of selling its products under trademarks and of
obtaining protection for those trademarks in the United States and certain
foreign countries. Lancer considers these trademarks to be of importance in the
operation of its business.
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the U.S. Effective copyright, trademark and
trade secret protection may not be available in such jurisdictions. Our efforts
to protect our intellectual property rights may not prevent misappropriation of
our content. In addition, there can be no assurance that Biomerica is not
violating any third party patents.
EMPLOYEES
As of July 29, 2005, the Company and its subsidiaries employed 62 employees
of whom 5 are part-time employees in the United States. Of the 62 employees, 36
are employees of Lancer and 26 are Biomerica employees. The following is a
breakdown between departments:
2005 2004
---- ----
Administrative 9 9
Marketing & sales 19 16
Research & development 3 3
Production and operations 31 29
-- --
Total 62 57
In addition, Lancer, through its Mexican subsidiary, employs approximately
97 people. Biomerica contracts with 21 people at its Mexican facility. We also
engage the services of various outside Ph.D. and M.D. consultants as well as
medical institutions for technical support on a regular basis. We are not a
party to any collective bargaining agreement and have never experienced a work
stoppage. We consider our employee relations to be good.
13
ITEM 2. DESCRIPTION OF PROPERTY
Biomerica leases its primary facility under a non-cancelable operating
lease expiring October 31, 2005, which had an initial monthly lease rate of
$15,000. The Company has requested a six-month lease extension with an
additional six-month option and is waiting for approval of such from the
landlord. Management is in the process of investigating alternative facilities
that could be leased in the event that the lease is not extended beyond October
2005. The facilities are owned and operated by four of the Company's
shareholders, one of whom is an officer and director. During fiscal 2004 and
2005 the Company consolidated some of its operations and the landlords agreed to
take back the space no longer needed by the Company and to reduce the rent
accordingly. The landlords also agreed not to institute the 3% increase as
required in the lease. The current monthly rent is $12,364. Management believes
there would be no significant difference in the terms of the leases if they were
with a third party. Total gross rent expense for this facility was approximately
$148,000 and $150,000 during the years ended May 31, 2005 and 2004,
respectively.
The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms.
Janet Moore, an officer, director and shareholder of our Company, is a partner
in JSJ Management. Mrs. Ilse Sultanian and the other partners of JSJ Management,
Susan Irani and Jennifer Irani, are also shareholders of the Company.
At May 31, 2005, future aggregate minimum lease payments for the facilities
for Biomerica are as follows:
Year ending May 31
-------------------
2006 $ 61,820
Biomerica has subleased a portion of its facility under a non-cancelable
operating lease, which expired May 16, 2003 and is currently month-to-month. The
Company recorded base rental income of $28,104 and $18,020 during the years
ended May 31, 2005 and 2004, respectively.
Lancer leases its primary facility under a non-cancelable operating lease
expiring April 30, 2009, as extended, which requires monthly rentals that
increase annually, from $6,688 per month in 2004 to $7,527 per month in 2009.
The lease expense is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash paid aggregates
$21,065 at May 31, 2005, and is included in accounts payable in the accompanying
consolidated balance sheet. Total rental expense for this facility for each of
the years ended May 31, 2005 and 2004 was approximately $81,000 and $75,000,
respectively.
Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a
non-cancelable operating lease for its Mexico facility through March 31, 2009.
The new lease encompasses the approximately 16,000 square feet of the previous
lease, plus additional square footage of approximately 10,000, for a total of
approximately 26,000 square feet. Lancer Orthodontics de Mexico is providing
subcontracted manufacturing services to Biomerica, Inc., using a portion of the
additional square footage. The lease requires monthly payments of approximately
$9,600 through March 2009. An agreement has been negotiated between Lancer
Orthodontics de Mexico and Biomerica for lease reimbursement of approximately
$2,000 per month. The remainder of approximately $7,600 monthly lease expense
will be borne by Lancer. Total rent expense for this facility for the year ended
May 31, 2005 and 2004, was approximately $105,000 and $103,000, respectively.
14
The Lancer Orthodontics de Mexico lease also required an additional
refundable security deposit of $26,550. Lancer Orthodontics, Inc., paid half and
Biomerica, Inc. the other half. This is in addition to the $31,146 refundable
security deposit paid in fiscal year 2002. At May 31, 2005 other assets on the
balance sheet include approximately $44,000 of security deposit paid by Lancer
on the Mexico location.
Future aggregate minimum annual cash lease payments for Lancer are as
follows:
Years ending May 31
-------------------
2006 $ 233,000
2007 238,000
2008 239,000
2009 200,000
---------
Total $ 910,000
A sub-lease agreement for approximately 459 square feet of Lancer's main
facility as entered into in April 2003, effective through November 2003, and
extended in December 2003 through November 2004. The subleased area was used for
a machine shop and required monthly payments of $344. Rental income for the
sub-leased space for the years ended May 31, 2005 and 2004 were $2,583 and
$4,128 respectively.
As of May 31, 2005, we believe that our facilities and equipment are in
suitable condition and are adequate to satisfy the current requirements of our
Company and our subsidiaries, except for anticipated manufacturing equipment
needs at Lancer. Subsequent to year-end Lancer has obtained financing in order
to purchase additional equipment needed for manufacturing.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company's obligations and commitments as of
May 31, 2005:
Payments Due by Period
Contractual Cash Less than
Obligations Total 1 year 1-3 years 5 years
---------------- ----- ------ --------- -------
Shareholder debt $ 301,087 $301,087
Operating Leases 1,023,227 314,741 705,061 $3,425
Employment agreement
at Lancer 232,500 77,500 155,000
Total $1,556,814 $693,328 $860,061 $3,425
Pursuant to the terms of an employment agreement between Lancer and Dan
Castner, the then Vice President of Sales and Marketing for Lancer, dated May
20, 2003, Lancer agreed to pay Mr. Castner an annual base salary of $135,000.
After June 1, 2004, the contract was automatically extended on a month-to-month
basis requiring fourteen days notice of intention to terminate by either party.
15
In addition, on June 2, 2003 Lancer granted Mr. Castner stock options to
purchase an aggregate of 120,000 shares of Lancer common stock at an exercise
price of $0.43 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 the
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 unaffiliated third party, the options shall vest 100%.
On November 29, 2004, the Board of Directors of Lancer approved a new
employment agreement and the promotion of Mr. Castner to President. The
agreement is for a term of two years. Mr. Castner's salary shall be $155,000 for
the first year with a possible merit increase after the first year. The
agreement also called for the grant of a stock option for 100,000 shares at fair
market value at the time of grant, to be granted no later than May 31, 2005.
These options were granted in February 2005 at an exercise price of $.70 per
share. The agreement was filed as an exhibit to a Form 8-K filed by Lancer
November 30, 2004.
On March 16, 2005 management of Lancer Orthodontics signed a strategic
marketing, sales and manufacturing agreement with Lingualcare, Inc. The terms of
the agreement provide for Lancer to manufacture Lingualcare's products in
Lancer's Mexicali facilities, and for Lancer to assist in introducing, marketing
and promoting Lingualcare's orthodontic products. Lancer shall be paid for the
manufacturing of the products, and shall further receive shares of Lingualcare's
common stock and warrants to purchase additional shares of common stock. The
vesting of the Shares and Warrants shall be based on certain milestones to be
achieved over a three to four year period. This agreement has required Lancer to
invest in new manufacturing equipment and upgrade its facility, and invest in
sales and marketing expenditures.
Biomerica and Lancer have various small leases for office equipment.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
---------------------------------------------------------
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------
Since June 20, 2002, the Company's stock has been quoted on the OTC
Bulletin Board under the symbol "BMRA.OB". The following table shows the high
and low bid prices for Biomerica's common stock for the periods indicated, based
upon data reported by Yahoo Finance. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
16
Bid Prices
----------
High Low
---- ---
Quarter ended:
May 31, 2005.............................. $0.70 $0.42
February 28, 2005......................... $0.65 $0.38
November 30, 2004......................... $0.55 $0.40
August 31, 2004........................... $0.52 $0.35
May 31, 2004.............................. $0.70 $0.42
February 28, 2004......................... $0.65 $0.38
November 30, 2003......................... $0.55 $0.40
August 31, 2003........................... $0.52 $0.35
As of August 19, 2005, the number of holders of record of Biomerica's
common stock was approximately 950, excluding stock held in street name. The
number of record holders does not bear any relationship to the number of
beneficial owners of the Common Stock.
The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividends on its Common Stock in the
foreseeable future. The Company's Board of Directors intends, for the
foreseeable future, to retain any earnings to finance the continued operation
and expansion of the Company's business.
During the past three fiscal years we completed the following private
placement transactions exempt under Regulation D of the Securities Act of 1933,
as amended:
Class or Persons Price per
Date Title Amount Sold To Share Total
---- ----- ------ ------- ------ ---
9/02 common 87,778 insiders & qualified investors $0.45 $ 51,417
2/03 common 100,000 qualified investor $0.25 $ 25,000
3/03 common 98,182 insiders & qualified investors $0.22 $ 21,600
5/03 common 22,107 qualified investor $0.45 $ 20,611
5/03 common 60,000 insider & qualified investors $0.25 $ 15,000
6/03 common 202,000 insider & qualified investors $0.25 $ 50,500
The table below provides information relating to our equity compensation
plans as of May 31, 2005:
17
Securities
Remaining Available
for Future Issuance
Under Compensation
Number of Securities Compensation Plans Plans (Excluding
Securities To be issued upon Weighted-Average Reflected in First
Plan Exercise of outstanding Exercise Price of Column)
Category Options Outstanding Options
Equity compensations
Plans approved by
Securities holders 923,828 $.72 1,014,291*
Total
* Of these shares, 759,000 have not yet been registered by a Form S-8.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS
FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S AND
LANCER'S RESULTS IN FUTURE PERIODS TO DIFFER FROM FORECASTED RESULTS. THESE
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR
THE COMPANIES' PRODUCTS, AVAILABILITY OF RAW MATERIALS AND THE STATE OF THE
ECONOMY AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND
APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
Biomerica currently has one active subsidiary, Lancer Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and development of
orthodontic products. As of May 31, 2005, Biomerica's direct ownership
percentage of Lancer was 23.41% and its direct and indirect (via agreements with
certain shareholders/directors) voting control over Lancer was greater than 50%.
As a result of Biomerica's control and ownership, our financial statements are
consolidated with those of Lancer. During the fiscal year ending May 31, 2005,
Biomerica was a party to certain informal agreements with certain of Lancer's
officers and directors, pursuant to which they agreed to vote in the same manner
as Biomerica (and its directors holding shares of Lancer's common stock) on
matters requiring the approval of Lancer's stockholders. Biomerica's percentage
of direct ownership in Lancer has continued to decrease due to Lancer's issuance
of additional shares of its common stock. Lancer's private placement of common
stock subsequent to May 31, 2005 (see Note 13) further decreased Biomerica's
percentage of direct ownership. As of the date of this Annual Report,
Biomerica's management has not made any determination whether, commencing with
its current fiscal year ending May 31, 2006, and as a result of Lancer's most
recent equity private placement (or of any subsequent issuances of Lancer's
common stock), Biomerica will continue to consolidate Lancer's financial
statements. Lancer is a non-reporting, public company whose common stock is
traded on the pink sheets under the symbol "LANZ".
18
Fiscal 2005 Compared to Fiscal 2004
Our consolidated net sales were $9,273,980 for fiscal 2005 compared to
$9,168,833 for fiscal 2004. This represents an increase of $105,147, or 1.1% for
fiscal 2005. Of the total consolidated net sales for fiscal 2005, $5,951,457 is
attributable to Lancer, and $3,322,523 to Biomerica. Lancer's sales decreased by
$72,552, or 1.2%, over the prior fiscal year, while Biomerica showed a sales
increase of $177,699, or 5.4%. The decrease at Lancer was primarily attributable
to a reduction in the volume of sales to orthodontic distributors in the U.S.
Lancer is now focused on increasing direct sales to orthodontists and hopes to
offset the reduction in sales to distributors through increased higher margin
direct sales. The increase at Biomerica was due to increases of sales to foreign
distributors.
Cost of sales in fiscal 2005 as compared to fiscal 2004 decreased by
$63,519 or 1.0%. Lancer's cost of sales as a percentage of sales increased from
68.5% to 69.7% in fiscal 2005 as compared to fiscal 2004. The increase was
primarily attributable to higher production costs. Biomerica had a decrease in
cost of sales as a percentage of sales from 68.7% to 62.5% in fiscal 2005 as
compared to fiscal 2004. The decrease was largely due to transferring additional
production to Mexico, a workman's compensation insurance refund and lower CE
Mark expenses.
Selling, general and administrative costs increased in fiscal 2005 as
compared to fiscal 2004 by $86,985 or 2.9%. Lancer had an increase of $229,077
in these costs due to increased labor and brochure costs. Biomerica had a
decrease in fiscal 2005 as compared to fiscal 2004 of $142,092, or 12.4%,
primarily due to lower commissions, option expense and bad debt expense in
fiscal 2005 as compared to fiscal 2004.
Research and development expense increased in fiscal 2005 as compared to
fiscal 2004 by $307 or .1%. Of this, Lancer had a decrease of $19,886, as a
result of reclassification of product development labor costs to manufacturing.
Biomerica had an increase in research and development expenses of $20,193, or
12.8% due to higher material costs, outside services and wages.
Interest expense net of interest income, increased in fiscal 2005 as
compared to fiscal 2004 by $6,579 or 19.3%, due to an increase of such expense
at Lancer of $7,191 which was offset by a decrease at Biomerica of $612 due to a
lower balance on the shareholder note payable.
Other income decreased by $43,069 or 54.5% in fiscal 2005 as compared to
fiscal 2004. Of this, Lancer had a decrease in other income of $9,394 due to a
decrease in rental income and the deflation of the Euro currency conversion to
dollars. Biomerica had a decrease in other income of $33,675 due to the sale of
available for sale securities in the prior fiscal year.
Consolidated net income was $162,259 for the year ended May 31, 2005.
Lancer had a net loss of $291,544. Biomerica had a loss from continuing
operations of $21,464 and the discontinued operation had a gain of $183,723.
Biomerica's loss of $21,464 includes its ownership percentage share of Lancer's
loss ($71,583). Without the Lancer loss, Biomerica would have recognized a gain
before discontinued operations of $50,919. The net income of $162,259 is a
result of Biomerica's gain of $50,919 less its percentage of Lancer's loss of
$71,583, plus the gain from the discontinued operation of $183,723 and less
$800 in income taxes.
19
As of May 31, 2005 Biomerica had net tax operating loss carryforwards of
approximately $3,498,000 and investment tax and research and development credits
of approximately $72,000, which are available to offset future federal tax
liabilities. These carryforwards expire at varying dates from 2005 to 2023. As
of May 31, 2005, Biomerica had net operating tax loss carryforwards of
approximately $617,000 available to offset future state income tax liabilities,
which expire through 2012. As of May 31, 2005, Lancer had net operating loss
carryforwards of approximately $2,160,000 and business tax credits of
approximately $23,000 available to offset future Federal tax liabilities. The
Lancer federal carryforwards expire through 2021. As of May 31, 2005, Lancer had
net tax operating loss carryforwards of approximately $85,000 and business tax
credits of approximately $29,000 available to offset future state income tax
liabilities. The state carryforwards expire through the year 2013.
Liquidity, Capital Resources and Going Concern
As of May 31, 2005, we had cash and available for sale securities of
$360,061 (see Note 2 of Notes to Consolidated Financial Statements) and current
working capital of $2,622,322. Of the current working capital, $2,503,877 is
attributable to the Lancer subsidiary, which is restricted from distribution of
any assets to Biomerica (except for reimbursement of expenses on behalf of
Lancer or for services rendered for Biomerica). During 2005, cash provided by
operations was $72,914 as compared to cash used in operations in fiscal 2004 of
$75,032. During fiscal 2005, cash used in investing activities was $233,352,
primarily due to the purchase of property and equipment of $242,240 ($198,230 by
Lancer), which was offset by sales of available for sale securities at Biomerica
of $8,888. During fiscal 2004 cash used in investing activities was $390,122
primarily due to the purchase of property and equipment at Lancer. During 2005,
cash provided by financing activities of $159,939 was primarily the result of an
increase in the borrowings on the line of credit by Lancer of $175,000.
Biomerica used $16,231 to pay down part of the shareholder note payable. During
2004, cash provided by financing activities was $293,335, primarily due to
private placements at Biomerica ($50,500) and Lancer ($270,000), which was
offset by minority interests.
The change in cash and cash equivalents at May 31, 2005 compared to May 31,
2004 was a decrease of $493. Of this, Biomerica had an increase of $26,492 and
Lancer had a decrease of $26,985.
Lancer has made a large investment into equipment in the last two fiscal
years ($198,230 in 2005 and $394,612 in fiscal 2004). The investment has
primarily been for manufacturing equipment, which is being used in the Mexico
facility. In addition, Lancer has reported a net loss of $291,544 this fiscal
year. Lancer's loss was a result of a decrease of $72,552 in sales, higher cost
of sales due to higher production costs, and higher selling, general and
administrative costs of $229,077 as a result of increased labor and brochure
costs. Research and development expenses decreased by $19,886 as a result of
reclassification of product development labor costs to manufacturing. As a
result, Lancer has had to draw on its line of credit. As of May 31, 2005, the
balance due on the line of credit was $175,000 as compared to $0 at the prior
fiscal year-end. In order to help cash flow, Lancer has been paying its
part-time Chief Executive Officer and part-time Chairman with restricted, common
stock ($79,850 in 2005).
20
On an unconsolidated basis, Biomerica had increased sales this fiscal year
of $177,699, primarily due to increased sales to foreign distributors. In order
to help cash flow during the last two fiscal years, two of the officers of
Biomerica have deferred most of their salaries. As a result, accrued
compensation increased during 2005 and 2004 by $128,257 and $123,023,
respectively and this positively affected cash flow. The Company is now paying
these officers their current salary and is no longer accruing their salaries.
The Company had decreased cost of sales due to manufacturing in Mexico, a large
workman's compensation insurance refund and lower CE Mark expenses. Decreased
selling, general and administrative costs of $142,092 due to lower bad debt
expense, commissions and utilities contributed to a better cash flow. As a
result, the Company has been able to pay down some of the debt owed for
payables, back rent, interest payable and its shareholder note payable.
On an unconsolidated basis, Biomerica's operating activities provided cash
of $81,645 in fiscal 2005 as compared to cash used in operating activities of
$24,336 in fiscal 2004. Net cash provided by (used in) investing activities for
the years ended May 31, 2005 and 2004 were $(35,122) and $3,937, respectively.
Net cash (used in) and provided by financing activities was $(20,031) for fiscal
2004 and $54,868 for fiscal 2004.
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 on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable bearing interest at 8% and payable September 1,
2004. The due date on this note was extended until September 1, 2005 and
subsequent to fiscal year end May 31, 2005, has been extended until September 1,
2006 at the same terms. Minimum payments of $4,000 per month plus an additional
$3,500 per month, depending on quarterly results of the Company, are being made.
Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica has funded its operations through debt and
equity financings, and may have to do so in the future. ReadyScript operations
were discontinued in May 2001. ReadyScript was a contributor to the Company's
losses in prior fiscal years. During the fiscal years ended May 31, 2005 and
2004, certain liabilities were forgiven and thus a discontinued operations
profit for the years then ended was recorded. The subsidiary is being reported
in the financial statements as a discontinued operation because it is no longer
an operating entity.
In the last several years the Company has been focusing on reducing costs
where possible and concentrating on its core business in Lancer and Biomerica to
increase sales. Management believes that cash flows from current operations,
coupled with the Lancer line of credit (to be utilized only by Lancer), the
private placement at Lancer in July 2005 and equipment financing at Lancer are
sufficient to enable the Company and the Lancer subsidiary to fund operations
for at least the next twelve months. Should the Company have a downturn in sales
or unanticipated, increased expenses, the result for the Company could be the
inability to continue as a going concern. The Company will continue to have
limited cash resources. Biomerica, as a parent entity, has no open or existing,
operating line of credit or loans on which it can draw any new or additional
debt financing.
21
Our independent registered public accounting firm has concluded that there
is 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 report 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.
As of May 31, 2005 Lancer has a $400,000 line of credit with Community
National Bank (formerly Cuyamaca Bank). The line of credit allows for borrowings
up to $400,000 and are limited to 80% of accounts receivable less than 90 days
old. The outstanding balance at May 31, 2005 was $175,000 and the unused portion
available under the line of credit at May 31, 2005, was approximately $137,000.
Borrowings bear interest at prime plus 2.00% per annum, but not lower than 8%
(8% at May 31, 2005). Lancer requested that Community National Bank reserve
$60,000 of Lancer's available credit as a guarantee of credit with a European
supplier.
The Lancer 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 that a zero outstanding
balance be maintained for 30 consecutive days during the term. The line of
credit expires on October 15, 2005.
Lancer is restricted from distribution of any assets to Biomerica except
for reimbursement of expenses on behalf of Lancer or for services rendered.
Due to the strategic marketing agreement signed by Lancer on March 16,
2005, the board of Lancer has decided to hold a private placement subsequent
to year end to raise the necessary funds to carry out that agreement.
During 2004 and 2003, a shareholder advanced the Company $4,000 and
$10,000, respectively. During June 2003 the $10,000 advance was repaid in the
form of Company common stock at the price of $.25 per share. Interest for the
fiscal year ended May 31, 2005 and 2004 were $320 and $283, respectively. At May
31, 2005, $1,979 was owed in interest payable on the two loans.
During 2005 and 2004, the Company incurred $31,734 and $32,060,
respectively, in interest expense related to the shareholder line of credit,
note payable and rental liabilities. As of May 31, 2005, $1,979 in accrued
interest was due on the promissory note and rental liabilities.
SUBSEQUENT EVENTS
On March 16, 2005 management of Lancer Orthodontics signed a strategic
marketing, sales and manufacturing agreement with Lingualcare, Inc. The terms of
the agreement provide for Lancer to manufacture Lingualcare's products in
Lancer's Mexicali facilities, and for Lancer to assist in introducing, marketing
and promoting Lingualcare's orthodontic products. Lancer shall be paid for the
manufacturing of the products, and shall further receive shares of Lingualcare's
common stock and warrants to purchase additional shares of common stock. The
vesting of the Shares and Warrants shall be based on certain milestones to be
achieved over a three to four year period. This agreement has required Lancer to
invest in new manufacturing equipment and upgrade its facility, and invest in
sales and marketing expenditures.
22
In July 2005 Lancer conducted a private placement, the purpose of which was
to raise funds to proceed with the terms of the Lingualcare agreement. Lancer
sold 722,769 shares of restricted common stock at the price of $.65 per share.
Total gross proceeds to Lancer were $459,800. This private placement further
reduced Biomerica's control and ownership percentage in Lancer. As a result, the
financial statements of Lancer may not be consolidated with those of Biomerica
in the future, as discussed above.
On July 21, 2005, Lancer entered into two equipment finance leases for the
purchase of manufacturing equipment for the Lingualcare project. The leases have
a total of $328,590 due and the minimum payments per month are $8,068. The term
of the leases is forty-eight months. Lancer is also entering into or has entered
into agreements to acquire other capital equipment for the Lingualcare project
in the total amount of $229,110. These agreements have varying financing terms.
On July 29, 2005, Biomerica entered into an agreement for the research,
development and transfer of certain technology. The total of the project is
estimated to be $55,000.
On August 20, 2005, the Company and the holder of the Note
Payable-shareholder described in Note 6 to the consolidated financial statements
agreed to the extension of the note due date until September 1, 2006, at the
same terms and conditions as the previous agreement.
In July 2005, Lancer signed a large contract manufacturing agreement with
an orthodontic reseller, wherein the reseller has committed to purchase at least
$960,000 of product from Lancer during the period of July 1, 2005 to October 1,
2006.
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
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.
Revenues from product sales are recognized at the time the product is
shipped, customarily FOB shipping point, at which point title passes. An
allowance is established for estimated returns as revenue is recognized.
23
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed by
management and discussed with the audit committee. We have identified specific
customers where collection is probable and have established specific reserves,
but to the extent collection is made, the allowance will be released.
Additionally, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on hand to
management's forecast of customer demand. Customer demand is dependent on many
factors and requires us to use significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from older
products to newer products. Once a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product.
In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future
taxable income is difficult, and requires the use of significant judgment. At
May 31, 2005, 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the 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, Inc. and are not meant to be an exhaustive discussion
of risks that apply to companies such as Biomerica, Inc. Like other businesses,
Biomerica, Inc. is susceptible to macroeconomic downturns in the United States
or abroad, as were experienced in fiscal year 2002, that may affect the general
economic climate and performance of Biomerica, Inc. or its customers.
Aside from general macroeconomic downturns, the additional material factors
that could affect future financial results include, but are not limited to:
Terrorist attacks and the impact of such events; diminished access to raw
materials that directly enter into our manufacturing process; shipping labor
disruption or other major degradation of the ability to ship out products to end
users; inability to successfully control our margins which are affected by many
factors including competition and product mix; protracted shutdown of the U.S.
border due to an escalation of terrorist or counter terrorist activity; the
operating and financial covenants contained in Lancer's credit line which could
limit our operating flexibility; any changes in our business relationships with
international distributors or the economic climate they operate in; any event
that has a material adverse impact on our foreign manufacturing operations may
adversely affect our operations as a whole; failure to manage the future
expansion of our business could have a material adverse 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, some of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or dental 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 these factors make it difficult to predict operating results for any
particular period.
24
INSURANCE COVERAGE
Biomerica currently carries various insurance policies including products
liability ($2,000,000), general liability ($2,000,000), property insurance
(personal property-$1,687,296), business income insurance ($800,000), employee
benefit errors or omissions liability insurance ($1,000,000), commercial crime
insurance ($100,000), crime insurance (pension plan) ($300,000), employee theft
($100,000), depositor's forgery ($100,000), commercial auto ($1,000,000)
umbrella liability insurance ($1,000,000), workman's compensation insurance
($1,000,000), directors and officers' insurance (shared with Lancer)
($3,000,000), group health, disability and life insurance. Lancer currently has
coverage for personal property ($472,500), business income ($1,200,000), general
liability ($2,000,000), employee benefit errors or omissions liability
($1,000,000), products liability ($2,000,000), auto ($1,000,000), commercial
fidelity ($100,000), difference in conditions and Mexico required coverage
($2,500,000), directors and officers' insurance (shared with Biomerica)
($3,000,000); group health and dental. Both Lancer's and Biomerica's workman's
compensation policies cover injuries to employees as a result of accidental
contamination of hazardous materials. The companies do not have a separate
policy for contamination of hazardous materials.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
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. The Company adopted the disclosure requirements effective December 1,
2002, in its consolidated financial statements. The adoption of SFAS No. 123 did
not have a material effect on the Company's consolidated financial position or
results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest
Entities". In December 2003, FIN 46 was replaced by FASB Interpretation No. 46R,
"Consolidation of Variable Interest Entities." FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R
was effective at the end of the first interim period ending March 15, 2004.
Entities that have adopted FIN 46 prior to this date can continue to apply
provisions of FIN 46 until the effective date of FIN 46R or early election of
FIN 46R. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN No. 46 requires identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand-alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. The adoption of FIN No. 46 did not have a material impact on the
Company's financial position or results of operations.
25
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of this statement did
not have a significant effect on the Company's consolidated financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 provides guidance on how an entity classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Many of these instruments were previously classified as equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement requires cumulative effect
transition for financial instruments existing at the adoption date. The adoption
of this statement did not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets- An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Early application was permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a material
effect on the Company's consolidated results of operations or financial
position.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). FAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R will require compensation costs related to share-based payment transactions
to be recognized in the financial statement (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. Compensation cost will be
recognized over the period that an employee provides service in exchange for the
award.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.
107 required disclosures upon adoption of SFAS No. 123R on January 1, 2006 and
is currently evaluating the impact the adoption of the standard will have on the
Company's financial condition, results of operations, and cash flows.
26
In April 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for SFAS No. 123R. The Statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company will adopt SFAS No. 123R on January 1, 2006 and is
currently evaluating the impact the adoption of the standard will have on the
Company's results of operations.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical.APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods. The Company does not
believe the adoption of this standard will have an impact on its results of
operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
Exhibit 99.3, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Inapplicable.
ITEM 8A. Controls and Procedures
---------------------------------
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to our management, including
our Principal Executive Officer and our Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Our
management, including our Principal Executive Officer and our Principal
Financial Officer, does not expect that our disclosure controls or procedures
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within Biomerica have been detected.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Principal Executive Officer and
our Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the annual
period covered by this report. Based on the foregoing, our Principal Executive
Officer and our Principal Financial Officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal year that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
--------------------------------------------------------------------------------
WITH SECTION 16(a) OF THE EXCHANGE ACT.
---------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2005 Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2005.
ITEM 10. EXECUTIVE COMPENSATION
-------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2005 Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2005 Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2005.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
In fiscal 2003, Biomerica entered into an agreement with Lancer whereby
Biomerica agreed to pay an initial shelter fee of $5,000 with additional monthly
payments of $2,875 for use of the Lancer de Mexico facilities to produce and
manufacture Biomerica products. The monthly payments are due as long as
Biomerica produces its products at the Lancer de Mexico facility. At May 31,
2005, Biomerica has paid all applicable shelter fees.
Other information regarding related transactions is incorporated by
reference to the Company's proxy statement for its 2005 Annual Meeting of
Stockholders, which will be filed not later than 120 days after the end of the
Company's fiscal year ended May 31, 2005.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
----------------------------------------------
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File No.
2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 6, 1978 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 4, 1983 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
January 19, 1987 (incorporated by reference to Exhibit 3.4 filed
with Form 8 Amendment No. 1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987).
28
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
November 4, 1987 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 filed with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
December 20, 1994 (incorporated by reference to Exhibit 3.7
filed with Registrant's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1995).
3.8 First Amended and Restated Certificate of Incorporation of
Biomerica, Inc. filed with the Secretary of State of Delaware on
August 1, 2000 (incorporated by reference to Exhibit 3.8 filed
with the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2000).
4.1 Specimen Stock Certificate of Common Stock of Registrant
(incorporated by reference to Exhibit 4.1 filed with
Registrant's Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.3 1999 Stock Incentive Plan of Registrant (incorporated by
reference to Exhibit 10.1 to Registration Statement on Form S-8
filed with the Securities and Exchange Commission on March 29,
2000).
10.4 1995 Stock Option and Common Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on January 20, 1996).
10.5 1991 Stock Option and Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on April 6, 1992).
10.11 Non-Qualified Option Agreement by and between Zackary Irani and
the Company dated June 10, 1999 (incorporated by reference to
Exhibit 10.15 filed with Form 8-K on July 7, 1999).
10.12 Non-Qualified Option Agreement by and between Janet Moore and
the Company dated June 10, 1999 (incorporated by reference to
Exhibit 10.16 filed with Form 8-K on July 7, 1999).
10.14 Non-Qualified Option Agreement by and between Robert A. Orlando,
M.D., Ph.D. and the Company dated June 10, 1999 (incorporated by
reference to Exhibit 10.18 filed Form 8-K on July 7, 1999).
10.21 Amendment to Lease Extension/Lease Term effective January 1,
1999, whereby Lancer Orthodontics, Inc. and L&T Corporation, a
California corporation entered into an amendment and extension
to the terms of that certain lease agreement dated November 4,
1993 for the premises located at 253 Pawnee Street, Suite A, San
Marcos, California 92069 (incorporated by reference to Exhibit
10.22 filed with Registrant's Registration Statement on Form
SB-2, Commission No. 333-87231 filed on September 16, 1999).
29
10.22 Sublease Agreement entered into by and between Eagleson de
California S.A. de C.V. and Lancer Orthodontics, Inc. commencing
on November 1, 1998 covering approximately 16,000 square feet
located in the Industrial Park at Ave. Saturno No. 20 and of
certain improvements constructed on the land as detailed in that
certain sublease between the parties dated April 1, 1996
(incorporated by reference to Exhibit 10.23 filed with
Registrant's Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.27 Lease between Biomerica, Inc., JSJ Management and Ilse Sultanian
dated September 1, 2001. (Incorporated by reference to the
Company's 2002 Form 10KSB/A filed June 6, 2003.)
10.28 Agreement between Biomerica, Inc. and Lancer Orthodontics, Inc.
for the acquisition of the remaining outstanding shares of
Lancer Orthodontics, Inc., common stock by Biomerica
(incorporated by reference to an exhibit filed with the S-4
filed on April 10, 2002).
10.29 General Assignment of Assets Agreement with Allergy Immuno
Technologies, Inc.(incorporated by reference to the Company 2002
Form 10KSB/A filed June 6, 2003.)
10.31 Loan Modification, Forbearance and Security Agreement
(incorporated by reference to the Company's February 29, 2004
Form 10-QSB filed April 14, 2004).
10.32 Promissory Note (incorporated by reference to the Company's
February 29, 2004 Form 10-QSB filed April 14, 2004).
10.33 Employment agreement with Lancer subsidiary President, Daniel
Castner (incorporated by reference to Lancer's report on Form-8K
November 29, 2004).
16.1 Letter on Change of Certifying Accountant (incorporated by
reference to Exhibit A to Form 8-K filed with the Securities and
Exchange Commission on May 24, 1993).
21.1 Subsidiaries of Registrant.
23.2 Consent of Independent Registered Public Accounting Firm (PKF
San Diego).
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 2005 and 2004 and
Independent Registered Public Accounting Firm's Report.
(b) Reports on Form 8-K.
None.
30
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
For the year end May 31, 2004, BDO Seidman, LLP reviewed the Company's
consolidated quarterly financial statements and provided tax related services.
PKF (San Diego), Certified Public Accountants, was engaged to audit the
consolidated financial statements for the years ended May 31, 2005 and 2004.
The aggregate fees billed for professional services by BDO Seidman, LLP and PKF
(San Diego) in 2005 and 2004 were as follows:
2005 2004
---- ----
PKF audit fees $ 78,190(3) $57,000(1)
BDO audit fees -- $66,421(2)
PKF audit related fees 1,208 260
PKF tax fees 6,197 --
-------- --------
total $ 85,595 $123,681
(1) Billed in fiscal 2005.
(2) Includes $19,000 billed in fiscal 2005 and $47,421 billed in fiscal 2004.
(3) Includes $59,000 billed or to be billed in fiscal 2006.
AUDIT FEES consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements, the audit of our
subsidiaries financial statements, the reviews of the financial statements
included in our Forms 10-QSB, the reviews of the financial statement included in
our subsidiaries Form 10-QSB and for any other services that are normally
provided by PKF or BDO in connection with our statutory and regulatory filings
or engagements.
AUDIT RELATED FEES consist of the aggregate fees billed for professional
services rendered for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and the financial statements of our subsidiaries that were not otherwise
included in Audit Fees.
TAX FEES consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.
ALL OTHER FEES consist of the aggregate fees billed for products and services
provided by PKF or BDO and not otherwise included in Audit Fees, Audit Related
fees or Tax Fees. Included in such Other Fees were fees for services rendered by
PKF or BDO in connection with our private and public offerings conducted during
such periods.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /s/ Zackary S. Irani
---------------------------------
Zackary S. Irani, Chief Executive
Officer
Dated: 9/13/05
-------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
Signature and Capacity
/s/ Zackary S. Irani Date: 9/13/05
------------------------------------
Zackary S. Irani
Director, Chief Executive
Officer
/s/ Janet Moore Date: 9/13/05
------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer
/s/ Francis R. Cano Date: 9/13/05
------------------------------------
Francis R. Cano
Director
/s/ Allen Barbieri Date: 9/13/05
------------------------------------
Allen Barbieri
Director
32
BIOMERICA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
================================================================================
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM FS-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of May 31, 2005 FS-3
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Years Ended
May 31, 2005 and 2004 FS-4 - FS-5
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 2005 and 2004 FS-6 - FS-9
Consolidated Statements of Cash Flows for the
Years Ended May 31, 2005 and 2004 FS-10 - FS-11
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Biomerica, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
(a Delaware Corporation) and its subsidiaries as of May 31, 2005 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended May 31, 2005 and 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. as of May 31, 2005, and the results of its consolidated
operations and cash flows for the years ended May 31, 2005 and 2004 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has historically
reported net losses and negative cash flows from operations, which raises
liquidity concerns. Management estimates that its available cash resources as of
May 31, 2005 along with cost reductions, anticipated increased sales and
financing activities should be sufficient to fund planned operations through May
31, 2006. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 1 to the accompanying consolidated financial statements.
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 from the outcome of this
uncertainty.
August 22, 2005 /s/ PKF
San Diego California Certified Public Accountants
A Professional Corporation
FS-2
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
MAY 31, 2005
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 351,881
Available-for-sale securities 8,180
Accounts receivable, less allowance for doubtful
accounts and sales returns of $168,801 1,722,212
Inventories, net 2,090,178
Prepaid expenses and other 114,643
Total current assets 4,287,094
--------------------------------------------------------------------------------
INVENTORIES, non-current 611,000
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost
Equipment 3,335,263
Construction in progress 189,383
Furniture, fixtures and leasehold improvements 489,822
--------------------------------------------------------------------------------
4,014,468
ACCUMULATED DEPRECIATION (3,197,054)
--------------------------------------------------------------------------------
Net property and equipment 817,414
INTANGIBLE ASSETS, net 12,938
OTHER ASSETS 62,240
--------------------------------------------------------------------------------
$5,790,686
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 175,000
Accounts payable and accrued expenses 1,082,926
Accrued compensation 594,180
Notes payable-shareholder 301,087
Net liabilities from discontinued operations 104,579
--------------------------------------------------------------------------------
Total current liabilities 2,257,772
--------------------------------------------------------------------------------
MINORITY INTEREST 2,479,853
--------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 25,000,000 shares
authorized; 5,752,431 shares issued and
outstanding 460,193
Additional paid in capital 17,107,474
Accumulated other comprehensive income 526
Accumulated deficit (16,515,132)
--------------------------------------------------------------------------------
Total shareholders' equity $ 1,053,061
--------------------------------------------------------------------------------
$ 5,790,686
================================================================================
SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FS-3
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED MAY 31, 2005 2004
--------------------------------------------------------------------------------
NET SALES $9,273,980 $ 9,168,833
Cost of sales 6,188,898 6,252,417
--------------------------------------------------------------------------------
GROSS PROFIT 3,085,082 2,916,416
--------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 3,045,558 2,958,573
Research and development 274,288 273,981
--------------------------------------------------------------------------------
Total operating expenses 3,319,846 3,232,554
--------------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS (234,764) (316,138)
OTHER INCOME (EXPENSE)
Interest expense, net of interest income (40,693) (34,114)
Other income (expense), net 35,970 79,039
--------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS, before minority
interest in net loss of consolidated
subsidiaries and income taxes (239,487) (271,213)
MINORITY INTEREST IN NET LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES 219,961 (26,014)
--------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS, before income taxes (19,526) (297,227)
INCOME TAX EXPENSE 1,938 1,823
--------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (21,464) (299,050)
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations, net 183,723 75,849
--------------------------------------------------------------------------------
NET INCOME (LOSS) 162,259 (223,201)
FS-4
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(CONTINUED)
YEARS ENDED MAY 31, 2005 2004
--------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized income (loss) on
available-for-sale securities (17,940) 28,123
--------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 144,319 (195,078)
================================================================================
BASIC NET INCOME LOSS PER COMMON SHARE:
(Loss) from continuing operations $ (.00) $ (0.05)
Income (loss) from discontinued operations .03 0.01
--------------------------------------------------------------------------------
Basic net income (loss) per common share $ .03 $ (0.04)
================================================================================
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Income (Loss) from continuing operations $ (.00) $ (0.05)
Income from discontinued operations .03 0.01
--------------------------------------------------------------------------------
Diluted net income (loss) per common share $ .03 $ (0.04)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
Basic 5,752,431 5,739,993
================================================================================
Diluted 6,619,121 5,739,993
================================================================================
SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FS-5
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL COMMON STOCK
PAID-IN SUBSCRIBED
SHARES AMOUNT CAPITAL SHARES AMOUNT
---------------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2003 5,522,431 $ 441,793 $ 17,117,393 18,000 $ 4,500
Issuance of subscribed shares 18,000 1,440 3,060 (18,000) (4,500)
Private placement 202,000 16,160 34,340 -- --
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
Exercise of stock options 10,000 800 1,200
Compensation expense in connection
with options and warrants granted -- -- 81,731 -- --
Change in minority interest related -- -- (112,719) -- --
to sale of stock at subsidiary
Net loss -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2004 5,752,431 $ 460,193 $ 17,125,005 -- $ --
FS-6
ACCUMULATED OTHER
COMPREHENSIVE ACCUMULATED
INCOME (LOSS) DEFICIT TOTAL
--------------------------------------------------------------------------------------------
Balances, May 31, 2003 $ (9,657) ($16,454,190) $ 1,099,839
Private placement -- -- 50,500
Change in unrealized gain (loss) on 28,123 -- 28,123
available-for-sale securities
Exercise of stock options -- -- 2,000
Compensation expense in connection
with options and warrants granted -- -- 81,731
Change in minority interest related
to sale of stock at subsidiary -- -- (112,719)
Net loss -- (223,201) (223,201)
--------------------------------------------------------------------------------------------
Balances, May 31, 2004 18,466 ($16,677,391) $ 926,273
(Continued)
FS-7
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
COMMON STOCK ADDITIONAL COMMON STOCK
PAID-IN SUBSCRIBED
SHARES AMOUNT CAPITAL SHARES AMOUNT
----------------------------------------------------------------------------------------------------------------------
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
Compensation expense in connection
with options and warrants granted -- -- 3,563 -- --
Expense related to
issuance of warrants
for extension of note -- -- 10,400 -- --
Change in minority interest related
to sale of stock at subsidiary (31,494)
Net income -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2005 5,752,431 $ 460,193 $17,107,474 -- --
======================================================================================================================
FS-8
ACCUMULATED OTHER
COMPREHENSIVE ACCUMULATED
INCOME (LOSS) DEFICIT TOTAL
---------------------------------------------------------------------------------------------
Change in unrealized gain (loss) on
available-for-sale securities (17,940) -- (17,940)
Compensation expense in connection
with options and warrants granted -- -- 3,563
Expense related to
issuance of warrants
for extension of note -- -- 10,400
Change in minority interest related
to sale of stock at subsidiary -- -- (31,494)
Net income -- 162,259 162,259
---------------------------------------------------------------------------------------------
Balances, May 31, 2005 $ 526 $(16,515,132) $ 1,053,061
=============================================================================================
SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FS-9
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2005 2004
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (21,464) $ (299,050)
Adjustments to reconcile loss from
continuing operations to net cash
(used in) provided by operating activities:
Depreciation and amortization 159,317 144,160
Provision for gain (losses) on accounts receivable (3,601) 52,357
Provision for losses on inventory (40,663) --
Gain on sales of available for sale securities (8,888) (30,853)
Warrants and options issued 3,563 81,731
Common stock issued or subscribed for services
rendered for the consolidated subsidiaries 79,850 33,750
Warrants issued for extension of note 10,400 --
Minority interest in net (loss) income
of consolidated subsidiaries (219,961) 26,014
Loss on disposal of property and equipment 1,258 --
Changes in assets and liabilities
Accounts receivable (201,328) 93,596
Inventories 32,328 (17,911)
Prepaid expenses and other 67,118 20,927
Other receivables and assets (13,419) (5,421)
Accounts payable and other accrued expenses 100,147 (297,355)
Accrued compensation 128,257 123,023
--------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 72,914 (75,032)
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities 8,888 45,967
Purchases of property and equipment (242,240) (436,089)
--------------------------------------------------------------------------------
Net cash (used in) investing activities (233,352) (390,122)
--------------------------------------------------------------------------------
(Continued)
FS-10
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 2005 2004
---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) under line of credit borrowings 175,000 (426)
(Decrease) increase of shareholder debt (16,231) 3,768
Change in minority interests -- (32,507)
Exercise of stock options -- 2,000
Exercise of stock option at subsidiary 1,170 --
Sale of common stock, net of offering expenses -- 50,500
Consolidated subsidiaries sale of common stock -- 270,000
---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 159,939 293,335
---------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations 6 (974)
---------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (493) (172,793)
CASH AND CASH EQUIVALENTS, beginning of year 352,374 525,167
---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 351,881 $ 352,374
===================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 40,693 $ 19,200
===================================================================================================
Income taxes $ 1,938 $ 1,823
===================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Change in unrealized holding gain (loss) on
available-for-sale securities $ (17,940) $ 28,123
===================================================================================================
Change in minority interest due to subsidiary sale of stock $ (31,494) $ (112,719)
===================================================================================================
SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FS-11
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
1. ORGANIZATION AND LIQUIDITY
ORGANIZATION
Biomerica, Inc. and Subsidiaries (collectively "the Company") are primarily
engaged in the development, manufacture and marketing medical diagnostic
kits and the design, manufacture and distribution of various orthodontic
products.
LIQUIDITY AND 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 (Note
6) expired on September 13, 2003 and was not renewed. The unpaid principal
and interest was converted into a note payable bearing interest at 8% and
payable September 1, 2004. The due date on this note was extended until
September 1, 2005 and subsequent to fiscal year end May 31, 2005, has been
extended until September 1, 2006 at the same terms (Note 13). Minimum
payments of $4,000 per month plus an additional $3,500 per month, depending
on quarterly results of the Company, are being made.
Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica has funded its operations through debt
and equity financings, and may have to do so in the future. ReadyScript
operations were discontinued in May 2001 (see Notes 3 and 12). ReadyScript
was a contributor to the Company's losses in prior fiscal years. During the
fiscal years ended May 31, 2005 and 2004, certain liabilities were forgiven
and thus a discontinued operations profit for the years then ended was
recorded. The subsidiary is being reported in the financial statements as a
discontinued operation because it is no longer an operating entity.
In the last several years the Company has been focusing on reducing costs
where possible and concentrating on its core business in Lancer and
Biomerica to increase sales. Management believes that cash flows from
current operations, coupled with the Lancer line of credit (to be utilized
only by Lancer), the private placement at Lancer in July 2005 and equipment
financing at Lancer are sufficient to enable the Company and the Lancer
subsidiary to fund operations for at least the next twelve months. Should
the Company have a downturn in sales or unanticipated, increased expenses,
the result for the Company could be the inability to continue as a going
concern. The Company will continue to have limited cash resources.
Biomerica, as a parent entity, has no open or existing, operating line of
credit or loans on which it can draw any new or additional debt financing.
Our independent registered public accounting firm has concluded that there
is 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
report 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended May 31, 2005 and
2004 (see Note 3) include the accounts of Biomerica, Inc. ("Biomerica"),
Lancer Orthodontics, Inc. ("Lancer") and ReadyScript, Inc. (as discontinued
operations). All significant intercompany accounts and transactions have
been eliminated in consolidation.
FS-12
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, line of credit, shareholder debt and
accounts payable. The carrying amounts of the Company's financial
instruments approximate their fair values at May 31, 2005.
CONCENTRATION OF CREDIT RISK
The Company, on occasion, maintains cash balances at certain financial
institutions in excess of amounts insured by federal agencies.
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company's sales are
not materially dependent on a single customer or a small group of
customers. The Company performs ongoing credit evaluations of its
customers. The Company does not obtain collateral with which to secure its
accounts receivable. The Company maintains reserves for potential credit
losses based upon the Company's historical experience related to credit
losses. At May 31, 2005 no customer accounted for more than 10% of gross
accounts receivable. At May 31, 2004, one customer accounted for 10.4% of
gross accounts receivable. No one customer accounted for 10% or more of
revenues for the years ended May 31, 2005 and 2004.
At May 31, 2005 no company accounted for more than 10% of accounts payable.
At May 31, 2004 one company accounted for 10.3% of accounts payable. No
company accounted for more than 10% of purchases for the years ended May
31, 2005 and 2004.
GEOGRAPHIC CONCENTRATION
Approximately $1,600,000 of Lancer's gross inventory, $114,000 of Lancer's
property and equipment, net of accumulated depreciation and amortization,
$133,400 of Biomerica's gross inventory and $11,000 of Biomerica's property
and equipment, net of accumulated depreciation and amortization, is located
at Lancer's wholly owned subsidiary in Mexico (Note 9).
CASH EQUIVALENTS
Cash and cash equivalents consists of demand deposits and money market
accounts with remaining maturities of three months or less when purchased.
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES." This statement addresses the
accounting and reporting for investments in equity securities which have
readily determinable fair values and all investments in debt securities.
The Company's marketable equity securities are classified as
available-for-sale under SFAS 115 and reported at fair value, with changes
in the unrealized holding gain or loss included in shareholders' equity.
Available-for-sale securities consist of common stock of unrelated
publicly-traded companies and are stated at market value in accordance with
SFAS 115. Cost for purposes of computing realized gains and losses is
computed on a specific identification basis. The proceeds from the sale of
available-for-sale securities during fiscal 2005 totaled $8,888. The change
in the net unrealized holding gain (loss) on available-for-sale securities
that has been included as a separate component of shareholders' equity
totaled $(17,940) and $28,123 for the years ended May 31, 2005 and 2004,
respectively.
FS-13
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of orthodontic products and biological
chemicals. Cost includes raw materials, labor, manufacturing overhead and
purchased products. Market is determined by comparison with recent
purchases or net realizable value. Such net realizable value is based on
forecasts for sales of the Company's products in the ensuing years. Non
current inventories represent inventories on hand in excess of amounts
expected to be utilized over the next twelve months. The industries in
which the Company operates are characterized by technological advancement
and change. Should demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable value of the
Company's inventories could be substantially less than the amount shown on
the accompanying consolidated balance sheet.
Inventories approximate the following:
MAY 31, 2005
---------------------------------------------------------------------------
Raw materials $ 751,591
Work in progress 342,349
Finished products 1,783,575
Inventory reserve (176,337)
---------------------------------------------------------------------------
2,701,178
Long-term Portion $ 611,000
---------------------------------------------------------------------------
Current portion $ 2,090,178
===========================================================================
Approximately $1,600,000 of Lancer's gross inventory and $133,400 of
Biomerica's gross inventory is located at its manufacturing facility in
Mexico as of May 31, 2005.
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that the Company intends to dispose of. The
inventory items identified for disposal at each year-end are generally
discarded during the following year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Repairs and maintenance costs are
charged to operations as incurred. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation or
amortization are removed from the accounts, and gains or losses from
retirements and dispositions are credited or charged to income.
Depreciation and amortization are provided over the estimated useful lives
of the related assets, ranging from 3 to 15 years, using straight-line and
declining-balance methods. Leasehold improvements are amortized over the
lesser of the estimated useful life of the asset or the term of the lease.
Depreciation and amortization expense amounted to $159,317 and $144,160 for
the years ended May 31, 2005 and 2004, respectively. At May 31, 2005,
approximately $125,000 of Biomerica and Lancer's property and equipment,
net of accumulated depreciation and amortization, is located at Lancer's
manufacturing facility in Mexico.
Management of the Company assesses the recoverability of property and
equipment by determining whether the depreciation and amortization of such
assets over their remaining lives can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured
based on fair value (projected discounted cash flows) and is charged to
operations in the period in which such impairment is determined by
management. Management has determined that there is no impairment of
property and equipment at May 31, 2005.
INTANGIBLE ASSETS
On June 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that the Company's license agreements be tested
annually (or more frequently if impairment indicators arise) for
impairment. Upon initial application of SFAS No. 142, the Company
determined there was no impairment. The Company has established the date of
May 31 on which to conduct its annual impairment test.
FS-14
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
Intangible assets are being amortized using the straight-line method over
the useful life, not to exceed 18 years for marketing and distribution
rights and purchased technology use rights, and 17 years for patents.
Marketing and distribution rights include repurchased sales territories.
Technology use rights consists of the purchase of manufacturing assets and
technology. Amortization amounted to $18,951 and $37,888 for the years
ended May 31, 2005 and 2004, respectively (see Note 4).
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset's balance over its
remaining life can be recovered through projected undiscounted future cash
flows. The amount of impairment, if any, is measured based on fair value
and charged to operations in the period in which the impairment is
determined by management.
RISKS AND UNCERTAINTIES
LICENSES - Certain of Lancer'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 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.
Lancer has entered into various license and/or royalty agreements pursuant
to which it has obtained rights to manufacture and market certain products.
The agreements expire in 2006, 2007, and 2010. Royalty expense of
approximately $78,000 is included in cost of sales for these agreements.
Sales of products manufactured under these agreements comprise
approximately 23% and 12% of Lancer's total sales for the fiscal year ended
May 31, 2005 and 2004 respectively.
Lancer has entered into license agreements expiring in 2006 whereby, for
cash consideration, the counter party has obtained the rights to
manufacture and market certain products patented by Lancer. Royalty income
of approximately $72,000 and $53,000 is netted from cost of sales for these
agreements for the years ended May 31, 2005 and 2004, respectively. Income
from these agreements is approximately 1% of the total revenue recognized
for the fiscal years ended May 31, 2005 and 2004.
Biomerica has entered into a royalty agreement which continues pursuant to
which it has obtained rights to manufacture and market certain products for
the life of the products. Royalty expense of approximately $79,000 and
$65,000 is included in cost of sales for this agreement for the years ended
May 31, 2005 and 2004, respectively. Sales of products manufactured under
this agreement comprise approximately 4% and 2% of total sales for the
fiscal years ended May 31, 2005 and 2004, respectively. Biomerica may
license other products or technology in the future as the Company deems
necessary for conducting business.
DISTRIBUTION - Biomerica and Lancer have 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. Biomerica and Lancer 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.
FS-15
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
GOVERNMENT REGULATION - Biomerica's immunodiagnostic products are regulated
in the United States as medical devices primarily by the FDA and as such,
require regulatory clearance or approval prior to commercialization in the
United States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the
regulations promulgated thereunder, the FDA regulates, among other things,
the clinical testing, manufacture, labeling, promotion, distribution, sale
and use of medical devices in the United States. Failure of Biomerica to
comply with applicable regulatory requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, the
government's refusal to grant premarket clearance or premarket approval of
devices, withdrawal of marketing approvals, and criminal prosecution.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries
may be longer or shorter than that required for FDA clearance or approval,
and requirements for licensing may differ significantly from FDA
requirements. There can be no assurance that Biomerica will be able to
obtain regulatory clearances for its current or any future products in the
United States or in foreign markets.
Lancer's products are subject to regulation by the FDA under the Medical
Device Amendments of 1976 (the "Amendments"). Lancer has registered with
the FDA as required by the Amendments. There can be no assurance that
Lancer will be able to obtain regulatory clearances for its current or any
future products in the United States or in foreign markets.
EUROPEAN COMMUNITY - Lancer and Biomerica are required to obtain
certification in the European community to sell products in those
countries. The certification requires Lancer and Biomerica to maintain
certain quality standards. Lancer and Biomerica have been granted
certification and undergo annual audits to assure that the companies remain
in compliance with regulations. There is no assurance that Lancer or
Biomerica will be able to retain their certification in the future.
FS-16
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
RISK OF PRODUCT LIABILITY - Testing, manufacturing and marketing of
Biomerica's products entail risk of product liability. Biomerica currently
has product liability insurance. There can be no assurance, however, that
Biomerica will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect Biomerica against losses due to product
liability. An inability could prevent or inhibit the commercialization of
Biomerica'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.
Lancer is subject to the same risks of product liability. Lancer currently
has product liability insurance. Lancer also is subject to the risk of loss
of its product liability insurance and the consequent exposure to
liability.
HAZARDOUS MATERIALS - Biomerica's manufacturing and research and
development involves the controlled use of hazardous materials and
chemicals. Although Biomerica believes that safety procedures for handling
and disposing of such materials comply with the standards prescribed by
state and Federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event
of such an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.
The Company may incur substantial costs to comply with environmental
regulations.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR
STOCK-BASED COMPENSATION," which defines a fair value based method of
accounting for stock-based compensation. However, SFAS 123 allows an entity
to continue to measure compensation cost related to stock and stock options
issued to employees using the intrinsic method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES." Entities electing to remain with the accounting
method of APB 25 must make pro forma disclosures of net (loss) income and
(loss) earnings per share, as if the fair value method of accounting
defined in SFAS 123 had been applied. The Company has elected to account
for its stock-based compensation to employees under APB 25.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148 ("SFAS 148"), "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS
NO. 123." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method on accounting for
stock-based employee compensation. The Company currently does not intend to
adopt SFAS No. 123 and the implementation of SFAS No. 148 did not have a
material effect on the Company's consolidated financial position or results
of operations.
Pro forma information regarding loss per share is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Black Scholes option
pricing model with the following assumptions for the years ended May 31,
2005 and 2004; risk free interest rates ranging from 2.20% to 3.85%;
dividend yield of 0%; expected life of the options ranging from three to
ten years; and volatility factors of the expected market price of the
Company's common stock ranging from 79% to 217%.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
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 disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Adjustments
are made for options forfeited prior to vesting. The effect on compensation
expense, net loss, and net loss per share (basic and diluted) had
compensation costs for the Company's stock option plans been determined
based on fair value on the date of grant consistent with the provisions of
SFAS 123 are as follows:
FS-17
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
MAY 31, 2005 2004
---------------------------------------------------------------------------
(Loss) from continuing
operations, as reported $ (21,464) $(299,050)
Plus: Stock-based employee
compensation expense included
in reported loss from continuing operations 3,563 38,515
Less: Stock-based employee
compensation expense
determined using fair
value based method (45,775) (150,404)
---------------------------------------------------------------------------
(Loss) from continuing
operations, pro forma $ (63,676) $(410,939)
===========================================================================
Pro forma (Loss) from
continuing operations
per share - basic $ (.01) $ (0.07)
===========================================================================
Pro forma (loss) from
continuing operations
per share - diluted $ (.01) $ (0.07)
===========================================================================
Income from
discontinued operations,
as reported $ 183,723 $ 75,849
Plus: Stock-based employee
compensation expense
included in reported income
from discontinued operations -- --
Less: Stock-based employee
compensation expense
determined using fair
value based method -- --
---------------------------------------------------------------------------
Income from discontinued
operations, pro forma $ 183,723 $ 75,849
===========================================================================
Pro forma income from
discontinued operations
per share - basic $ 0.03 $ 0.01
===========================================================================
Pro forma income from
discontinued operations
per share - diluted $ 0.03 $ 0.01
===========================================================================
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). FAS No. 123R revised SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R will require compensation costs related to
share-based payment transactions to be recognized in the financial
statement (with limited exceptions). The amount of compensation cost will
be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects
of share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide
SAB No. 107 required disclosures upon adoption of SFAS No. 123R on January
1, 2006 and is currently evaluating the impact the adoption of the standard
will have on the Company's financial condition, results of operations, and
cash flows.
In April 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for SFAS No. 123R. The Statement requires
that compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on
the fair value of the equity or liability instruments issued. SFAS No. 123R
covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company will
adopt SFAS No. 123R on January 1, 2006 and is currently evaluating the
impact the adoption of the standard will have on the Company's results of
operations.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The
Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. SFAS No. 154 requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is impractical. APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No.154 improves the
financial reporting because its requirements enhance the consistency of
financial reporting between periods. The Company does not believe the
adoption of this standard will have an impact on its results of operations.
MINORITY INTEREST
Minority interest represents the minority shareholders' proportionate share
of the equity of Lancer. At May 31, 2005, Biomerica owned 23.41% of Lancer
and 88.9% of ReadyScript (see Notes 3 and 12). ReadyScript's results of
operations are reported under discontinued operations.
FS-18
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY, 31 2005 AND 2004
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped, customarily FOB shipping point, at which point title passes. An
allowance is established for estimated returns as revenue is recognized.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred. The Company
expensed $274,288 and $273,981 of research and development expenses during
the years ended May 31, 2005 and 2004, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES."
Under the asset and liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement No.
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided for certain deferred tax assets if
it is more likely than not that the Company will not realize tax assets
through future operations.
Biomerica and Lancer file separate income tax returns for Federal and state
income tax purposes.
ADVERTISING COSTS
The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were approximately
$96,700 and $52,100 for the years ended May 31, 2005 and 2004,
respectively.
CURRENCY
The functional currency for the Lancer De Mexico subsidiary is dollars.
Accordingly, all transactions are recorded using dollars and no adjustments
gains and losses on intercompany currency transactions are recorded.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "EARNINGS
PER SHARE" ("EPS"). SFAS 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/(loss) 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.
FS-19
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
EPS computations.
For the Years Ended May 31,
----------------------------
2005 2004
---------------------------------------------------------------------------
Numerator:
(Loss) from continuing operations $ (21,464) $ (299,050)
Income (loss) from discontinued
operations 183,723 75,849
---------------------------------------------------------------------------
Numerator for basic and diluted net
income (loss) per common share $ 162,259 $ (223,201)
===========================================================================
Denominator for basic net income
(loss) per common share 5,752,431 5,739,993
Effect of dilutive securities:
Options and warrants 866,690 --
---------------------------------------------------------------------------
Denominator for diluted net income
(loss) per common share 6,619,121 5,739,993
===========================================================================
Basic net income (loss) per common share:
(Loss) from continuing operations $ .00 $ (0.05)
Income (loss) from discontinued
operations .03 0.01
---------------------------------------------------------------------------
Basic net income (loss) per common share $ .03 $ (0.04)
===========================================================================
Diluted net income (loss) per common share:
(Loss) from continuing operations $ .00 $ (0.05)
Net income from discontinued
operations .03 0.01
---------------------------------------------------------------------------
Diluted net income (loss) per common share $ .03 $ (0.04)
===========================================================================
For the fiscal year ended May 31, 2004, 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. See summary
of outstanding stock options and warrants in Note 7.
As of May 31, 2005 there were a total of 866,690 anti-dilutive shares of
common stock and as of May 31, 2004 there were 3,657,637, potential
anti-dilutive shares of common stock.
SEGMENT REPORTING
The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION". SFAS 131 requires public companies to
report information about segments of their business in their annual
financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the product, services an entity
provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Company's business segments are
disclosed in Note 9.
FS-20
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." This statement establishes standards for reporting the components
of comprehensive income (loss) and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (loss) be included in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income (loss) includes net income (loss) as well as certain
items that are reported directly within a separate component of
stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
FS-21
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities". In December 2003, FIN 46 was replaced by
FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities."
FIN 46R clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements. FIN 46R was effective at the end of the
first interim period ending March 15, 2004. Entities that have adopted FIN
46 prior to this date can continue to apply provisions of FIN 46 until the
effective date of FIN 46R or early election of FIN 46R. This interpretation
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," relating to consolidation of certain
entities. FIN No. 46 requires identification of the Company's participation
in variable interests entities ("VIEs"), which are defined as entities with
a level of invested equity that is not sufficient to fund future activities
to permit them to operate on a stand-alone basis, or whose equity holders
lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE,
if any, bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN No. 46 also sets forth
certain disclosures regarding interests in VIE that are deemed significant,
even if consolidation is not required. The adoption of FIN No. 46 did not
have a material impact on the Company's financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement is effective
for contracts entered into or modified after June 30, 2003. The adoption of
this statement did not have a significant effect on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 provides guidance on how an entity classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. Many of these instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The statement requires cumulative effect transition for financial
instruments existing at the adoption date. The adoption of this statement
did not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
FS-22
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets- An Amendment of APB Opinion No. 29. The guidance in APB Opinion No.
29, Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The
provisions of SFAS No. 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early
application was permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). FAS No. 123R revised SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R will require compensation costs related to
share-based payment transactions to be recognized in the financial
statement (with limited exceptions). The amount of compensation cost will
be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects
of share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide
SAB No. 107 required disclosures upon adoption of SFAS No. 123R on January
1, 2006 and is currently evaluating the impact the adoption of the standard
will have on the Company's financial condition, results of operations, and
cash flows.
In April 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for SFAS No. 123R. The Statement requires
that compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on
the fair value of the equity or liability instruments issued. SFAS No. 123R
covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company will
adopt SFAS No. 123R on January 1, 2006 and is currently evaluating the
impact the adoption of the standard will have on the Company's results of
operations.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The
Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. SFAS No. 154 requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is impractical.APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No.154 improves the
financial reporting because its requirements enhance the consistency of
financial reporting between periods. The Company does not believe the
adoption of this standard will have an impact on its results of operations.
3. CONSOLIDATED SUBSIDIARIES
Lancer is engaged in the design, manufacture and distribution of
orthodontic products. Biomerica's direct ownership percentage of Lancer is
23.41% and its direct and indirect (via agreements with certain
shareholders) voting control over Lancer is greater than 50% as of May 31,
2005.
The ReadyScript subsidiary was a development-stage enterprise and required
the raising of a significant amount of capital to fund its short-term
working capital needs. The ReadyScript operations were discontinued in May
2001 (see Note 12). The net assets and operating results of ReadyScript are
included in the accompanying consolidated financial statements as
discontinued operations.
Operating results for Lancer and ReadyScript (as discussed) in the
aggregate for the years ended May 31, 2005 and 2004, which are included in
the consolidated operating results of the Company, are as follows:
2005 2004
-------------------------------------------------------------------------
Net sales $ 5,951,457 $ 6,024,009
Cost of sales 4,150,254 4,127,590
-------------------------------------------------------------------------
Gross profit 1,801,203 1,896,419
-------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,044,460 1,815,383
Research and development 96,218 116,104
-------------------------------------------------------------------------
Total operating expenses 2,140,678 1,931,487
-------------------------------------------------------------------------
Other income (expense):
Interest expense, net (9,097) (1,885)
Other income, net 58,166 66,927
-------------------------------------------------------------------------
Total other income (expense) 49,069 65,042
Income (loss) from continuing
operations before income taxes (290,406) 29,974
Income tax expense 1,138 1,023
-------------------------------------------------------------------------
Income (loss) from continuing
operations (291,544) 28,951
Discontinued operations of
ReadyScript:
Income from discontinued
operations, net 183,723 75,849
-------------------------------------------------------------------------
Net income (loss) $ (107,821) $ 104,800
=========================================================================
4. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the
following:
FS-23
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
MAY 31, 2005
---------------------------------------------------------------------------
Marketing and distribution rights $ 442,750
Patents and other intangibles 34,500
---------------------------------------------------------------------------
477,250
Less accumulated amortization (464,312)
---------------------------------------------------------------------------
$ 12,938
===========================================================================
Included in marketing and distribution rights are repurchased sales
territories by Lancer which are being amortized straight-line over the
estimated useful life of eighteen years. In each of the fiscal years 2005
and 2004, Lancer recorded amortization expense of $10,375 and $24,900,
respectively, related to repurchased sales territories.
Lancer has entered into license agreements expiring in 2006 whereby, for
cash consideration, the counter party has obtained the rights to
manufacture and market certain products patented by Lancer. Royalty income
in 2005 and 2004 of approximately $72,000 and $53,000 respectively, is
netted from Cost of Sales for these agreements. Income from these
agreements is less than 1% of the total revenue recognized for the fiscal
years ended May 31, 2005 and 2004.
5. LINE OF CREDIT
During fiscal 2005, Lancer obtained a new line of credit with Community
National Bank (formerly Cuyamaca Bank), which expires October 15, 2005.
Borrowings are made at prime plus 2.0% (8% at May 31, 2005) and are for
borrowing up to $400,000 which is limited to 80% of accounts receivable
less than 90 days old. The outstanding balance at May 31, 2005 was $175,000
and the unused portion available at May 31, 2005 was approximately
$137,000. Lancer requested that Cuyamaca Bank reserve $60,000 of Lancer's
available credit as a guarantee of credit with a European supplier.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending
agreement for the line of credit requires, among other things, that Lancer
maintain a balance sheet net worth of $2,700,000 and that a zero
outstanding balance be maintained for 30 consecutive days during the term.
The agreement prohibits the advancing of funds to Biomerica. Lancer is not
required to maintain compensating balances in connection with this lending
agreement. The Company was in compliance with its debt covenants at May 31,
2005.
FS-24
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
The following summarizes information on short-term borrowings for the year
ended May 31, 2005:
MAY 31, 2005
---------------------------------------------------------------------------
Average month end balance $128,368
Maximum balance outstanding at any month end $245,000
Weighted average interest rate (computed by dividing 7.24%
interest expense by average monthly balance)
Interest rate at year end 8.00%
===========================================================================
6. RELATED PARTY TRANSACTIONS
NOTES PAYABLE -SHAREHOLDER
Biomerica, Inc. entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to
the Company, as needed, up to $500,000 for working capital needs. The line
of credit bore interest at 8%, was secured by accounts receivable and
inventory, and expired September 13, 2003. In March 2004 the Company signed
a note payable for the principal and interest due at that time of $313,318
and agreed to a forbearance of any payments for the length of the
agreement. A warrant for 40,000 shares of restricted common stock
exercisable at a price of $.51 per share was awarded as compensation for
the forbearance. The note payable is secured by all the Company's assets
except for the Lancer common stock owned by Biomerica. The note was due
September 1, 2004. On November 19, 2004, the Company entered into an
agreement entitled "Amendment of the Note, Loan and Modification Agreement"
and "Amended And Restated Promissory Note" which were included as exhibits
to the Form 10QSB filed April 14, 2004. The Amendment of the Note, Loan And
Modification Agreement was filed as an exhibit to a Form 8K filed November
24, 2004. The agreement extended the maturity date of the note until August
31, 2005 and allows for minimum payments of $4,000 per month and additional
contingent payments of up to $3,500 per month based on the Company's
quarterly performance. Collateral remains the same under The Amendment.
There was $297,087 of outstanding principal and $0 of interest payable
under this note payable at May 31, 2005 (also see Note 7).
During 2005 and 2004, the Company incurred approximately $25,017 and
$25,438, respectively, in interest expense related to the shareholder line
of credit and note payable.
During 2005 and 2004, a shareholder/director advanced the Company $0 and
$4,000, respectively. Interest for the fiscal year ended May 31, 2005 and
2004 was $320 and $219. At May 31, 2005, $1,979 was owed in interest
payable on this loan and a previous loan of $10,000.
RENT EXPENSE
Biomerica, Inc. leases facilities from an individual and a partnership,
owned by shareholders of the Company. Gross rent expense of approximately
$148,000 and $150,000 was incurred during 2005 and 2004, respectively, for
this lease. A further expense of approximately $15,310 has been included in
accounts payable representing late fees, insurance and interest payable on
outstanding rent. Rent payable at May 31, 2005 was $74,184. The total of
rent, late fees, insurance and interest payable of $89,494 is included in
accounts payable in the consolidated balance sheet.
ACCRUED COMPENSATION
Two officers, who are also shareholders of the Company, agreed to defer
payment of a portion of their salaries. At May 31, 2005 approximately
$300,482 of deferred officer's salary is included in accrued compensation
in the accompanying consolidated financial statements.
Included in accrued compensation as of May 31, 2005 is vacation accrual of
$162,293. Of this, approximately $121,000 is due to the former chief
executive officer's estate.
See additional related party transactions in Note 10.
FS-25
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
7. SHAREHOLDERS' EQUITY
1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS
In December 1991, the Company adopted a stock option and restricted stock
plan (the "1991 Plan") which provides that non-qualified options and
incentive stock options and restricted stock covering an aggregate of
350,000 of the Company's unissued common stock may be granted to officers,
employees or consultants of the Company. Options granted under the 1991
Plan may be granted at prices not less than 85% of the then fair market
value of the common stock, vest at not less than 20% per year and expire
not more than 10 years after the date of grant.
In January 1996, the Company adopted a stock option and restricted stock
plan (the "1995 Plan") which provides that non-qualified options and
incentive stock options and restricted stock covering an aggregate of
500,000 of the Company's unissued common stock may be granted to
affiliates, employees or consultants of the Company. Options granted under
the 1995 Plan may be granted at prices not less than 85% of the then fair
market value of the common stock and expire not more than 10 years after
the date of grant.
In August 1999, the Company adopted a stock option and restricted stock
plan (the "1999 Plan") which provides that non-qualified options and
incentive stock options and restricted stock covering an aggregate of
1,000,000 of the Company's unissued common stock may be granted to
affiliates, employees or consultants of the Company. As of January 1, of
each calendar year, commencing January 1, 2000, this amount is subject to
automatic annual increases equal to the lesser of 1.5% of the total number
of outstanding common shares, assuming conversion of convertible
securities, or 500,000. Options granted under the 1999 Plan may be granted
at prices not less than 85% of the then fair market value of the common
stock and expire not more than 10 years after the date of grant.
FS-26
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
Activity as to stock options and warrants granted are as follows:
WEIGHTED
NUMBER AVERAGE
OF STOCK PRICE RANGE EXERCISE
OPTIONS PER SHARE PRICE
---------------------------------------------------------------------------
Options and warrants out-
standing at May 31, 2003 3,552,770 $ .20 - $3.00 $2.26
Options or warrants granted 242,000 $ .25 - $0.51 $0.29
Options exercised (10,000) $ .20 $0.20
Options canceled or expired (127,133) $ .20 - $1.38 $0.85
---------------------------------------------------------------------------
Options and warrants out-
standing at May 31, 2004 3,657,637 $ .20 - $3.00 $2.26
Options or warrants granted 244,000 $ .33 - $.40 $ .35
Options and warrants canceled
or expired (2,299,000) $ .20 - $3.00 $2.86
---------------------------------------------------------------------------
Options and warrants out-
standing at May 31, 2005 1,602,637 $ .20 - $3.00 $0.90
===========================================================================
The weighted average fair value of options and warrants granted during 2005
and 2004 was $0.35 and $0.29 respectively.
The following summarizes information about all of the Company's stock
options and warrants outstanding at May 31, 2005. These options and
warrants comprise of those granted under the 1991, 1995 and 1999 plan and
those granted outside of these plans.
WEIGHTED
AVERAGE
REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING LIFE IN EXERCISE AT MAY 31, EXERCISE
PRICES MAY 31, 2005 YEARS PRICE 2005 PRICE
---------------------------------------------------------------------------
$ .20 - $.90 1,141,953 2.54 $ .35 942,078 $ .24
$ 1.09 - $1.92 213,250 .92 $ 1.64 213,250 $1.64
$ 2.00 - $3.00 247,434 3.22 $ 2.77 247,434 $2.77
FS-27
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
STOCK ACTIVITY
During 2004, the Company sold 202,000 shares of common stock at a selling
price of $0.25 per share. Proceeds to the Company were $50,500. Warrants to
purchase 202,000 shares of the Company's restricted common stock at an
exercise price of $0.25 were also granted as part of the private placement.
During 2004, the Company granted 210,000 and 32,000 warrants to employees
and non-employees, respectively to purchase restricted shares of the
Company's stock. Of the warrants granted, 202,000 were granted to investors
in the private placement and 40,000 were granted as compensation related to
the shareholder promissory note. The purchase price of the warrants ranges
from $0.25 to $0.51. Management recorded $47,442 and $0, respectively
during the year ended May 31, 2004 of expense related to the granting of
warrants to employees and non-employees. These warrants were not granted
through one of the employee stock option plans.
During 2004 the Company issued 10,000 shares of its common stock as the
result of an exercise of options granted in prior years. Proceeds to the
Company were $2,000.
During fiscal 2005, Biomerica granted 169,000 stock options to purchase
shares of common stock at an exercise price of $.33 to select employees and
consultants of the Company. The options vest over four years, and have a
term of five years. Management assigned a value of $3,500 to these options.
These options were granted under the Company's existing 1995 and 1999 Stock
Option and Restricted Stock Plan.
During fiscal 2005, Biomerica granted 75,000 stock options to purchase
shares of common stock at an exercise price of $.40 to outside directors
and the President. The options vest over four years, and have a term of
five years. Management assigned a value of $0 to these options.
Subsequent to fiscal 2005 year-end an employee of the Company exercised a
stock option for 750 shares at the purchase price of $.20 per share and 750
shares at the purchase price of $.33 per share. The total proceeds to the
Company was $398.
Options and warrants granted to employees are assigned values of $0 if the
options are granted at current market value as quoted on Yahoo Finance as
of the date of grant. If options or warrants are granted at a price which
is below market value, the option or warrant is assigned a value according
to the amount per share it is above market value times the number of shares
granted. Options or shares granted to non-employees are assigned values
according to current market value, using the Black-Sholes model for option
valuation. The term used in the calculation of the options or warrants is
the vesting period. A discount rate equivalent to five-year (or other life
of the option or warrant) Treasury constant maturity interest rates is
utilized. The historical volatility of the stock is calculated using weekly
historical closing prices for the prior year as reported by Yahoo Finance.
For purposes of the SFAS 123 footnote disclosure, the Black-Sholes Model is
also used for calculating employee options and warrants valuations.
When shares are issued for services or other non-cash consideration, fair
value is measured using the current market value on the day of the board
approval of such issuance.
SUBSIDIARY SALE OF STOCK
During the years ended May 31, 2005 and 2004 the Company recognized a
reduction in its additional paid capital in the amount of $31,494 and
$112,719, respectively, resulting from a decrease in its ownership
percentage of Lancer as a result of Lancer's sale of common stock. The
Company has treated this reduction in its equity of the subsidiary as an
equity transaction in the accompanying consolidated statement of
stockholder's equity.
SUBSIDIARY OPTIONS, WARRANTS AND STOCK ACTIVITY
During fiscal 2004, Lancer issued 91,346 shares of its common stock valued
at $29,000 to its Chief Executive Officer for services rendered from
January 2002 to December 2003.
During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
stock to the Chairman Of the Board of Lancer for services rendered from
January 2002 to December 2003.
During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
stock to the Chairman of the Board of Lancer for services rendered from
January 2004 to May 2004 and 31,250 shares of common stock to the Chief
Executive Officer for services rendered per agreement. At May 31, 2004,
these shares were reported as subscribed stock on Lancer's balance sheet.
The Lancer Board of Directors approved a private offering of common stock,
effective March 23, 2004, and ending April 12, 2004. The offering, to
officers, board members, and key employees resulted in the sale of 450,000
new shares at $0.60 per share with total proceeds received of $270,000. In
addition, one warrant exercisable for each share purchased (450,000
warrants) was issued at $0.85 per share. These warrants shall be
exercisable until April 12, 2009.
FS-28
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
During fiscal 2004, Lancer granted its Chief Executive Officer 75,000 stock
options to purchase shares of Lancer's common stock at an exercise price of
$0.43. The options vest over three years and have a term of five years.
Management assigned a value of $0 to the options.
During fiscal 2004, Lancer granted its directors 52,500 options to purchase
shares of Lancer's common stock at an exercise price of $0.43. The options
vest over two years and have a term of five years. Management assigned a
value of $0 to the options.
During fiscal 2004, Lancer granted 120,000 options to purchase shares of
Lancer's common stock at an exercise price of $0.43 per share pursuant to
terms of the employment agreement between Lancer and Dan Castner, Vice
President of Sales and Marketing at Lancer. The options vest over four
years and have a term of five years. Management assigned a value of $0 to
the options.
During fiscal 2004, Lancer granted 40,000 stock options to purchase shares
of Lancer's common stock at an exercise price of $0.57 to an employee of
Lancer for services rendered. The options vest over four years and have a
term of five years. Management assigned a value of $0 to these options.
During fiscal 2004, Lancer granted 17,500 stock options to purchase shares
of Lancer's common stock at an exercise price of $.60 to a new member of
the board of directors. The options vest over two years and have a term of
five years. Management assigned a value of $0 with respect to the options.
During fiscal 2004, Lancer granted 8,000 stock options to purchase shares
of Lancer's common stock at an exercise price of $0.50 to an employee of
Lancer for services rendered. The options vest over 3 years beginning June
30, 2004 and have a term of five years. Management assigned a value of $0
to the options.
During fiscal 2004, Lancer issued 450,000 warrants to officers, directors
and key employees who purchased 450,000 shares of the Company's common
stock in a private placement. The warrants have an exercise price of $0.85
and have a term of five years.
During fiscal 2005, the Board of Directors of Lancer granted 27,500 stock
options to purchase shares of Lancer's common stock at an exercise price of
$.75 to certain employees of Lancer for services rendered. The options vest
over four years and have a term of ten years. Management assigned a value
of $0 to the options.
During fiscal 2005, the Board of Directors of Lancer granted 100,000 stock
options to purchase shares of Lancer's common stock at an exercise price of
$.70 to Lancer's President, Dan Castner. The options expire February 1,
2010 and vest 4,167 shares on the first day of each calendar month he is
employed by Lancer, commencing March 1, 2005. Management assigned a value
of $0 to the options.
During fiscal 2005, an employee of Lancer exercised a stock option for
4,500 shares at the purchase price of $.26 per share. Proceeds to Lancer
were $1,170.
There were 1,234,000 options and warrants outstanding and exercisable (at a
weighted average price of $.61) to acquire Lancer common stock at May 31,
2005. Of these shares, 874,542 were exercisable at an average exercise
price of $.63 per share.
8. INCOME TAXES
Income tax expense from continuing operations for the years ended May 31,
2005 and 2004 consists of the following current provisions:
MAY 31, 2005 2004
---------------------------------------------------------------------------
U.S. Federal $ -- $ --
State and local 1,938 1,823
---------------------------------------------------------------------------
$ 1,938 $ 1,823
===========================================================================
FS-29
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
Income tax expense from continuing operations differs from the amounts
computed by applying the U.S. Federal income tax rate of 35 percent to
pretax loss as a result of the following:
MAY 31, 2005 2004
---------------------------------------------------------------------------
Computed "expected" tax benefit $ (24,734) $ (68,286)
Increase (reduction) in income taxes
resulting from:
Meals and entertainment 4,326 3,966
Change in valuation allowance 91,991 (14,099)
Equity in earnings of affiliates
not subject to taxation because
of dividends- received deduction
for tax purposes (71,583) 78,419
State income taxes 1,938 1,823
---------------------------------------------------------------------------
$ 1,938 $ 1,823
===========================================================================
The tax effect of temporary differences that give rise to significant
portions of liabilities are presented below.
MAY 31, 2005
---------------------------------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 67,243
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 100,505
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 210,951
Net operating loss
carryforwards 2,043,913
Tax credit carryforwards 124,629
Accumulated depreciation of property
and equipment
Marketing rights, principally due to
amortization
Less valuation allowance (2,547,241)
Net deferred tax asset (liability) $ --
===========================================================================
The Company has provided a valuation allowance for all of its deferred tax
assets as of May 31, 2005. Management provided such allowance as it is
currently more likely than not that the Company will not generate taxable
income sufficient to realize such assets in foreseeable future reporting
periods. During fiscal 2005 the valuation allowance decreased by $347,765.
FS-30
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
As of May 31, 2005, Biomerica had net tax operating loss carryforwards of
approximately $3,498,000 and investment tax and research and development
credits of approximately $72,000, which are available to offset future
Federal tax liabilities. The carryforwards expire at varying dates from
2005 to 2022. As of May 31, 2005, Biomerica has net operating tax loss
carryforwards of approximately $617,000 available to offset future state
income tax liabilities, which expire through 2012.
As of May 31, 2005, Lancer had net tax operating loss carryforwards of
approximately $2,160,000 and business tax credits of approximately $23,000
available to offset future Federal tax liabilities. The Federal
carryforwards expire in varying amounts through 2021. As of May 31, 2005,
Lancer has net tax operating loss carryforwards of approximately $85,000
and business tax credits of approximately $29,000 available to offset
future state income tax liabilities. The state carryforwards expire at
varying dates through 2013.
On September 11, 2002, California passed one of the budget trailer bills
that implemented the state's 2002-2003 Budget Bill (A425). The new law
suspended the net operating loss ("NOL") carryover deduction for tax years
2002 and 2003. To compensate for the deduction suspension, the period of
availability for these NOL deductions has been extended for two years.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss ("NOL") and credit carryforwards will be
limited by statute because of a cumulative change in ownership of more than
50%. The Company has had numerous equity transactions that have more likely
than not resulted in several changes in ownership of us as defined by
Section 382 of the Internal Revenue Code of 1986, as amended, or the Code.
Pursuant to Sections 382 and 383 of the Code, the annual use of the
Company's NOLs would be limited if there is a cumulative change of
ownership (as that term is defined in Section 382(g) of the Code) of
greater than 50% in the past three years. Should Section 382 ownership
change have occurred, there would be a substantial limitation on the
Company's ability to utilize its NOLs to offset future taxable income.
9. BUSINESS SEGMENTS
Reportable business segments are identified by product line and for the
years ended May 31, 2005 and 2004 are as follows:
2005 2004
---------------------------------------------------------------------------
Domestic sales:
Orthodontic products $ 2,923,000 $ 3,119,000
===========================================================================
Medical diagnostic products $ 951,000 $ 1,160,000
===========================================================================
Foreign sales:
Orthodontic products $ 3,028,000 $ 2,905,000
===========================================================================
Medical diagnostic products $ 2,372,000 $ 1,985,000
===========================================================================
Net sales:
Orthodontic products $ 5,951,000 $ 6,024,000
Medical diagnostic products 3,323,000 3,145,000
---------------------------------------------------------------------------
Total $ 9,274,000 $ 9,169,000
===========================================================================
Operating profit (loss):
Orthodontic products $ (340,000) $ (36,000)
Medical diagnostic products 70,000 (280,000)
---------------------------------------------------------------------------
Total $ (270,000)* $ (316,000)
===========================================================================
*The income statement reported a loss of $235,000. The difference of
$35,000 is attributable to intercompany elimination entries upon
consolidation.
FS-31
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
Operating income from discontinued segment:
ReadyScript 183,723 75,849
---------------------------------------------------------------------------
Total $ 183,723 $ 75,849
===========================================================================
Domestic long-lived assets:
Orthodontic products $ 571,000 $ 453,000
Medical diagnostic products 121,000 158,000
---------------------------------------------------------------------------
Total $ 692,000 $ 611,000
===========================================================================
Foreign long-lived assets:
Orthodontic products $ 114,000 $ 113,000
Medical diagnostic products 11,000 13,500
---------------------------------------------------------------------------
Total $ 125,000 $ 126,500
===========================================================================
Total assets:
Orthodontic products $4,144,000 $4,089,000
Medical diagnostic products 1,647,000 1,479,000
---------------------------------------------------------------------------
Total $5,791,000 $5,568,000
===========================================================================
Depreciation and amortization expense:
Orthodontic products $ 90,000 $ 76,000
Medical diagnostic products 69,000 68,000
---------------------------------------------------------------------------
Total $ 159,000 $ 144,000
===========================================================================
Capital expenditures:
Orthodontic products $ 198,000 $ 394,000
Medical diagnostic products 44,000 42,000
---------------------------------------------------------------------------
Total $ 242,000 $ 436,000
===========================================================================
The net sales as reflected above consist of sales to unaffiliated customers
only as there were no significant intersegment sales during fiscal years
2005 and 2004. No customer accounted for more than 10% of net sales during
fiscal years 2005 and 2004.
Geographic information regarding net sales is as follows:
2005 2004
---------------------------------------------------------------------------
Net sales:
United States $ 3,874,000 $ 4,279,000
Europe 3,075,000 2,711,000
South America 423,000 428,000
Middle East 370,000 311,000
Asia 256,000 207,000
Oceania 678,000 518,000
Other foreign 598,000 715,000
---------------------------------------------------------------------------
Total net sales $ 9,274,000 $ 9,169,000
===========================================================================
Identifiable assets by business segment are those assets that are used in
the Company's operations in each industry. Identifiable assets are held
primarily in the United States.
FS-32
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Biomerica leases its primary facility under a non-cancelable operating
lease expiring October 31, 2005, with monthly base rent of $15,000 with a
3% increase effective September 1, 2003. The facilities are owned and
operated by four of the Company's shareholders, one of whom is an officer
and director. During fiscal 2004 the Company consolidated some of its
operations and the landlords agreed to take back the space no longer needed
by the Company and to reduce the rent accordingly. The landlords also
agreed not to institute the 3% increase as required in the lease. The
currently monthly rent is $12,324. Management believes there would be no
significant difference in the terms of the leases if they were with a third
party. Total rent expense for this facility was approximately $148,000 and
$150,000 during the years ended May 31, 2005 and 2004, respectively.
Biomerica has subleased a portion of its facility under a non-cancelable
operating lease which expired May 16, 2003 and is currently month-to-month.
The Company recorded base rental income of $28,104 and $18,020 during the
years ended May 31, 2005 and 2004, respectively.
Lancer leases its primary facility under a non-cancelable operating lease
expiring April 30, 2009, which requires monthly rental payments that
increase annually, from $6,688 per month in 2004 to $7,527 per month in
2009. The lease expense is being recognized on a straight-line basis over
the term of the lease. The excess of the expense recognized over the cash
paid aggregates $21,065 at May 31, 2005, and is included in accounts
payable in the accompanying consolidated balance sheet. Total rental
expense for this facility for each of the years ended May 31, 2005 and 2004
was approximately $81,000 and $75,000, respectively.
Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a
non-cancelable operating lease for its Mexico facility through March 31,
2009. The new lease encompasses the approximately 16,000 square feet of the
previous lease, plus additional square footage of approximately 10,000
feet, for a total of approximately 26,000 square feet. Lancer Orthodontics
de Mexico will provide subcontracted manufacturing services to Biomerica,
Inc., using a portion of the additional square footage. The lease requires
monthly payments of approximately $9,600 through March 2009. An agreement
has been negotiated between Lancer Orthodontics de Mexico and Biomerica for
lease reimbursement of approximately $2,000 per month. The remainder of
approximately $7,600 monthly lease expense will be borne by Lancer. Total
rental expense for this facility for the years ended May 31, 2005 and 2004
was approximately $105,000 and $103,000, respectively.
The Lancer Orthodontics de Mexico lease also requires an additional
refundable security deposit of $26,550, Lancer Orthodontics, Inc. paid half
and Biomerica, Inc. the other half. This is in addition to the $31,146
refundable security deposit paid in fiscal year 2003. At May 31, 2005,
other assets on the consolidated balance sheet includes approximately
$44,000 of security deposit paid by Lancer on the Mexico location.
A sub-lease agreement for approximately 459 square feet of Lancer's main
facility was entered into in April 2003, effective through November 2003,
and extended in December 2003 through December 2004. The leased space is to
be used for a machine shop and requires monthly payments of $344. Rental
income for the years ended May 31, 2005 and 2004 was $2,583 and $4,128,
respectively.
Biomerica and Lancer have various small leases for office equipment.
FS-33
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
The future annual minimum payments under operating leases, net of subleases
income, are as follows:
YEARS ENDING MAY 31, Amount
---------------------------------------------------------------------------
2006 $ 294,820
2007 238,000
2008 239,000
2009 200,000
---------------------------------------------------------------------------
Minimum lease payments, net $ 971,820
===========================================================================
MANUFACTURING AGREEMENT
In May 1990, Lancer entered into a manufacturing subcontractor agreement
(the "Manufacturing Agreement"), whereby the subcontractor agreed to
provide manufacturing services to Lancer through its affiliated entities
located in Mexicali, B.C., Mexico. Effective April 1, 1996, Lancer leased
the Mexicali facility under a separate arrangement, as discussed above
under Leases. Since October 2000, the manufacturing agreement was operated
on a month-to-month basis. During fiscal 2002, the facility in Mexico was
incorporated as Lancer Orthodontics de Mexico ("Lancer de Mexico"), a
wholly-owned subsidiary of Lancer. This subsidiary now administers services
previously provided by an independent manufacturing contractor. A new lease
was negotiated in the name of Lancer de Mexico, effective April 1, 2001,
for the 16,000 square foot facility already in use for the Mexican
operations. Mexican utilities and vendor obligations were also converted to
the Lancer de Mexico name. This conversion eliminated the expense of an
administrative fee and is expected to provide better control in meeting
future obligations. Should Lancer discontinue operations in Mexico, it is
responsible for the accumulated employee seniority obligation as prescribed
by Mexican law. At May 31, 2005, this obligation was approximately
$415,000. Such obligation is contingent in nature and accordingly has not
been accrued in the accompanying consolidated balance sheet.
RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute
to the plan up to the maximum percentage of total annual compensation
allowable under the limits of Internal Revenue Code Sections 415, 401(k)
and 404. The Company, at the discretion of its Board of Directors, may make
contributions to the plan in amounts determined by the Board each year. No
contributions by the Company have been made since the plan's inception.
LITIGATION
The Company is, from time to time, involved in legal proceedings, claims
and litigation arising in the ordinary course of business. While the
amounts claimed may be substantial, the ultimate liability cannot presently
be determined because of considerable uncertainties that exist. Therefore,
it is possible the outcome of such legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or
cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a
material adverse affect on the Company's consolidated financial position,
results of operations or cash flows.
In January 2001, ReadyScript, Inc., entered into negotiations with
PacifiCare Health Systems, Inc. and its wholly owned subsidiary, RxConnect
Acquisition Corporation, for a transaction that would have resulted in the
sale of substantially all of ReadyScript's assets or stock to PacifiCare or
PacifiCare controlled entities. The transaction was seen as desirable for
ReadyScript due to financing and cash flow
FS-34
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
concerns that threatened ReadyScript's ability to operate as a going
concern. As part of the negotiations, the parties developed a term sheet
and entered into a confidentiality and consulting agreement in connection
with the proposed transaction. In March 2001, PacifiCare and RxConnect
terminated negotiations and refused to close the proposed transaction. In
April 2001, ReadyScript ceased doing business and filed suit against
PacifiCare and Rx Connect in Orange County California Superior Court
alleging breach of the confidentiality and consulting agreements,
misappropriation of trade secrets, unfair competition, fraud and other
related claims. The court ordered the case to arbitration and in March
2004, the parties reached a confidential settlement agreement. After paying
attorney's fees, all remaining proceeds were distributed to former
ReadyScript employees who were owed unpaid wages.
NASDAQ SMALL CAP MARKET LISTING REQUIREMENTS
The Company was notified by NASDAQ that it was no longer in compliance with
either the minimum $2,000,000 net tangible assets or $2,500,000
stockholders' equity requirement for continued listing on the NASDAQ Small
Cap Market under Marketplace rule 4310(c)(2)(B). Effective June 20, 2002,
the Company was delisted. The Company's securities were immediately
eligible for trade on the OTC Bulletin Board.
FS-35
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
11. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Lancer's line-of-credit prohibits the transfer or dividend of funds to
Biomerica, Inc. As a result, the following condensed unconsolidated balance
sheet for Biomerica, Inc. as of May 31, 2005, and the condensed
unconsolidated statements of operations and cash flows for the years ended
May 31, 2005 and 2004 have been provided. No cash dividends were paid by
the consolidated subsidiaries (see Note 3) during the years ended May 31,
2005 and 2004.
CONDENSED UNCONSOLIDATED BALANCE SHEET
MAY 31, 2005
---------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
CASH $ 74,721
AVAILABLE-FOR-SALE SECURITIES 8,180
ACCOUNTS RECEIVABLE, NET 421,040
INVENTORIES 911,150
NOTES RECEIVABLE 7,619
PREPAID EXPENSES AND OTHER 47,157
---------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,469,867
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
SUBSIDIARY, RESTRICTED 757,977
INVENTORY, NON-CURRENT 18,000
PROPERTY AND EQUIPMENT, NET 132,281
INTANGIBLE ASSETS 12,938
OTHER ASSETS 13,419
---------------------------------------------------------------------------
$ 2,404,482
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 482,980
ACCRUED COMPENSATION 462,775
CURRENT PORTION OF NOTES PAYABLE-SHAREHOLDER 301,087
---------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,246,842
---------------------------------------------------------------------------
EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES,
NET OF ADVANCES, UNRESTRICTED 104,579
---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
COMMON STOCK 460,193
ADDITIONAL PAID-IN CAPITAL 17,107,474
ACCUMULATED OTHER COMPREHENSIVE INCOME 526
ACCUMULATED DEFICIT (16,515,132)
---------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,053,061
---------------------------------------------------------------------------
$ 2,404,482
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FS-36
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
CONDENSED UNCONSOLIDATED STATEMENT OF OPERATIONS
MAY 31, 2005 2004
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NET SALES $ 3,322,523 $ 3,144,824
COST OF SALES 2,073,144 2,159,327
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GROSS PROFIT 1,249,379 985,497
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OPERATING EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE 1,001,098 1,143,190
RESEARCH AND DEVELOPMENT 178,070 157,877
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TOTAL OPERATING EXPENSES 1,179,168 1,301,067
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OPERATING INCOME (LOSS) 70,211 (315,570)
OTHER INCOME (EXPENSE) (19,292) 14,383
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INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST
IN NET LOSS (INCOME) OF CONSOLIDATED
SUBSIDIARIES AND INCOME TAXES 50,919 (301,187)
INTEREST IN NET LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES 71,583 (2,937)
INTEREST IN NET INCOME OF CONSOLIDATED
SUBSIDIARIES - DISCONTINUED
OPERATIONS (183,723) (75,849)
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME
TAXES 163,059 (222,401)
INCOME TAX EXPENSE 800 800
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NET INCOME (LOSS) $ 162,259 $ (223,201)
===========================================================================
FS-37
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2005 2004
---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $ 162,259 $(223,201)
ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO NET CASH PROVIDED (USED)
IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 69,479 67,708
PROVISION FOR LOSSES ON
ACCOUNTS RECEIVABLE (62,011) 57,357
REALIZED GAIN ON SALE OF
AVAILABLE-FOR-SALE SECURITIES (8,888) (30,853)
LOSS OF SUBSIDIARIES (112,134) (78,786)
OPTIONS AND WARRANTS ISSUED 13,963 81,731
INCREASE IN INVESTMENT IN AND
ADVANCES TO CONSOLIDATED
SUBSIDIARIES -- --
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT 1,258 --
NET CHANGE IN OTHER CURRENT
ASSETS AND CURRENT LIABILITIES 17,719 101,708
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 81,645 (24,336)
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CASH FLOWS FROM INVESTING ACTIVITIES:
SALES OF AVAILABLE-FOR-SALE SECURITIES 8,888 45,967
PURCHASE OF PROPERTY AND EQUIPMENT (44,010) (42,030)
---------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (35,122) 3,937
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CASH FLOWS FROM FINANCING ACTIVITIES:
NET DECREASE (INCREASE)IN SHAREHOLDER LOANS (16,231) 3,768
EXERCISE OF STOCK OPTIONS -- 2,000
SALE OF COMMON STOCK, NET OF
OFFERING EXPENSES -- 50,500
INCREASE IN NOTES RECEIVABLE (3,800) (1,400)
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NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (20,031) 54,868
---------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 26,492 34,469
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 48,229 13,760
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CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,721 $ 48,229
===========================================================================
FS-38
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
CASH PAID DURING THE YEAR FOR:
INTEREST $ 30,071 $ 19,200
INCOME TAXES $ 800 $ 800
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
CHANGE IN UNREALIZED HOLDING GAIN
ON AVAILABLE-FOR-SALE SECURITIES $ (17,940) $ 28,123
===========================================================================
CHANGE IN MINORITY INTEREST DUE
TO SUBSIDIARY SALE OF STOCK $ (31,494) $(112,719)
===========================================================================
12. DISCONTINUED OPERATIONS
The following summarizes the net liabilities of the discontinued
operations, ReadyScript, as of May 31, 2005 and the results of its
operations for each of the years in the two-year period ended May 31, 2005.
Balance sheet items:
MAY 31, 2005
--------------------------------------------------------
Assets:
Prepaid expenses and other $ 7,711
Equipment --
--------------------------------------------------------
7,711
Less liabilities:
Accrued expenses 112,290
--------------------------------------------------------
Net liabilities $ 104,579
========================================================
Results of its operations items:
YEARS ENDED MAY 31, 2005 2004
---------------------------------------------------------------------------
Legal settlements and related party
debt forgiveness $ 177,372 $ 102,500
Cost and expenses:
General and administrative (reduction
of previous expenses) 6,351 (26,651)
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Total costs and expenses 6,351 (26,651)
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Income from operations $ 183,723 $ 75,849
===========================================================================
FS-39
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2005 AND 2004
13. SUBSEQUENT EVENTS
On March 16, 2005 management of Lancer Orthodontics signed a strategic
marketing, sales and manufacturing agreement with Lingualcare, Inc. The
terms of the agreement provide for Lancer to manufacture Lingualcare's
products in Lancer's Mexicali facilities, and for Lancer to assist in
introducing, marketing and promoting Lingualcare's orthodontic products.
Lancer shall be paid for the manufacturing of the products, and shall
further receive shares of Lingualcare's common stock and warrants to
purchase additional shares of common stock. The vesting of the Shares and
Warrants shall be based on certain milestones to be achieved over a three
to four year period. This agreement will require Lancer to invest in new
manufacturing equipment and upgrade its facility, and invest in sales and
marketing expenditures.
In July 2005 Lancer conducted a private placement, the purpose of which was
to raise funds to proceed with the terms of the Lingualcare agreement.
Lancer sold 722,769 shares of restricted common stock at the price of $.65
per share. Total gross proceeds to Lancer were $459,800. This private
placement further reduced Biomerica's control and ownership percentage in
Lancer. As a result, the financial statements of Lancer may not be
consolidated with those of Biomerica as of this date.
On July 21, 2005, Lancer entered into two equipment finance leases for the
purchase of manufacturing equipment for the Lingualcare project. The leases
have a total of $328,590 due and the minimum payments per month are $8,068.
The term of the leases is forty-eight months. Lancer is also entering into
or has entered into agreements to acquire other capital equipment for the
Lingualcare project in the total amount of $229,110. These agreements have
varying financing terms.
On July 29, 2005, Biomerica entered into an agreement for the research,
development and transfer of certain technology. The total of the project is
estimated to be $55,000.
In July 2005, Lancer signed a large contract manufacturing agreement with
an orthodontic reseller, wherein the reseller has committed to purchase at
least $960,000 of product from Lancer during the period of July 1, 2005 to
October 1, 2006.
On August 20, 2005, the Company and the holder of the holder of the Note
Payable-shareholder described in Note 6 agreed to the extension of the note
due date until September 1, 2006, at the same terms and conditions as the
previous agreement.
FS-40